The Magazine

Credit Is Given

Indebtedness (and its discontents) is as old as human nature.

Mar 5, 2012, Vol. 17, No. 24 • By JAY WEISER
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The relentlessness of the debt expansion had consequences beyond the current bust, although Hyman does not address them. After 1970, debt-fueled consumer spending provided less proto-Keynesian stimulus to domestic production and employment. In manufactured goods, it increased demand for imports and foreign employment. Even housing production, the vaunted motor of the American economy, disproportionately created low-skilled domestic construction jobs for a huge influx of undocumented Latino immigrants. For higher-skilled housing financial services workers, such as real estate brokers, mortgage brokers, and investment bankers, government-subsidized house-flipping created an explosion of new jobs with huge bubble-era compensation that was pure waste.

Hyman argues that, over the past century, each wave of regulation has had perverse consequences—and has driven the next wave of innovation to get around it, resulting in still more consumer debt. His solution, however, is more regulation to steer credit in socially desirable directions. Rather than steering credit, we should consider rationing it again. While usury laws created an illegal loan-sharking industry, they also discouraged many financially distressed consumers from hopelessly overextending themselves. A modern equivalent might be to require a minimum 20 percent loan to value on home mortgages, including home equity lines.

Debtor Nation’s real lesson—although not the one that Hyman draws—is that public policy should not subsidize consumer leverage, whether through mortgage guarantees, mortgage interest deductibility, or too-big-to-fail lenders.

Jay Weiser is associate professor of law and real estate at Baruch College.