The Magazine

When Bankers Behave Badly

Mitt Romney should call them on it.

Jul 23, 2012, Vol. 17, No. 42 • By IRWIN M. STELZER
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Besides, the moral hazard argument applies not only to borrowers, but to bankers, many of whom remain in place and well compensated after seriously damaging their institutions and the larger economy, while -others have had soft landings thanks to golden parachutes. The absence of consequences for reckless lenders as severe as those imposed on delinquent borrowers is surely the stuff of which moral hazard is made.

Then there is the matter of consumer protection. Democrats seem to have a monopoly on wanting to save consumers from the big businesses with which they often partner. Why does Romney not agree with the Consumer Financial Protection Bureau (CFPB) that mortgages should be made more understandable to the borrower? After all, good conservatives should favor programs to eliminate “information asymmetry”—a situation in which one party, in this case the lender, knows a lot more about the costs and risks inherent in a transaction than does the other party. He could at the same time take a swipe at the administration’s preference for regulation, in this case the CFPB’s 1,099-page proposed regulation to mandate a three-page mortgage-disclosure. 

Instead of such complicated regulations, a gift to the class-action lawyers who contribute so generously to Democratic campaigns, Romney can propose a simple rule requiring lenders to keep skin in the game so that they have an incentive to lend only to borrowers with a reasonable prospect of repaying their loans. And elimination of the multiple barriers to entry in the real estate, mortgage brokering, and related businesses. Incentives and competition trump regulation in serving the national interest every time.

And a good conservative, which Romney claims to be, certainly should feel comfortable railing against charges and fees that are obscured to the point of invisibility and enacted retro-actively. That’s not how well-functioning competitive markets work. Instead of more regulation, Romney can propose eliminating barriers that make it difficult for large retailers to enter the credit card and other banking businesses. The fact that Elizabeth Warren, the creator of the CFPB, is on the warpath against bankers is enough, of course, to make one want to oppose all the bureau’s doings. But that is an urge that can be overcome in the interests of championing borrowers in an imperfect market.

Finally, where is Romney every time the Fed cranks up the printing presses, or depresses interest rates first by one means and then another? Surely he knows that the hyperactivity of the Fed is due to the failure of the Obama fiscal policies, threatens future inflation, and cheats savers in order to benefit borrowers. Millions of retired folks are watching their pensions and modest savings shrink in the face of the Fed’s low interest rate policy, one that has failed to persuade America’s corporations to use their $1.7 trillion cash pile to build factories and hire workers, as Carnegie Mellon University professor Allan Meltzer so clearly pointed out in the Wall Street Journal last week.

There’s more, but you get the idea. There is solid conservative ground on which Mitt Romney can stand that would enable him to promise to lance the festering sore that has come to be called crony capitalism—deals between big business and big government to shield big business from competition and help big government get even bigger, all the while distorting capital markets. Indeed, there are instances when good conservative economics just happens—well, not just happens, but inevitably proves—to coincide with politically popular causes.

As University of Chicago professor Luigi Zingales puts it, “Democrats have promoted crony capitalism to foster their liberal agenda. They are pro-business—at least certain businesses—but fundamentally anti-market. This is exactly the opposite of what most Americans want. .  .  . A pro-market, but not pro-big-business, platform would be a winner for Republicans.”

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