Coyote Blog

Darin Morely sent me this.  Woe be it to the upstart competitor with a new business model who challenges an incumbent with political connections.  This goes double when the incumbent is the government itself:

One of the great things about the web, obviously, is that it allows for much more efficient communication that opens up new and useful offerings. For example: the web offers the ability to find other people traveling to the same general place you're heading and to set up a convenient carpool. It's good for the environment. It's good for traffic. It just makes a lot of sense. Unless, of course, you're a bus company and you're so afraid that people will use such a system rather than paying to take the bus. That's what happened up in Ontario, as earlier this year we wrote about a bus company that was trying to shut down PickupPal, an online carpooling service, or being an unregulated transportation company. TechCrunch points us to the news that the Ontario transportation board has sided with the bus company and fined PickupPal. It's also established a bunch of draconian rules that any user in Ontario must follow if it uses the service -- including no crossing of municipal boundaries -- meaning the service is only good within any particular city's limits.

All of us in the states need to be prepared for more of this corporate economy thing in the US.  I saw last night on Sunday Night Football that NBC is really going hard on some green initiative, including having a green peacock.  GE (parent company of NBC) is a smart company and sees the writing on the wall.  It understands the new administration and Congress seem hell-bent on moving us to a more European model.  In that model, there are 10-20 corporations per country that insinuate themselves into government and get the opportunity to help run the country to their own benefit.  GE wants to be one of these chosen few.  The push is going on not just at NBC, but in light bulbs (betting on Congressional action to provide regulatory support for a new type of bulb they have invented) and in power systems (who are making large bets on wind that will not pay off without a government subsidy program).

In the near term, GE may need a bailout in its financial arm.  GE must have seen that GM made a huge public push for its Chevy Volt over the last 6 months, spending hundreds of million in advertising on a car that does not exist yet. Why would a company near bankrupcy do this?  We now know the advertising was aimed at Congress and the Administration, not consumers, trying to burnish their green image to give Democrats enough political cover to vote for the bailout their UAW supporters so desperately need  (any chapter 11 would likely result in enormous restructurings of union contracts).

In a post earlier today on the mortgage market meltdown, I wrote:

And that is what the argument usually boils down to - someone smart should have been watching them.  But lots of smart people were watching all the time.  You can see one such person featured in Lewis's article.  Guys run all over Wall Street looking every day for some single digit basis point spread they can make money off of.  But untold wealth was just sitting there for someone who was willing to call bullshit on the whole CDO/CDS pyramid game.  These guys playing this game were searching for people to bet against them.

And despite this, despite untold wealth as an incentive, and companies looking for folks to take the other side of their transactions, only a handful saw the opportunity.  Thousands of people steeped in the industry with near-perfect incentives to identify these issues ... did not.  What, then, were our hopes of having some incremental government bureaucrats do so?  Usually, after this kind of crisis, there are lines of pundits and writers ready to suggest, with perfect hindsight, new regulations to avert the prior crisis.  But, tellingly, I have heard very few suggestions.

So in this context, I found these comments by leftish Kevin Drum, certainly no knee-jerk advocate of free markets, quite interesting:

No argument on the greed and ideology front, but I'm curious: was there really anyone who made the right call on all this at a policy level? There were, of course, plenty of people who recognized the housing bubble for the idiocy that it was (Alan Greenspan notably not one of them), but were there any major voices making specific policy proposals to slow down the bubble? Or rein in the mortgage market? Or regulate the CDO/CDS market in a way that would have prevented some of
the damage? I'm talking specifics here, not just general observations that the FIRE sector was out of control. Arguments about interest rates being too low count, if they were made for the right reason, but I'm interested mainly in more detailed recommendations.

I don't have any big point to make here. I'm genuinely curious. There were many moments in the past few years when perhaps something could have been done, but what? And who was proposing serious measures that would have helped? Any major Dems? Economic pundits? Wall Street mucky mucks? Who were the unsung heroes? Help me out here.

Well, we have upheld the ban on payday loans here in Arizona.

The payday-loan industry, which flourished this past decade on Arizonans' almost-insatiable need for quick, short-term loans regardless of their high interest rates, may have to close down in Arizona unless state lawmakers can be persuaded to ignore voters' wishes.

Voters last week overwhelmingly rejected Proposition 200, a ballot initiative financed and written by the loan companies to allow them to continue charging high interest rates on small loans. That decision placed Arizona among a growing number of states that have effectively shut down the payday lenders.

So, payday loans from company A to person B are really popular with both A & B, and the industry has "flourished."  But persons C, who don't participate in this market, have decided that, for their own good, A & B need to stop engaging in this behavior.  One such third party explains it this way:

Sen. Debbie McCune Davis, D-Phoenix, opposed Prop. 200 and has steadfastly fought payday lenders. She sees no need to let payday lenders continue to charge higher interest rates than other lenders.

Her and voter's actions have effectively limited payday loan companies to charging total interest and fees equivalent to no more than 36% annual interest.  OK, you say, this seems like a really high rate.  That should be enough, right?  Well, the problem comes with fixed costs and loan size.  Lets look at an example.

A typical payday loan size and term is about $400 for 18 days (pdf).  A typical fee for such a loan is $50, which includes both fixed costs and interest.  Wow, annualized that is 250%.  Usurious!  So would you personally go out and get a payday loan?  No way! And that is why voters vote to ban them - they are not good for me personally, so they must not be good for anyone else.

But here is the problem.  How do you maintain a storefront and trained people and all the documentation and collection apparatus for less than $50?  The same loan at 36% would allow a fee of only $7.20.  That barely even covers paying someone to originate the loan at the counter, much less pay interest and a risk premium.

Try going to the bank and getting a home loan or some other type of loan for only a $50 fee.  Granted those loans are more complicated, but in turn you will likely get charged hundred and probably thousands of dollars in fees.  There is a large fixed cost component to the act of lending which we tend to ignore on larger loans, but is there none-the-less.  In fact, just try to go to a bank and get a loan for $400 at all.  They don't make them, outside of the credit card industry, which solves this problem in part through economies of scale and in part through cost-shifting costs to merchants, options not really available to payday loan companies.

And so far, we are only talking about fixed costs, not the underwriting risk of extending loans to about any person who wanders in the door and can sign his/her name.  Anyone remember sub-prime mortgages?  Maybe there is a justification for large risk premiums, after all, on loans to under-qualified borrowers.  Particularly when you consider that most payday loan customers could not qualify even for a sub-prime mortgage.

The best equivalent to a payday loan offered by banks is overdraft protection, where the bank will go ahead and pay out on checks where there are insufficient funds, though they will charge a $20-$30 fee per check paid.  As you can see, these fees are very similar in magnitude to those charged by payday loan companies, particularly when you consider that these fees are generally charged on checks that average about $150.  Also, folks who get one overdraft fee usually get several in a row.  People are willing to pay these fees because they are in fact lower than the fees of actually having a check bounce, which can incur similar fees from merchants as well as hurting one's credit.

So, you just had to write three checks to get the power and water and telephone turned on, and you are pretty sure the money is not there in your checking account.  You are facing $80 in bounced-check (NSF) fees or overdraft fees.  Now might you consider a $400 loan for a $50 fee?  Well, probably the answer is still no, you would put it on your credit cards.  But everyone doesn't have credit cards, or doesn't qualify for them, or don't have a lifestyle that allows for them.  Where do they go, short of Tony Soprano?

Update: A reader sent me a link to this report, comparing payday loan rates to overdraft protection, and finding them of similar magnitude.  The author calculates an average $28.61 overdraft fee on an average $155 bounced check yields an APR of 478%.  There is a fixed cost to lending, and small very short term loans cost a lot of money, no matter how you get them.

I will remind folks not to be fooled by 18% or 23% rates on credit cards and set that as the market rate for small loans.  First, this misses annual fees for the cards.  But more importantly, it misses merchant fees.  Merchants pay between 2.5% and 3.5% of everything you charge to the credit card companies.  This helps to subsidize rates and, particularly, subsidize the fixed costs of small lending transactions.

As mentioned in the updates to this earlier post, the Obama transition web site has, at least temporarily, purged out all the real content they had up about specific programs and legislative goals.  So, as a public service, I will help fill this information gap by re-posting an article I wrote about 9 months ago on the "Patriot Employer Act" sponsored by Barack Obama and likely a kernel for early 2009 legislative action:

Posted 2/13/2008:

It turns out, according to Barack Obama, (who hales from the party that doesn't believe in questioning anyone's patriotism) that I am not a "Patriot Employer." This is from the text of Senate Bill S. 1945 of which he is a co-sponsor (My snark is interspersed in italics): Patriot Employers are to be given tax breaks over unpatriotic employers (I presume this means that their tax rates will be raised less in an Obama presidency than those of other folks) with "patriot employers" defined as such:

(b) Patriot Employer- For purposes of subsection (a), the term`Patriot employer' means, with respect to any taxable year, any taxpayer which-

`(1) maintains its headquarters in the United States if the taxpayer has ever been headquartered in the United States,

OK, I guess I can comply with this. Though I am not sure the best way to begin an Obama "kindler gentler foreign policy" is to tell the nations of the world that we will be taxing their company's income in the US at a higher rate than our own companies.

`(2) pays at least 60 percent of each employee's health care premiums,

So the #1 determinant of patriotism is not commitment to individual rights but paying 60% of employee health care costs. I guess I am so unpatriotic

And, just from a practical standpoint, 90% of my employees are seasonal, hired for about 4 months of the year. To be patriotic, I have to pay their health care costs all year long? Also, since most of my employees are retired, they are on Medicare or an employee retirement medical plan. If they pay $0 in premiums and I pay $0 of that, do I get credit for 60%? Maybe the government can mandate a solution for zero divided by zero, like they did for the value of pi years ago

`(3) has in effect, and operates in accordance with, a policy requiring neutrality in employee organizing drives,

I presume neutrality means that in a hypothetical union drive, I do not express my opinion (and likely opposition) to said unionization drive? I am told that this also entails allowing card checks rather than hidden ballot voting. In other words, patriotism is being defined here as 1) giving up your free speech rights and 2) opposing hidden ballot voting. Uh, right. Besides, if a union organized our company, as unlikely as that would be, I would probably have to do a Francisco d'Anconia on the place.

`(4) if such taxpayer employs at least 50 employees on average during the taxable year-

`(A) maintains or increases the number of full-time workers in the United States relative to the number of full-time workers outside of the United States,

In other words, we don't want American companies growing overseas. This could also be called the "give up international market share act." This implies that it is unpatriotic for US-based Exxon to explore for oil in Asia and that it is more patriotic to let the Chinese national oil company do it. This implies that it is more patriotic for Coke to lose market share in Germany than to gain it. This means that it is more patriotic for Mattel to buy its toys in China from Chinese companies rather than run the factories themselves (and thereby be accountable themselves for product quality and working conditions).

This is beyond stupid. We LIKE to see US companies doing well overseas. If we have to import our raw materials, we feel more comfortable if it is US companies doing the extraction. Don't we? In the name of patriotism, do we really want to root for our domestic companies to fail in international markets?

`(B) compensates each employee of the taxpayer at an hourly rate (or equivalent thereof) not less than an amount equal to the Federal poverty level for a family of three for the calendar year in which the taxable year begins divided by 2,080,

90% of my workers are retired. They work for me to supplement their income, to live our in nature, and to stay busy. They need me to pay them based on the poverty line for a family of three, why? I will tell you right now that if I had to raise wages this much, most of my employees would quit. Many of them force me to give them fewer hours so they can stay under the social security limits for income. I discussed what rising minimum wages often force me to do here, but just as an illustration, a $1 an hour across the board wage increase would easily wipe out all the money I make in a year and put me into a loss position. In which case the lowered tax rate would not do me much good anyway.

`(C) provides either-

`(i) a defined contribution plan which for any plan year-

`(I) requires the employer to make nonelective contributions of at least 5 percent of compensation for each employee who is not a highly compensated employee, or

`(II) requires the employer to make matching contributions of 100 percent of the elective contributions of each employee who is not a highly compensated employee to the extent such contributions do not exceed the percentage specified by the plan (not less than 5 percent) of the employee's compensation, or

`(ii) a defined benefit plan which for any plan year requires the employer to make contributions on behalf of each employee who is not a highly compensated employee in an amount which will provide an accrued benefit under the plan for the plan year which is not less than 5 percent of the employee's compensation, and

Uh, I am not sure why it is unpatriotic for an employee to save for themselves, but I think 401k plans are a nice benefit. I would certainly offer one except for one tiny fact - ALL MY EMPLOYEES ARE ALREADY RETIRED!! They are over 65. They are drawing down on their retirement, not contributing to it.

This is at the heart of the problem with all US labor law. Folks up in Illinois write laws with a picture of a steel mill in mind, and forget that employment and employees have infinite variations in circumstances and goals.

So I am unpatriotic, huh. But if forcing companies to contribute to emplee retirement plans is patriotic, why is hiring folks once they are retired to give them extra income in retirement unpatriotic? In fact, maybe I could argue that 100% of the wages I pay go to retirement spending

`(D) provides full differential salary and insurance benefits for all National Guard and Reserve employees who are called for active duty, and

In other words, we of the government are not going to pay our employees (ie reservists on active duty) what they are worth and are not going to give them benefits, so to be patriotic you need to do it for us. We in Congress are not really very patriotic and don't support the troops, so you need to do it for us.

All kidding aside, I would do this in my company if it was applicable, but I really resent being piously told to do so by several Senators who don't really model this behavior themselves.

`(5) if such taxpayer employs less than 50 employees on average during the taxable year, either-...

blah, blah. Basically the same stuff repeated, though slightly less onerous.

Since when did patriotism equate to "rolling over to the latest AFL-CIO wish list?"

This story comes from the Arizona Republic as part of the general effort to maintain the ban on payday loan companies passed earlier this year (their is a proposition on the ballot in November to overturn the ban).

At least 5 percent of last year's freshmen at the University of Arizona obtained a payday loan, a figure the surveyor described as "very alarming."

Arizona's Norton School of Family and Consumer Sciences conducted
the survey, which measured the financial habits of 2,172 freshmen -
about a third of the class - who enrolled in fall 2007.

Student use of payday loans
more than doubled based on a survey taken a year ago that included
freshmen through seniors, said professor Soyeon Shim, the group's
director.

"As consumers, students shouldn't be using payday loans as a resort to deal with financial stress," Shim said.

I wouldn't really recommend that students use this expensive form of ready cash, but I can't say I am particularly alarmed.  How can any of us know what pressures they are under.  In most circumstances, paying a 30% interest rate seems too high.  But I know, from personal experience, there are times when short term liquidity is so valuable you might pay anything for it  (just look - the American taxpayers are paying about a trillion dollars this year just for short-term liquidity).

In fact, if students have a bad experience, it's probably better to learn a $100 life lesson in college rather than a $500,000 life lesson later flipping condos on interest-only loans.  I personally had my own caveat emptor eye-opener with Columbia House Records in college.  Nothing like getting stuck with a couple of over-priced America albums to teach financial horse sense.  Muskrat Love... aaaarrrggghhh!

Anyway, the effort to ban payday loans altogether is one of those elitist, snobby, holier-than-thou, we're smarter than you unwashed masses issues.  Middle class homeowners who are upside down in their mortgages are not calling for inexpensive mortgages to be banned, they just want a government bailout.  The government may spend a trillion dollars in the end supporting the mortgage market.  But if poor people pay a high fee for a $100 loan, we have to ban the whole industry. 

The fact is that there is always a demand for ready cash at high interest rates, and if you drive it under ground, people just go to Tony Soprano instead. 

Oh, but you are not for banning payday loans, you just think the interest rates are too high, and that what is needed is government regulation of the rates?  Uh, OK, I'm sure that will go well.  Past government efforts to reduce the interest rate premium for risk have worked out really well *cough* mortgages *cough*. 

But, if you are still thinking that you are much smarter in money management than people who go to payday loan stores and you really want to use the coercive power of government to force poor people to make the same decisions you would, here's this:

However, for those who think they are ever so much smarter than payday
loan customers, who are charged a lot of money for small liquidity
boosts, consider this:  Let's say you take out $40 each week from an
ATM to keep you liquid and that the ATM fee is $1.50.  You are
therefore spending $1.50 or 3.75% for a one week liquidity boost of
$40, which you must again refresh next week.  Annualized, you are
effectively paying 195% to get liquid with your own money.  For this kind of vig, at least payday loan customers are getting the use of someone else's money.

The lesson I take from the numerous efforts to regulate/ban/demonize bottled water is that we have officially run out of real stuff to be worried about.  Seriously, when bottled water is the health and environmental risk of the decade, it is time to declare victory over Mother Nature.  More here.

One argument about regulation that seems to be gaining traction through the recent financial crisis is "See, private action and enterprise is not infallible.  They can make mistakes that have costs for everyone.  Therefore they need to be regulated." 

I don't have time for the full refutation of this, but a few thoughts:

• No one ever said that private actors in the economy are infallible or even universally honest.  However, no one has ever been able to make the case that government employees are any more infallible or honest. 
• There are a couple of reasons government regulators are going to be demonstrably worse than the marketplace in making decisions.  The first is information -- a few actors in Washington can never have the same access to information as thousands of actors across the country or around the world.  The second is incentives -- while regulatory hawks cite private greed as a bad incentive in the marketplace, bureaucratic incentives can be at least as problematic.
• Governments are subject to all sorts of rent-seeking initiatives, not to mention regulatory capture, that undermine regulatory effectiveness.  Just look at the bailout bill. Wooden arrows?

For some reason, the argument "private actors screwed up" seems sufficient justification for regulation.  The burden of proof should instead be "the government could have done better."

Here is a nice example of how regulation really works, from an interview with Warren Buffett:

QUICK: If you imagine where things will go with Fannie and Freddie, and
you think about the regulators, where were the regulators for what was
happening, and can something like this be prevented from happening
again?

Mr. BUFFETT: Well, it's really an incredible case study in regulationbecause
something called OFHEO was set up in 1992 by Congress, and the sole job
of OFHEO was to watch over Fannie and Freddie, someone to watch over
them. And they were there to evaluate the soundness and the accounting
and all of that. Two companies were all they had to regulate. OFHEO has
over 200 employees now. They have a budget now that's $65 million a
year, and all they have to do is look at two companies. I mean, you
know, I look at more than two companies.

QUICK: Mm-hmm.

Mr.
BUFFETT: And they sat there, made reports to the Congress, you can get
them on the Internet, every year. And, in fact, they reported to
Sarbanes and Oxley every year. And they went--wrote 100 page reports,
and they said, 'We've looked at these people and their standards are
fine and their directors are fine and everything was fine.' And then
all of a sudden you had two of the greatest accounting misstatements in
history. You had all kinds of management malfeasance, and it all came
out. And, of course, the classic thing was that after it all came out,
OFHEO wrote a 350--340 page report examining what went wrong, and they
blamed the management, they blamed the directors, they blamed the audit
committee. They didn't have a word in there about themselves, and
they're the ones that 200 people were going to work every day with just
two companies to think about. It just shows the problems of regulation.

The problem, of course, is that Fannie and Freddie were doing exactly what Congress wanted them to do -- systematically lowering mortgage underwriting standards.  They won't put it that way now, but that is  what spreading home ownership to lower income families really amounted to.

From John Allison, CEO of BB&T  (via TJIC).  Here is a taste:

Download bailout_critique.pdf

Via Scrappleface:

The foundation of the U.S. economy could crumble, President George
Bush said today, if Congress fails to approve a U.S. Treasury plan to take over
foundering financial firms, a proposal which the president called "a
much-needed 21st-century civil rights act for stupid people."

"To sustain this shining city on a hill," Mr. Bush said, "we need to rescue
the ignorant, irresponsible folks "” from Wall Street to Capitol Hill to
Main Street "” who got us to where we are today. We must guarantee that no American suffers the soft bigotry of being forced to live with the consequences of his bad decisions."

The president, in remarks to the news media clearly aimed at
reluctant Republicans in Congress, said, "Our financial system rests on
a foundation of huge banks, brokerage houses and quasi-governmental
agencies that followed Washington's lead by gambling on long-shot,
poorly-collateralized investments. Now this glorious way of life is
threatened, and we must act to preserve it."

"We need to guarantee that the structures, systems, people and
products that got us to this point won't be tossed on the ash heap of
history," said Mr. Bush. "If these giant companies fail, then America
will be left with nothing but thousands of small to mid-sized financial
firms that made prudent investment decisions during the past 15 years."

Via Carpe Diem, comes this September 30, 1999 NY Times story:

In a move that could help increase home ownership rates among
minorities and low-income consumers, the Fannie Mae Corporation is
easing the credit requirements on loans that it will purchase from
banks and other lenders.

The action, which will begin as a
pilot program involving 24 banks in 15 markets -- including the New
York metropolitan region -- will encourage those banks to extend home
mortgages to individuals whose credit is generally not good enough to
qualify for conventional loans. Fannie Mae officials say they hope to
make it a nationwide program by next spring.

Fannie Mae, the
nation's biggest underwriter of home mortgages, has been under
increasing pressure from the Clinton Administration to expand mortgage
loans among low and moderate income people and felt pressure from stock
holders to maintain its phenomenal growth in profits.

In
addition, banks, thrift institutions and mortgage companies have been
pressing Fannie Mae to help them make more loans to so-called subprime
borrowers. These borrowers whose incomes, credit ratings and savings
are not good enough to qualify for conventional loans, can only get
loans from finance companies that charge much higher interest rates --
anywhere from three to four percentage points higher than conventional
loans.

''Fannie Mae has expanded home ownership for millions of
families in the 1990's by reducing down payment requirements,'' said
Franklin D. Raines, Fannie Mae's chairman and chief executive officer.
''Yet there remain too many borrowers whose credit is just a notch
below what our underwriting has required who have been relegated to
paying significantly higher mortgage rates in the so-called subprime
market.''

Demographic information on these borrowers is
sketchy. But at least one study indicates that 18 percent of the loans
in the subprime market went to black borrowers, compared to 5 per cent
of loans in the conventional loan market.

In moving, even
tentatively, into this new area of lending, Fannie Mae is taking on
significantly more risk, which may not pose any difficulties during
flush economic times. But the government-subsidized corporation may run
into trouble in an economic downturn, prompting a government rescue
similar to that of the savings and loan industry in the 1980's.

''From
the perspective of many people, including me, this is another thrift
industry growing up around us,'' said Peter Wallison a resident fellow
at the American Enterprise Institute. ''If they fail, the government
will have to step up and bail them out the way it stepped up and bailed
out the thrift industry.''

Those heartless free marketing guys at the AEI -- always predicting doom every time we open our hearts to poor people.  Bailout?  What ridiculous scare-mongering.

Someone noticed that just before certain stocks crash in value, there is a lot of short-selling.  So the US government has banned short-selling, at least temporarily.  Classic cargo-cult logic. 

Boy this sure makes perfect sense in a time when we are concerned about speculative bubbles -- let's ban one of the most important tools that exist for bubbles to be shortened and made less, uh, bubbly.  Here is why (very briefly and non-technically) short-selling takes the edge off speculative excesses.

At the start of the bubble, a particular asset (be it an equity or a commodity like oil) is owned by a mix of people who have different expectations about future price movements.  For whatever reasons, in a bubble, a subset of the market develops rapidly rising expectations about the value of the asset.  They start buying the asset, and the price starts rising.  As the price rises, and these bulls buy in, folks who owned the asset previously and are less bullish about the future will sell to the new buyers.  The very fact of the rising price of the asset from this buying reinforces the bulls' feeling that the sky is the limit for prices, and bulls buy in even more. 

Let's fast forward to a point where the price has risen to some stratospheric levels vs. the previous pricing as well as historical norms or ratios.  The ownership base for the asset is now disproportionately
made up of those sky-is-the-limit bulls, while everyone who thought
these guys were overly optimistic and a bit wonky have sold out. 99.9% of the world now thinks the asset is grossly overvalued.  But how does it come to earth?  After all, the only way the price can drop is if some owners sell, and all the owners are super-bulls who are unlikely to do so.  As a result, the bubble might continue and grow long after most of the world has seen the insanity of it.

Thus, we have short-selling.  Short-selling allows the other 99.9% who are not owners to sell part of the asset anyway, casting their financial vote for the value of the company.  Short-selling shortens bubbles, hastens the reckoning, and in the process generally reduces the wreckage on the back end.

Update:  From Don Boudreaux:

To ban short-selling of stocks is to short-circuit an important
mechanism through which people share their knowledge and expectations
with others.  Banning a mechanism that better allows share prices to
reflect the expectation that the underlying assets are not worth as
much as current market prices suggest does nothing to change the
underlying reality.  Such a ban merely distorts knowledge of this
reality

While I am not happy to see a historic company go bankrupt, and have vague but unspecific worries about some kind of general cascading financial problem, I am happy to see the government let Lehman go bankrupt without any sort of special intervention or bailout for a number of reasons:

• Bailouts create awful incentives for other large companies managing their risk portfolios
• I know many small business people who have gone bankrupt, and I once lost my job in a company bankruptcy.  There is no reason Lehman equity holders and managers should be immune from the same process just because their company is large and old. 
• Lehman's management has failed to get a positive return from the assets in their care.  A bailout only keeps these assets under the same management.  A bankruptcy puts these assets in the hands of new parties who hopefully can do a better job with them. 
• I strongly suspect that the hole in Lehman's balance sheet from underwater assets like certain mortgages is large compared to its equity but small compared to its total assets.  If this is true, equity holders will end up with nothing, but most creditors should come out close to whole when everything is unwound.

Like Megan McArdle, I found Obama's recent reaction to the Lehman bankruptcy to be wrong-headed but unsurprising.  Obama is blaming recent financial problems on an overly laissez faire approach by GWB in general (LOL,that's funny) and a lack of strong enforcement by the SEC in particular. 

But one has to ask, what laws were not enforced?  My sense is that these are all perfectly lawful portfolios of mortgages in which the one mistake was systematically being too generous in giving out credit.  Mr. Obama's party has always been a strong advocate of pushing banks to be more generous with credit, particularly to the poor, and of promoting home ownership as a national goal.  If anything, financial institutions are struggling because they were too aggressive in these goals.  McArdle writes:

This was not some criminal activity that the Bush administration should
have been investigating more thoroughly; it was a thorough, massive, systemic
mispricing of the risk attendant on lending to people with bad credit.
(These are, mind you, the same people that five years ago the Democrats
wanted to help enjoy the many booms of homeownership.) Lehman, Bear,
Merrill and so forth did not sneakily lend these people money in the
hope of putting one over on the American taxpayer while ruining their
shareholders and getting the senior executives fired.  They got it
wrong.  Badly wrong.  So did everyone else.

It appears from further Obama statements talking about lack of enforcement for predatory lending laws that the Democrats want to get back on the rollercoaster of whipsawing banks between charges of redlining (you are not lending enough to the poor) and predatory lending (you are lending too much to the poor).

Postscript:  While in retrospect there may turn out to have been laws broken, in situations like this, particularly when a management team is trying to head off a liquidity crisis, these tend to be of the reporting and disclosure ilk.  We saw back during the Enron failure that people tend to assume law-breaking of some sort to be the cause of a major bankrupcy or collapse, and to satisfy this notion the government aggresively pursued Enron executives.  But nothing for which Enron was prosecuted had anything to do with their failure -- all the violations were about disclosure and accounting methodologies.  The company would have still crashed, probably faster, without these violations.

Update:  More here

From the grasping at straws file, Michigan governor Jennifer Granholm has been talking for a while about remaking Michigan as an alternative energy powerhouse.  Henry Payne reports on her breakfast talk yesterday morning at the DNC Convention:

At a breakfast talk, Michigan's deeply unpopular governor
Jennifer Granholm explained that she was chosen to moderate Tuesday
night's energy panel from the convention stage because of the Wolverine
State's efforts in renewable power. The idea that windmills will rescue
one of America's great manufacturing states is absurd on its face, but
she persisted in spinning a fairy tale that Michigan is perfectly
positioned to take advantage of alternative energy manufacturing
because of the "Five Ws" (I'm not making this up) in abundance in the
state: "Wind, water, waste, workforce and wood."

That's terrific - they have all the key inputs needed for setting up an early 19th century business.  What is left unsaid is that Michigan has the highest unemployment rate in the country, driven by fussy and high cost unions and a crushing taxation and regulatory burden.  The only message I take from the governor's talk is that if one is not in an alternative energy business, it's time to get out of Michigan, as the majority of businesses are about to face higher power costs and more taxes to support the governor's preferred industrial investment.  Which, come to think of it, is a message most businesses have already internalized about Michigan, seeing as the population of its largest city has dropped by more than 50% over the last several decades.

It is highly entertaining to see people who have never even worked in, much less have run, a real business (including Obama, Clinton, and about everyone else on the DNC rostrum) express the hubris that only they know what the right industrial investment plan for the US is and that only they know how to build a major new industry.  In particular, we saw last night the repetition of Obama's ridiculous made-up 5 million jobs number that I critiqued in depth several days ago.

Disclosure:  I actually run a few campgrounds in the UP of Michigan, but since sleeping in tents seems to fit the governor's industrial policy, I'll probably be OK.

Whatever its stated purposes, in reality most professional licensing efforts are mostly aimed at using the power of government to limit new entrants, and thus new competitors, from a certain business:

In Alabama it is illegal to recommend shades of paint without a
license.  In Nevada it is illegal to move any large piece of furniture
for purposes of design without a license.  In fact, hundreds of people
have been prosecuted in Alabama and Nevada for practicing "interior
design" without a license.  Getting a license is no easy task,
typically requiring at least 4 years of education and 2 years of
apprenticeship. Why do we need licenses laws for interior designers?
According to the American Society of Interior Designers (ASID) because,

Every decision an interior designer makes in one way or another affects the health, safety, and welfare of the public.

This hardly passes the laugh test.  Moreover as Carpenter and Ross point out in an excellent article in Regulation from which I have drawn:

In
more than 30 years of advocating for regulation, the ASID and its ilk
have yet to identify a single documented incident resulting in harm to
anyone from the unlicensed practice of interior design...These laws
simply have nothing to do with protecting the public.

As always on this topic, I end with a quote from Milton Friedman on licensing:

The justification offered is always the same: to protect the consumer. However, the reason
is demonstrated by observing who lobbies at the state legislature for
the imposition or strengthening of licensure. The lobbyists are
invariably representatives of the occupation in question rather than of
the customers. True enough, plumbers presumably know better than anyone
else what their customers need to be protected against. However, it is
hard to regard altruistic concern for their customers as the primary
motive behind their determined efforts to get legal power to decide who
may be a plumber.

Update:  This is timely, as 1-800-CONTACTS has informed me that due to various state and federal laws, they may not sell me the contact lenses any more that I have been purchasing from them for a year.  I must go into an office and pay a government-licensed eye doctor to get an updated prescription.  This is despite the fact that, once sized, contact lens strengths are easy to understand.  Every year or so my eyes go up by about 0.5.  I could easily get by still with my old contacts, or I could, if I wanted, self-medicate by adding 0.5 (the minimum step at my level of vision) to each eye and testing to see if this new setting was any better.  This is exactly how people buy reading glasses (or pants, or shoes), by simple trial and error in the store.  But I can't do this with my contact lenses -- or actually I do exactly this, but can only do it in a doctor's office, paying the government mandated annual toll to get my prescription updated.

Yes, I know, there are all kinds of fabulous reasons to go to the eye doctor each year, to test for glaucoma and other stuff.  But why shouldn't that be my choice?  The government doesn't force people with good vision to go to the eye doctor for such tests each year, only those of us with bad vision.  The only analogy I can come up with would be having to go to your physician each year to get your shoe size validated before you could buy shoes for the coming year.  After all, I am sure there are substantial health and safety issues with wearing poorly-fitted shoes.

George McGovern has an editorial in the WSJ urging the Democratic party to abandon the idea of stripping secret balloting from union organizing elections:

The key provision of EFCA is a change in the mechanism
by which unions are formed and recognized. Instead of a private
election with a secret ballot overseen by an impartial federal board,
union organizers would simply need to gather signatures from more than
50% of the employees in a workplace or bargaining unit, a system known
as "card-check." There are many documented cases where workers have
been pressured, harassed, tricked and intimidated into signing cards
that have led to mandatory payment of dues.

Under EFCA, workers could lose the freedom to express
their will in private, the right to make a decision without anyone
peering over their shoulder, free from fear of reprisal.

There's no question that unions have done much good
for this country. Their tenacious efforts have benefited millions of
workers and helped build a strong middle class. They gave workers a new
voice and pushed for laws that protect individuals from unfair
treatment. They have been a friend to the Democratic Party, and so I
oppose this legislation respectfully and with care.

To my friends supporting EFCA I say this: We cannot be
a party that strips working Americans of the right to a secret-ballot
election. We are the party that has always defended the rights of the
working class. To fail to ensure the right to vote free of intimidation
and coercion from all sides would be a betrayal of what we have always
championed.

I have always been a bit torn on this issue.  I don't in general think the government needs to get involved in how private organizations do their business.  However, by force of law, unions are not a normal private organization. They have special rights, including ones that mimic taxation, other groups do not have:

Unfortunately, we don't live in a free society, and the term "union"
comes with a lot of legal baggage.  Recognized unions are granted
certain legal powers and rights that an average group of self-organized
folks don't.  For example, they are the only private organizations in
this country that I know of that have taxation power, and the power to
demand absolutely that certain monies be withheld from employee
paychecks (even of employees not in the union) and given to them.
Perhaps more importantly, companies can't ignore them - they have
to negotiate with a recognized union.  Unions also have informal
powers.  For example, the legal system tends to tolerate a lot of
violence and physical intimidation by union members (in strikes and
such) that it does not tolerate in other contexts  (seventy-five years
ago, the situation was reversed and the system tolerated a lot of
company violence against workers).

I remember it was not that long ago that the main issues for many urban politicians vis a vis the poorer parts of their city were

• to encourage more and free-er mortgage lending
• to encourage more retail businesses that would, through competition, help eliminate the retail price premium charged in many poorer areas

When I say I remember back to these things, I am not talking about 2 generations ago, for God sakes, I am talking about the 1990's.  Just one presidency ago.

Now, politicians are looking to punish bankers who provided easy mortgages for poorer borrowers, and are seeking to shut down payday loan companies, the last resort for ready cash before once goes to Tony Soprano.  Now, the LA city council wants to ban certain new retail establishments in South LA merely because they are too low cost and easy to use.

One of the most prevelent misconceptions about the political economy is the assumption that business universally opposes government licensing and regulation.  Often this misconception manifests itself as someone making a statement like, "Even [name of large competitor in the industry to be regulated] supports the proposed regulation so what are you libertarians complaining about."

In fact, regulation tends to protect incumbents at the expense of new entrants or new business models.  Large competitors can pass on the costs of regulation to customers, but new entrants have substantial investments to make just to build the systems and knowledge for compliance.  Perhaps worse, regulation like licensing tends to lock in current business models, by making current business practices part and parcel of becoming licensed.

For these reasons, I am excited by the book In Restraint of Trade by Butler Shaffer:

This extremely important study by Butler Shaffer--professor of law
and economist--will change the way you think of the relationship
between the state and business. It makes a deep inquiry into the
attitudes of business leaders toward competition during the years 1918
through 1938 to see how those attitudes were translated into proposals
for controlling competition, through political machinery under the
direction of trade associations.

What he finds is a business sector not only hostile to free markets
but aggressively in favor of restrictions that would protect their
interests. This, he finds, is the very source of the origins and
development of the regulatory state.

The author chooses this period because it was a time when the entire
relationship between American business and the federal government
underwent dramatic upheaval. It was in this time that business forged a
consensus about the scope and intensity of competition behavior that
they would tolerate. This began to exhibit a disposition favoring
collectivist authority over one another via government-backed
enforcement agencies.

Free and unrestrained competition required more of them than they
were willing to tolerate. It required constant innovation, a fight
against falling prices, a continued effort to seek out new markets, and
the willingness to subject their bottom line to consumer preferences
for lower prices and better products. They saw the vibrancy of free
enterprise as a threat to their firms and well being, so they used
anti-business sentiment in politics to hamper the market in ways that
would benefit them....

If you ever thought that the struggle for free enterprise was about
business versus government, this study, which is written in exciting
prose and beautiful English, will change the way you understand the
essential struggle. The evidence is vast that big business cooperated
closely with big government in building the essential architecture of
the mixed economy.

OK, here is the story to date:  Paradise Valley is a small, very wealthy town within the boundaries of Phoenix.  There is no commercial development allowed in the town except for a series of golf resorts, of which there are a number.  The town had one last large tract of unbuilt land, owned by the Wrigley heirs, I believe, that has for years been zoned for a resort.  There was an auction several years ago in which the land was sold for some figure north of $70 million to a group who wants to build a Ritz-Carlton resort, a hotel chain notorious for bringing riff-raff into communities ;=).  The Ritz group unanimously obtained all the town council and planning board approvals it needed to build.

Except now a ballot initiative will be voted on by the town residents in November as to whether to allow them to build a resort on their own land that is zoned for a resort (my previous report, complete with Zillow maps).  This action is consistent with the absolute resistence that every resident's attempt to do a major remodel of their house encounters from various community groups and zoning bodies.

One lesson, of course, is that local participative democracy can be just as much a threat to individual rights as the worst dictatorship  (though this is not a new lesson -- it was in fact learned in Athens when it was first tried).  But a second lesson is just how short-sighted this is.  I am sure residents convince themselves in each such individual effort that they are somehow protecting their property values.  But in sum, the effect of multiple such efforts is to make people reluctant to invest in property in the town, fearful that some citizens group or zoning body will take control of what they can do with their land. 

I live about 4 houses away from the Town of Paradise Valley in the city of Phoenix, though most of my neighbors and even the US Postal Service think I live in PV.  It used to be, about 10 years ago when I moved in, that living outside the PV boundary was considered a negative.  There was a big enormous value gradient between the nearest PV home and mine, based as much on snob appeal of the address as anything else.  Now, however, the gradient is reversing (hurray for my home equity!)  Real estate agents in my neighborhood who used to hide the fact that the homes are not actually in tony PV (shame on them) now use it as a selling point.  My remodel contractor breathed an enormous sigh of relief when he found out that I was, in fact, not in the town of PV.

Help me out, readers.  I seem to remember there was a name for an economic game where the profit maximizing strategy when playing once was different than if one were playing multiple times in sequence.

PS - If you are confused why a town would consider a Ritz to be bringing down the neighborhood, see here, complete with Zillow maps where not a single surrounding home is going for less than $1.8 million. 

I guess it turns out that compensation deals between sophisticated, consenting adults at private firms are not actually subject to approval by the NY attorney general, no matter how much he grandstands:

A state appeals court on Tuesday dealt a devastating blow to the New
York attorney general's efforts to force ex-New York Stock Exchange
Chairman Richard Grasso to return a portion of his $187.5 million
compensation package.

New York Attorney General Andrew Cuomo's
spokesman issued a statement saying he is not pursuing an appeal in the
case. The Grasso case is "over" "¦ "for all intents and purposes," the
spokesman said.

In a 3-1 decision, the New York Supreme Court's
Appellate Division dismissed the two remaining causes of actions
against Mr. Grasso and one against former NYSE director Ken Langone

I wrote much more about this fiasco long ago...

Update:  The AG argues that their real concern was about pay practice in non-profits.  OK, I am sure there are any number of NGOs and museum presidents where there might be real issues with the sophistication of board members.  Go after those folks, then, but there was never, ever any evidence that somehow Dick Grasso pulled the wool over the eyes of financial neophytes on the NYSE Board, babes in the woods such as the CEOs of JP Morgan Chase and Goldman Sachs.  Unfortunately, all these other non-profits tend to be run by folks who are the backbone of the NY Democratic Party.  Even in the Grasso suit, Spitzer had to work a bit to avoid naming prominent Democrats as targets.  For example, there is a lot of evidence that the person most responsible on the NYSE baord for the structure of Dick Grasso's compensation contract was NYSE board member and former NY State Comptroller Carl McCall, but since he is a powerful Democrat, Spitzer did some slick judo to avoid including him in the suit, which still including other NYSE board members.

Arizona voters will have a chance to raise the price of a new home and reduce the choice they have in the marketplace with an initiative on the ballot this November:

The proposed measure, which requires more than 153,000 certified
signatures to qualify for the statewide ballot, includes a 10-year
warranty on new homes and gives homeowners the right to choose which
contractors with a decade-long, complaint-free record do repair work.

Having shopped from time to time for a new home, I can say that such homes with extended warranties from quality companies do exist in the marketplace - some builders offer this kind of warranty, and some do not.  All this bill is doing is reducing choice.  It is requiring that consumers no longer be offered the choice of a new home without a 10-year warranty, and will require that all homes carry this more expensive option.  I am sure that what people voting for this bill will hope for is that they will be getting today's less expensive house but with a 10-year warranty added, but that is not the way it works.

Second, this will virtually eliminates the small independent builder.  Though they do not produce a large percentage of the total homes, small builders, often individual investors with a single property, are still an important part of the market.  You might say, surely this is just an unintended consequence!  Well, what if I told you the AFL-CIO, the largest organizer of construction workers in large home builders, is the #1 financial supporter of this bill?  That information might change this from an unintended consequence to the #1 rationale behind the bill.

Finally, one can easily argue that the law is forcing people to pay for something that may well have no value.  Individuals trying to game the system can easily start a company, build some houses, pay off owners, fold up the tent, and move on to a new entity.  Consumers are left with a 10-year warranty from a company that no longer exists.  Which is how the roofing game is played by the bottom-fishers in that industry.  Which means customers have to shop around for well-established companies with long track records and good products, which, if they did so, would obviate the need for the bill in the first place.

Provisions give homeowners the ability to sue without the threat of
being responsible for a builder's attorney and expert fees and require
builders to disclose their relationships with financial institutions.

Just what we need - another industry where the plaintiffs have zero cost to launch any frivolous suit they want.

Yet another would require that model homes reflect the types of properties that are for sale.

I have no idea what this means.  Are there really buyers who are dumb enough to walk through a model, say this is the house they want, and then blandly accept a home that is totally different?

What I perhaps found funniest about the article was this bit of political positioning:

The campaign, called the Arizona Homeowners Bill of Rights
Committee, formed in the midst of this year's housing-mortgage
meltdown. And the committee has attempted to draw links between
financing and construction troubles.

"These same companies that build shoddily also were involved in the
housing-mortgage crisis. They were on both sides of this equation. They
were financing homes above people's means and selling homes that were
defective," said Richard McCracken, an attorney for the measure's
sponsor, the Sheet Metal Workers' International Association, Local
Union 359.

This is kind of a hilarious stretch - talk about guilt by association.  Of course, the bill has nothing to day about mortgages, but since homebuilders were associated with those bad mortgage guys, we should feel free to do anything we want to them.

Via Tim Worstall, Gawain Towler reports this bill in front of the European Supreme Soviet Parliament:

Written declaration on fixing fuel prices
The European Parliament,"“ having regard to Rule 116 of its Rules of Procedure,
A.
Whereas we are witnessing an unprecedented rise in fuel prices, and
this scandalous surge is having a devastating effect on economic
activity in various sectors: transport and other services, industry,
agriculture and fisheries,
B. Whereas in Portugal, the major oil
companies in the first quarter of this year, vis-à-vis the first
quarter of 2007, made net profits of 22.9% (GALP), and consolidated
profits of 36.5% (REPSOL) and 63.4% (BP), which were fundamentally the
result of practising speculative pricing, as a result of the
speculative valuation of oil stocks
bought at lower prices,

1.
Calls for the establishment of a tax, for each Member State, to be
levied exclusively on these profits so as to bring them back into the
coffers of the Member State. This tax should be paid within 60 days
after the end of each quarter, with the value and scope of the levy
depending on the readiness of the oil companies to reduce their
speculative gains thanks to the 'stock effect';
2. The revenue
generated by this tax should be returned on a proportional basis to the
various economic sectors in each Member State;
3. Instructs its
President to forward this declaration, together with the names of the
signatories, to the Council, Commission, and Parliaments of the Member
States.

"depending on the readiness of oil companies to reduce their speculative gains thanks to the 'stock effect'"??  What the *&#$@% does this mean?  What economic concept are they even trying to get at?

Further, I was amazed at the statement that BP made net profits of 63.4%.  It took me a while to figure out that this was the quarter over quarter profit growth, not the profit margin.  I can't tell if these guys are just ignorant or if this is a translation issue into English, so i will give them the benefit of the doubt.  In case you are wondering, BP's net profit margin in the first quarter of 2008 was 8.3% of revenues, which in the grand scheme of industry is actually below average.

One reason fuel prices are so high in Europe is because the government takes more than half of fuel revenues in taxes:

Fuel taxes are also the central issue for truckers in Europe, because
they account for a large portion of the retail price of fuel. Unleadedgasoline
sold for $8.65 per gallon and diesel for $9.62 per gallon Tuesday in
Britain, which charges a flat $3.77 per gallon in fuel duty and imposes
a 17.5 percent consumptiontax on the total price

So, 61% (44% from the $3.77 plus the 17.5%) goes to government and 8.3% goes to the BP shareholders.  So lets tax BP shareholders more to lower the price!

Kevin Drum titles a post on providing government incentives for high MPG cars "Ending the Addiction,"  by which I presume he means addiction to gasoline.   I really struggle with the point of view on life that describes consumer affinity for enormously value-producing technologies to be an "addiction."  One could equally well refer to our preference for good health or prosperity to be an "addiction," particularly when fossil fuels have played such a central role in fueling the industrial revolution and the prosperity which it has brought.  With the current jump in oil prices tied so closely to growing wealth in China, never has the tie between fossil fuel use and prosperity been more obvious.

Drum advocates for what he calls a "progressive" proposal:

For cars, the most effective thing would be a "feebate": In the
showroom, less-efficient models would have a corresponding fee, while
the more-efficient ones would get a rebate paid for by the fees. That
way when choosing what model you want you would pay attention to fuel
savings over its whole life, not just the first year or two. It turns
out that the automakers can actually make more money this way because
they will want to get their cars from the fee zone into the rebate zone
by putting in more technology. The technology has a higher profit
margin than the rest of the vehicle.

I will say that this is probably less bad than other "progressive" proposals I have heard, but the logic here is based on consumer ineptness.  Higher gas prices, which drive higher lifecycle costs, are presumably providing exactly this incentive without any government program.  The problem, it seems, is that progressives don't think very much of the common people they wish to defend.  Just as the justification for Social Security is that the average person can't be trusted to make good decisions about their retirement savings so we elites will do it for them, this seems to be the logic here, but even more patronizing.   Here is the best bit which really demonstrates the point I am making:

Here's a further suggestion: require stickers to list the estimated cost of fuel consumption over a five year period.

Basically this calculation is total estimated miles per year divided by mpg times estimated gas prices times five. A simple piece of math with four numbers that can be completed on a calculator in 10 seconds or by hand in less than 30 seconds.  Mr. Drum, a big supporter of our current monopoly government school system, apparently does not think that people educated in this system can do this math for themselves.  Could it be clearer that "progressivism" is really about disdain for the common man and a belief that elites should make even the smallest decisions for them?

A good column on gas prices by George Will.

Can a senator, with so many things on his mind, know so precisely how
the price of gasoline would respond to that increase in the oil supply?
Schumer does know that if you increase the supply of something, the
price of it probably will fall. That is why he and 96 other senators
recently voted to increase the supply of oil on the market by stopping
the flow of oil into the Strategic Petroleum Reserve,
which protects against major physical interruptions. Seventy-one of the
97 senators who voted to stop filling the reserve also oppose drilling
in the Arctic National Wildlife Refuge.

One million barrels is what might today be flowing from ANWR if in 1995 President Bill Clinton
had not vetoed legislation to permit drilling there. One million
barrels produce 27 million gallons of gasoline and diesel fuel.
Seventy-two of today's senators -- including Schumer, of course, and 38
other Democrats, including Barack Obama, and 33 Republicans, including John McCain -- have voted to keep ANWR's estimated 10.4 billion barrels of oil off the market.

The Europeans have crafted a regulatory environment in their labor market that grants all kinds of protections and gauranteed benefits at the expense of new or unskilled workers trying to join the workforce.  We are doing the same thing:

This year, it's harder than ever for teens to find a summer job. Researchers at Northeastern University
described summer 2007 as "the worst in post-World War II history" for
teen summer employment, and those same researchers say that 2008 is
poised to be "even worse."

According to their data, only about
one-third of Americans 16 to 19 years old will have a job this summer,
and vulnerable low-income and minority teens are going to fare even
worse.

The percentage of teens classified as "unemployed""”those
who are actively seeking a job but can't get one"”is more than three
times higher than the national unemployment rate, according to the most
recent Department of Labor statistics.

One of the prime reasons
for this drastic employment drought is the mandated wage hikes that
policymakers have forced down the throats of local businesses. Economic
research has shown time and again that increasing the minimum wage
destroys jobs for low-skilled workers while doing little to address
poverty.

According to economist David Neumark of the University of California at Irvine,
for every 10 percent increase in the minimum wage, employment for high
school dropouts and young black adults and teenagers falls by 8.5
percent. In the past 11 months alone, the United States' minimum wage has increased by more than twice that amount.

After years of arguing that expanded credit is critical for the poor, and attacking banks for "red-lining" poor and minority districts, the liberal-left of this country has reversed directions, and has decided that the poor can't handle credit.

No matter how much folks want to paint the recent mortgage problem as some sort of fraud perptrated on homeowners, the fact of the matter is that in large part, lenders lowered their income standards and a lot of those folks now can't pay.  While we have yet to see any specific legislation beyond bailouts, it is impossible for me to imagine any reaction-regulation that does not have the consequence (intended or not) of restricting credit to the poor.

But these restrictions are not limited to the housing market.  Many states, for example, are cracking down and even outright banning payday loan companies, often the last resort (legal) credit source before people turn to the loansharks.  First in Ohio (via Mises Blog)

  If Ohio's 1,600 payday-lending stores want to continue operating past this fall, it
appears they will have to find something else to offer besides payday loans.

   A hotly debated bill that effectively would spell the end of the short-term,
high-interest payday-lending industry in Ohio sailed through the Ohio Senate yesterday despite
pleas from lenders that their stores would close and 6,000 employees would be put out of work.

   The Senate was unable to find a compromise that both satisfied payday lenders and
eliminated the debt trap that bill supporters said forced too many borrowers to take out new loans
to pay for old ones. So it did what the House did last month: dropped the hammer.

   "I think everybody said there is just no way to redeem this product. It's
fundamentally flawed," Bill Faith, a leader of the Ohio Coalition for Responsible Lending, said of
the twoweek loans. The industry "drew a line in the sand, and the legislature kicked the line aside
and said we're done with this toxic product."

And perhaps soon in Arizona.  Yes, the interest rates are astonishing, though the dollars involved are seldom huge for the short life and small size of the loan.  And, as an extra added bonus, Tony Soprano does not send someone to break your legs if you don't pay (the Sopranos being the only alternative provider once payday loan companies are illegal).

So, for those of you oppose payday loans, you are welcome to comment below about what a bad idea they are.  However, I challenge folks to criticize payday loans without simultaneously implicitly expressing disdain for the intelligence of payday loan customers, or trumpeting your ability to make better decisions for payday loan customers than they can make for themselves.

However, for those who think they are ever so much smarter than payday loan customers, who are charged a lot of money for small liquidity boosts, consider this:  Let's say you take out $40 each week from an ATM to keep you liquid and that the ATM fee is $1.50.  You are therefore spending $1.50 or 3.75% for a one week liquidity boost of $40, which you must again refresh next week.  Annualized, you are effectively paying 195% to get liquid with your own money.  For this kind of vig, at least payday loan customers are getting the use of someone else's money.