On Anti-Usury Laws

Steve Sailer posts a couple of excellent pieces reflecting on the interest rate caps of yore:

Traditionally, there were legal or cultural limits on interest rates. Even though anti-usury laws and traditions were often perceived as a populist issue, it actually meant in practice that finance used to be much more elitist. If people in Arkansas got their state legislature to cap interest rates that New York banks could charge them, well, the New York banks would then lend only to the least risky Arkansawyers.

So, if you couldn't qualify for a prime mortgage, you didn't get a mortgage. If your corporation couldn't issue bonds above junk quality, no reputable investment bank would issue bonds for it. If you had a bad credit record, you couldn't get a credit card.

Given the events of the last year, the advantages of this regime are all too apparent. Indeed, most of our countrymen are voluntarily deleveraging their personal finances irrespective of government policy. (Unfortunately, the government itself is undertaking the exact opposite process, doubling the national debt in a single year.)

But the words of Megan McArdle give me pause: the system can be "stable" at different levels of output. A permanent contraction in consumer credit seems likely to lead to permanently lower economic growth, and the kind of policies that would compensate for this are politically radioactive for the usual reasons.

This bit grabbed me though:

[T]he problem is that defaults can have widespread costs to people who weren't parties to the agreement -- another case of privatizing profits and socializing costs.

For example, Joe Cassano of AIG bet Goldman Sachs that Goldman's mortgage-backed subprime securities wouldn't default, and now I and my descendants unto the 7th generation are supposed to pay off the damn things.

More subtly, if a firm lends money to people who have nothing to lose, there can be collateral damage. If the house next door gets bought by deadbeats who don't have a prayer of paying off the mortgage, but are just going to live in it rent-free until the sheriff finally kicks them out, I'm harmed. A foreclosure next door lowers my property value. Moreover, I had to live for two years next to deadbeats who shouldn't have been able to afford to live there.