The problems governments face in regulating consumer finance fall into two categories: normative and cognitive. The normative problems have to do with the way that some governments, particularly those adhering to an American model of household finance, have financed social mobility and intergenerational welfare through debt, a tenuous and socially risky policy choice. Credit has a substantial social aspect to it in the United States, where the federal government has in some way engaged in subsidizing about 1/3 of consumer credit, particularly in the residential mortgage market, feeding into a substantial capital markets dimension through government-guaranteed securitization. Most Americans think they “choose” and “earn” their wealth only through their own efforts, but in fact a substantial institutional apparatus of government assistance supports wealth creation, particularly for higher income households, including substantial disguised subsidies supporting home mortgage credit. Access to credit in such a system becomes a social primary good in need of regulation to ensure compliance with equality principles appropriate to the society in question. Governments have poor records in regulating access to credit and in some cases enact law or support social structures going in the opposite direction, towards injustice, substantially impairing the life chances of persons and families in historically disadvantaged groups, compounding status and material inequality. No government has as yet developed appropriate policy tools to evaluate the effects of financial regulation on equality. Rather, most policies have historically entrenched and even promoted inequality. The cognitive problems have to do with the dilemma of trading off between paternalism and autonomy in consumer financial regulation. Disclosure approaches fail because they do not adequately take the cognitive limitations of persons into account. Debtors do not read or understand terms and conditions. Paternalism can fail because capital can freely exit a market and engage in regulatory arbitrage in seeking out the best returns. If credit is what in a Rawlsian framework can be understood as a social primary good in a society then all of these problems are all the more serious. The solutions to these twin normative-cognitive problems are in either taking the distributive justice of access to credit seriously or in decoupling debt from its role in producing social mobility when this cannot be done. Debt can be ill-suited for allocating basic means to a good life in a society. It converts collective duties of justice owed to individuals to private duties of contract owed by individuals, aggravating power and domination dynamics in a society and worsening inequality.
John Linarelli, Equality and Access to Credit: A Social Contract Framework (September 13, 2020). Law and Contemporary Problems, Vol. 84, No. 1, 2021
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