Whenever we talk about consumer credit markets -- Adam and I have two articles up today on the topic -- someone usually wonders whether or not serious consumer financial protection would have prevented the financial crisis. The answer is that it would have substantially changed the nature of the crisis, probably for the better. There's pretty good reason to believe, between loose monetary policy and a huge surplus of wealth at the top of the income scale, that some kind of asset bubble was inevitable. The only way to deal with that problem is through traditional prudential regulation, a smarter Fed (if that's possible) and, as Matt Yglesias suggests, higher taxes. But that consumer home lending was the venue of this pernicious asset bubble was was not inevitable. The various frauds and predatory loans that made consumers, and particularly low-income people and minorities, the target and eventual victims of all of this speculation would have been severely curtailed by effective consumer protection.The effect of putting the asset bubble in another sector would be enormous. The consumer spending that drove the economy would not have been hit as hard, and in general the hurt on Main Street would be decreased. Also, had this kind of asset bubble occurred in another sector, it might have had some socially productive outputs, like the Internet bubble, which at least resulted in a lot of new technology, unlike our current bubble, which resulted in an over-capacity of cheap homes and toxic assets. It's also possible that an asset bubble would have been smaller in another sector where it might be harder to take advantage of people -- while we've learned that there's certainly no monopoly on intelligence in the financial world, average borrowers are uniquely suited to being ripped off by those with more knowledge, money and political power than they. Incidentally, Simon Johnson has a good post today on why we should think of consumer protection as a macroeconomic issue. -- Tim Fernholz
