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Where's the Beef? Elizabeth Warren Edition

posted by Adam Levitin

Here's what's striking about all the criticism of Elizabeth Warren: there's no smoking gun. No one has been able to point to anything radical in Elizabeth Warren's extensive body of writing. Where's the beef?

As far as I can tell, the objections to her are a perception that she doesn't like banks (neither does Congress or anyone else these days, it seems), that she "doesn't understand the logic of consumer finance" or that she is someone who "fundamentally objects to the wayour financial markets are organized," and that she would overregulate and restrict the availability of some financial products. Where's the evidence for this? 

The only attempt I have seen to peg Elizabeth Warren to a specific regulatory proposal, rather than kvetch about her gestalt is an uninformed suggestion that she might bring back usury restrictions. For starters, section 1027(o) of Dodd-Frank explicitly restricts CFPB's authority to enact a usury limit. Irrespective, I am not aware of any occasion when Professor Warren has ever called for a usury law. There are passages in her work that lament the rise of predatory lending in the wake of the Supreme Court's 1978 Marquette decision that effectively undermined usury laws, but that's a far cry from wanting to return to the state of consumer finance regulation in 1977.

Elizabeth Warren has no problem with banks. She (like anyone else, I would hope) does have a problem with sharp practices, be they by banks, or anyone else. There's plenty of disagreement as to what sort of practices are "unfair, abusive, or deceptive" to use the language of Dodd-Frank, and Professor Warren no doubt takes a more expansive view of this than, say, the American Bankers Association, but that's hardly a radical position.

As for the overregulation bogeyman, let's remember a few things. First, regardless of who runs CFPB, any regulations would have to go through the regular notice-and-comment rule-making process. The bureaucratic and procedural hurdles to enacting a regulation have an inherently moderating effect. Section 1031 of Dodd-Frank places significant restrictions on the CFPB's ability to prohibit practices as unfair, abusive, or deceptive, for example. Second, Elizabeth Warren's whole modus operandi is to make evidence-based policy recommendations, rather than engage in faith-based financial regulation--regulating based on faith that market participants will behave themselves, even if misbehaving is profitable. She is about data, not pushing social theory. And, remember that if the CFPB gets out of hand, Congress (and the new Financial Stability Oversight Council) is free to rein it in.

So let me throw down the gauntlet: can anyone point to anything Elizabeth Warren has written or said that indicates that she would pursue a radical agenda? If not, then this is just a matter of degrees--that Elizabeth Warren (like many others) has a vision of fair play is more exacting than that of the banking industry. And that's not a very convincing argument against her.


ANYTHING???? Gosh that's an awfully big word. But after much deep thought and thoughtful/conscientious consideration.... uuuuuuuuuuuuuuuuuuhh.... NO

Megan McArdle at the Atlantic spent a long post arguing that Dr. Warren's M.O. is NOT evidence based. I haven't read 'The Two Income Trap' so don't feel that I can judge McArdle's criticisms of that book. But every one of the interviews and YouTube presentations of Dr. Warren showed her to have a definite command of the numbers and trends. I think it will be yet another terrible betrayal of America's struggling middle class if the post does not go to Elizabeth Warren.

I'm right there with a lot of people in hoping that Prof. Warren gets the nod for CFP captain... That said, she's had a rough couple of years at COP. Has anyone asked her if she'd want the job?

This NY Times Article contains what strikes me as some sensible statements by a banking industry representative about Professor Warren. He says that she is bright, competent, and a great advocate. Then goes on to explain why his organization would prefer an alternate candidate for Director: "We just respectfully disagree with her view of the world." Fair enough.

The interesting statements are that "she's partisan and she's bull-headed and she's opinionated." I think the debate should focus on the relative importance of having the first Director possess those qualities, and whether those statements accurately describe Professor Warren or the other two candidates (apparently Michael Barr and Eugene Kimmelman). Some would see these qualities as essential to making sure the Bureau doesn't immediately succumb to regulatory capture or flounder around without any concrete activity for its first years. Others would value someone with less of a past trail of advocacy and a more obvious history of compromise. And, I am not sure those statements don't describe all three candidates--they all are Democrats who have advocated for consumers. Finally, would we really want someone as Director who doesn't have opinions???? And what is the opposite of bull-headed? Weak-willed???

In 1987 she wrote "Bankruptcy Policy" in which she argued that bankruptcy law should be revamped to allocate losses based on ability to sustain the loss rather than preexisting nonbankruptcy priorities. Whatever one thinks of it, that was certainly radical. There was no evidence to support it. (I am not even sure it is capable of evidentiary testing.) She justified the argument by saying the benefit of bankruptcy to creditors justified the losses they would incur. But that was dogmatic; you can believe it or not, but there is no evidence to support it, just arguments based on postulates, not data. She also suggested that secured credit ought to be ignored in bankruptcy. That was radical and there was no evidence to support it.

In 1997 she published her setaside article, arguing that up to 20% of all secured creditors' recovery in a firm's bankruptcy be set aside for the firm's tort victims. That was radical and there was no evidence to support it.

The obvious common denominator of those was that they were anti-financial institution since the largest creditors would bear more losses and their prebankruptcy efforts to mitigate their losses would be partially nullified.

I am unaware of an article where she leaned the other way as among the various constituencies in bankruptcy.

I've also noticed her troubling tendency in interviews to attack the motives of anyone who disagrees with her, never to debate on the merits qua merits. It's always ad hominem and the genetic fallacy, "well of course he'd say that when he works for ...." (never herself disclosing the extent to which she has provided legal services to asbestos plaintiff lawyers ...)

I won't discuss her "medical bankruptcy" work as it is slightly off point, although in general it showed a strong tendency to limit the pursuit, analysis and presentation of evidence to what supported her preconceived views. The failure to disclose the positive impact of section 522's exemptions on the financial condition of the alleged medical bankrupts was particularly noteworthy since she is a bankruptcy expert.

So, based on the evidence, I see a strong, passionate, dogmatic, not burdened by evidence opponent of financial institutions with a distributive agenda at their expense. If that is what the times and politics call for, then she is the right person for the job. And if you want to be a passionate, dogmatic, "that's exactly who I want running the CFPB" blogger - hey, it's your blog! But this particular post, that characterizes her as data driven and undogmatic, is passionately and dogmatically inaccurate and contrary to the evidence.

MT: Your characterization of “Bankruptcy Policy, 54 U. Chicago L. Rev. 775 (1987) is simply false. The article doesn’t say anything close to what you claim it does.

In “Bankruptcy Policy” Professor Warren presents a positive description of how the bankruptcy process works, not a normative vision of how it should work. Here is the only part that even discusses allocating losses to those parties best able to sustain them. It is a statement about what bankruptcy _already does_, not what it should do. To give the quotation in full context, Warren notes that

“By definition, the distributional issues arising in bankruptcy involve costs to some and benefits to others…. Bankruptcy is simply a federal scheme designed to distribute the costs among those at risk. On what basis does bankruptcy law distribute these costs? Below are some of the important features for ordering distributional priorities. The list is only partial, but it identifies some of the key issues.

“1. Relative ability to bear the costs of default. Some creditors are not likely to have anticipated the risks of termination of the business, and others may face especially acute difficulties in absorbing the costs of a debtor's default. For example, a debtor's employees may be particularly ill-suited to bear the costs of default. Employees are among the creditors least likely to have spread the risks of default. They seldom are able to contract with several different employers, and losing a paycheck will quickly deplete modest savings. The Bankruptcy Code reflects a concern for these creditors, granting a priority to limited employee wage and retirement fund payments.”

She goes on to lay out several more ways in which bankruptcy allocates costs. There’s nothing radical there. The whole point of the article is to take Professor Douglas Baird to task for attempting to analyze bankruptcy through an economic efficiency lens that Professor Warren believes is too narrow and artificial. Whatever you think of the Baird-Warren debate, it is a positive one, not a normative one by its own terms.

As for the secured credit set-aside proposal, yes, it generated a lot of criticism at the time, and was called “radical,” by the banks, but it’s worth looking at the substance of the proposal and making our own evaluation. The proposal appeared originally in a 1996 memo to the ALI’s Council. The proposal was for a 20% set aside for certain judicial lien creditors in certain circumstances, and it draws heavily on the thinking of Grant Gilmore, the draftsman of original Article 9 of the UCC that there has to be limits on secured credit (Grant tried to limit secured credit in other ways, but that's another story). Warren recognized that a set aside could potentially constrain credit, but as she noted in a subsequent article in Cornell Law Review (1997) the structure of bankruptcy, tax, and secured credit law show that “fostering as much lending as possible is not the only goal of any commercial law system. The question is always one of balance….The real question is how the efficiency arguments, even if they were unambiguously true, stack up against other considerations.”

Isn’t that very much the lesson of the housing bubble? Credit is a two-edged sword—it can be an engine of prosperity, but also cause a lot of problems—so we need to find the right balance. Simply maximizing credit availability cannot be the proper balance.

The 20% set aside proposal was certainly novel, but it was an attempt to deal with a serious problem that scholars and practitioners across the political spectrum all recognize: that bankruptcy doesn’t do a great job by unsophisticated or involuntary creditors, like tort victims and taxing authorities. Professor Warren was hardly alone in proposing reforms to the secured credit system; academics of all political stripes have proposed changes.

Any reform of secured credit is “radical” in the sense that it would change the status quo and alter the distribution system. But is it really so radical in terms of out-of-the-mainstream political thought, to suggest that the bankruptcy priority scheme be rejiggered? Recall that Congress itself did just that in 2005, by elevating the status of a group of involuntary creditors—child care and alimony claimants.

So what your complaint comes down to is that you don’t like the distributional implications of trimming the sails of secured creditors. This is the grounds for your allegation that “the obvious common denominator” in her work is to be “anti-financial institution.” I think a fairer characterization of her work is that it argues that the law needs to balance the interests of all participants in the economy, not just heed the interests of financial institutions. I dare say that view is not radical, but decidedly mainstream.

As a bankruptcy practitioner, I can tell you that secured creditors are better protected than any other parties in a bankruptcy case. If anyone is to be afforded more protection, it just about has to be taken from the secureds' slice of the pie.

Concerning your headline question, I shall tell a tale. When the Challenger blew up, a blue ribbon investigation panel was appointed that included Richard Feynman. The testimony before this panel was interminable NASA-speak obfuscation. While the testimony was droning on, Feynman had a piece of the O-ring material that had failed and caused the explosion, and he was dipping it into his glass of ice water. When the witness was finished, Feynman broke in and demonstrated that the water, actually a few degrees warmer than the air had been the night before the launch, removed the elasticity from the material, making it useless as a seal. He crumbled it to bits in his hand. He then asked some simple questions about whether the temperature specifications were known and why they weren't followed. After that, the lid blew off the investigation.

But Feynman had broken the rules. Instead of keeping everything in jargon so the investigation could be tightly controlled and the results gamed, he'd made a blunt, simple demonstration any child could understand. Since he was already a Nobel laureate, there wasn't much of a way to punish him. Such is not the case with Warren. She breaks the same rule, and so must be excluded from the halls of power. Criticism of "lack of hard data in her research" or "lack of experience in such a position" are code phrases for the real motivation.

Here's a letter from a group of economists supporting Prof. Warren's nomination to serve as Director of the CFPB.


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