Hopelessly misinformed opponents of liberty and prosperity claim that “South Africans are lucky, our National Credit Act (NCA) saved us from the “subprime crisis”. I have also heard the statement that the US subprime crisis has no relevance for SA. People who are sufficiently well-informed, know both of these statements are nonsense.

“Subprime” credit is for people who aren’t credit-worthy. There is no objective definition of “credit-worthiness”. The only rational option is to allow enough financial market freedom for trial, error and innovation to determine optimal trade-offs between risk and reward.

Flaws in NCA and subprime mythology include:

— The subprime crisis occurred long before the NCA was implemented.

— The NCA precipitated an unprecedented deluge of subprime lending in anticipation of its implementation.

—The subprime crisis isn’t a global phenomenon. It impacts the USA because of country-specific circumstances.

—The USA crisis was preceded by the setting of extremely low interest rates by the Federal Reserve, which encouraged borrowers to enter into home loans that were beyond their capacity to service when interest rates rose once again.

— SA does have US-type non-commercial policies, such as the Financial Sector Charter, which has the intention of inducing banks to provide non-commercial mortgage finance, which the banks are reluctant to do without a measure of risk-sharing by government.

— Ostensibly the NCA was introduced to prevent reckless lending but at the same time government prevents credit grantors from relying on objective indicators of credit-worthiness.

Though the probable causes, effects and solutions of the subprime crisis are debatable, some basic truths are seldom mentioned. Firstly, US state and federal governments, like ours, went to great lengths to get credit providers to fund people they would rather not fund. In other words, our government policies prevent people from transacting freely with each other, and making business decisions for business reasons.

When banks and retailers lend their own money, they tend to exclude certain groups of people based on real world credit experience. They may, for instance, “red line” people residing in areas known for debt default, or charge higher interest to offset greater risk when giving credit to people with “negative” ratings. In a free market, such decisions are made exclusively on dispassionate statistical grounds — the predictive value of credit data. Should anyone discriminate irrationally, they will be out-competed by alert lenders.

Secondly, the notion that clever, wealthy credit providers should throw their hard-earned wealth away by lending it “recklessly” is so bizarre that it doesn’t need refuting. The theory that credit grantors sell to debt-defaulters, to repossess and then to resell, and thus profit from the repeated sales of recycled products is absurd.

It is prohibitively costly to sue for bad debts, to repossess used things and to resell them. Credit grantors dread bad debts, which is why they spend much time and money accumulating credit information and running credit checks. The SA credit industry was so good at this that, until the system was undermined by newly introduced legislation, it was regarded as a model for the world to emulate. Schizophrenic enemies of liberty say they want responsible credit yet wage war against proven techniques for achieving it.

Policy schizophrenia has lawyers laughing all the way to the bank

Policy schizophrenia has lawyers laughing all the way to the bank. Unfortunately, the bank is in an impossible situation — obliged by the Banking Charter and forbidden by the NCA to do subprime lending.

Why do seemingly intelligent people perpetuate such regulatory madness? Political expediency entails the purposeful adoption of counter-productive measures, usually because popular opinion responds to superficially plausible rhetoric. It is easy to tell consumers that anti-market interventions such as the NCA “protect” them without explaining that promised benefits are more apparent than real, are negligible and will cost them dearly. They are, for instance, subjected to substantially reduced access to credit when they need it most, higher finance charges, and fewer consumer choices. The disastrous collapse of retail sales, especially motor vehicles and furniture, is one of the NCA’s many anti-consumer impacts and not a result of “high” interest rates.

Access to lawful credit by needy people, especially historically disadvantaged black South Africans, evaporated at the stroke of the statutory pen because, with the implementation of the NCA, it became prohibitively risky and costly to help them. They’ve been driven into the clutches of informal lenders who are inclined to resort to underground methods of debt collection because the NCA denies borrowers access to formal credit.

The assumption in the legislation is that bureaucrats know better than credit grantors who is credit worthy, and officials have been given the power, in violation of the rule of law, to set aside credit agreements retroactively and impose fines called “penalties” far in excess of what proper courts may do. The NCA is internally contradictory and imposes harm where benefits are intended.

In short, if we want to reverse subprime tendencies, all we have to do is discontinue aspects of the NCA, the Financial Advisory and Intermediary Services Act (FAIS), and pressure on banks to finance non-commercial mortgages.

Leon Louw is the executive director of the Free Market Foundation.


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