Points on proposition's rebuttal to our arguments

- The proposition claims that we did not tackle their point that the bankers (ant not the banks) are interested in making excessively risky loans. However, they themselves failed to present it properly. They did not explain the mechanism how such perverse incentives appear and how they lead to excessive risk taking. More importantly, the government did not show how high risk taking may make banks go bankrupt and consequently cause economic crisis. On contrary, we claim that it is not high risk taking but the miscalculation of risk and thus setting insufficient required return. Even if we agreed that perverse incentives to take to high risk exist among banks’ employees and high risk taking may be harmful, it is just a good enough reason to improve control mechanisms preventing such behavior. Indeed, corporate governance should be tackled first – for instance, creating a pay mechanism for management which would not encourage excessive risk taking sounds like a good idea (bye bye, executive stock options). If we accept the proposition’s premise that the bankers are taking excessive risks, putting a cap of 20% on interest rates is not a solution to the problem - they will continue taking excessive risks as long as the underlying incentives arising from poor corporate governance remain. However, the imperfections of internal control mechanisms is not a sufficient reason for the government to intervene by imposing arbitrary limits on how much risk an institution can take. Indeed, risk bearing capacity of a financial institution depends on a number of factors such as amount of reserves, leverage etc. As a result, “one size fits all” idea can not be applicable in this case as the government believes. We want to emphasize that banks are in a much better position than the government to evaluate how much risk they should take and can bear. The whole purpose of financial intermediation is to allocate scarce resources spatially and over time. We create banks, because they are more efficient and they are capable of allocating these resources. We create them, because due to their size and diversification capabilities they are able to manage high risk, unlike single individuals. Prudent management of high risk projects/loans has a high societal value, and we appreciate that – it allows people to borrow, creating value for them. On the other hand, the government doesn’t really posses the knowledge of how financial resources could be efficiently allocated. The cap will lead to suboptimal outcomes, by preventing financial institutions, who can bear higher risk, from doing so while at the same time restricting individuals from access to financial resources. - The rebuttal to our second point is just a short version of our own argument with emphasis on other points. Sure, we agree that the banks might deny credit and that this is most likely. Our main point is that due to already present contractual agreements they might not be able to do so; hence, transfer the costs on clients with good credit. - It is true that we believe that individuals are capable of making the best decisions on their own. However, we never demanded educating people. The proposition was implying with their case that individuals are not capable of making wise decisions and should be prevented from doing that. We simply proposed a handy list of alternatives that are so much better than restricting people from a free choice. We never demanded them being implemented. - While making the rationality analysis, the proposition neglects the positive effects of loans to individuals. The fact that the individual wants to borrow automatically implies that she expects the benefit from the action to outweigh the costs. We do not see any single reason why the individual should not be able to borrow 100$ now to return 104$ a week later after she gets her monthly pay. In this case the transfer of consumption possibilities is very valuable: the person bought food for the money. Consumption of food, unfortunately, is not very transferable over time which sort of makes it a priority. Just because some people were unfortunate enough to get into debt spirals is not a sufficient reason to deny the possibility to borrow for other people. Since the decision is made under rational mind (the individual is not intoxicated, furthermore, the decision is not addictive - as are drugs and gambling, which are given as an example by the proposition), she knows best about possible gains and possible consequences of the loan that she is considering taking. - Third party harm is not sufficient here. We can find negative “broader consequences” of something in each and every action. Emergence of a new business hurts incumbents. Technical innovations leave people temporarily unemployed. A claim that proposition’s case in the debate is not very strong might hurt their feelings. However, we allow all these things, because we generally value the right of people to act freely when there is no direct tangible harm to the third party. If the proposition is so keen on intangible harms for the society, perhaps they could consider revising their plan, because denying the loans can force individuals to get money from not so legal sources (stealing), which is also a harm for the society.