Financial Stability Is a Volume Business: A Comment on the Legal Infrastructure of Ex Post Consumer Debtor Protections

Article excerpt

I. Household Debt and Financial Stability
II. Household Debt and Legal Services
III. Legal Services and Financial Stability: What Is To Be Done?


Professor Melissa B. Jacoby's essay (1) pays homage to Stewart Macaulay's classic study of the Magnuson-Moss Warranty Act, a U.S. federal consumer protection law that, according to Macaulay, was virtually unknown to the lawyers whose clients needed it the most. (2) The moral of Macaulay's study is that even good consumer protection laws on the books often fail to deliver in action for complex cultural, institutional, and economic reasons. (3) Yet reducing Professor Jacoby's essay to this very important moral undersells its contribution. A fragmented infrastructure for legal service delivery of the sort she describes does not merely fail consumers more often than it should, but can frustrate economic policy, delay crisis response, and undermine financial stability. By implication, rationalizing legal service provision is key to the success of both crisis management and financial reform.

In this Comment, I first situate household debt in the context of financial stability. Second, I highlight elements of Professor Jacoby's argument most relevant to financial stability concerns. Third, I sketch out several potential implications of her contribution for crisis response and financial regulation.


By the end of the twentieth century, ordinary people joined the global capital markets in force. The rapid expansion of consumer finance in recent decades is variously attributed to government policy and the growth of financial and information technology. For example, as governments loosened restrictions on cross-border capital movements, Argentine, Icelandic, and Hungarian households borrowed in foreign currency, notably to finance housing with long-term loans, unavailable or prohibitively expensive in local currency. An Indian firm launched a public offering to fund tiny loans to the poor. (4) Securitization techniques transformed small, idiosyncratic, and illiquid consumer and housing loans made in the United States into standardized bundles packaged and repackaged to meet the risk and liquidity demands of diverse constituents around the globe. Policy and market forces thus combined to produce a period of apparent global capital abundance, albeit one punctuated by financial crises that implicated households directly.

The transformation of retail debt into wholesale capital flows had important benefits in the form of economic growth and financial inclusion: more and cheaper money to the masses. Therein too lay the costs. More, cheaper money to the masses produced credit bubbles, which burst and left behind insolvent institutions and over-indebted people in Argentina, Iceland, Hungary, India, and the United States alike. Financial technology made it possible to multiply and spread consumer debt throughout the financial system, (5) with pockets of risk concentration in critical places. If they are sufficiently numerous, small consumer debts that populate key financial institutions but exceed debtors' capacity to pay can bring down the economy as a whole. First, they can bankrupt creditors and disrupt intermediation. Second, they may depress consumer spending and with it aggregate consumption, growth, and employment. Third, they may neglect or rush to sell assets, such as homes, contributing to depressed asset prices. (6) Other costs of turning consumer debt into capital markets debt are more subtle: for example, securitization transplants a "contractual bankruptcy" (7) model designed for firms into the world of consumer finance for which they are ill-suited. (8)

It follows that stabilizing a complex modern financial system in crisis and creating a stable system going forward require capacity to manage household debt on a large scale. Managing household debt with a view to financial stability is a task somewhat different from consumer protection for its own sake, or as a way to address social problems. …