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Might one argue that the Federal Reserve, in combination with various measures by the federal government to pursue easy credit policies for the past 50 years, has been an effective tool in crime fighting?

I’d love to be able to parse this out empirically – but remember one reason why we have organized and other crime – black market activity. When market activities are pushed underground, people with a comparative advantage in protection and violence tend to be involved in the production and distribution of the goods. Think about the difference in having a loan called in from a loan shark versus from a bank – the latter is a far more “civil” affair. If there are factors which push borrowing and lending activities into black markets, then you would expect the incidence of crime to be higher than if we lived in a world where borrowing and lending in the formal sector was easier.

Thus, despite the millions of rotten loans that were made by fly-by-night mortgage originators, despite the bad incentives created from low-interest rate policies, despite the flood of capital via Fannie and Freddie into the lending markets, might we only be focusing on the easy to see negative effects of these things? Could it not be the case that millions of people used these formal institutions rather than the informal institutions of the past? If this is the case, then the amount of crime, particularly in the areas where loan sharking and money collection are involved, could very well have been lower than otherwise would be the case because of this easy credit policy.

I am not saying this is true, but what I am saying is that it is entirely possible – and if someone were to take a purely utilitarian approach to social policy, before rejecting easy credit out of hand, perhaps a study or ten could be employed?

One Response to “The Fed as Crime Fighter?”

  1. Michael says:

    Are you argueing the crooks in Washington are crowding out the crooks on the streets?
    I would point out that there are usually legal “loan sharks,” such as pay-day loan centers, that offer loans at high interest rates, butmaybe below a loan shark rate (not positive). Unfortunately, there is a crusade against these lenders by the government (at least in MO), which would encourage people to seek loan sharks instead.
    I guess maybe if we look only at the short-run, it could be true that there are less loan sharks, but in the long run the government would drive more legitimate lenders out of the market (82 banks so far this year, 140 last year), which would then support more loan sharks.

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