Can You Legislate Moderation?

Folks, this is an important post for the book-writing. Can you help me think this through?Years ago an editor of mine observed that most writing blocks are caused by tangled thoughts. People think they're just having trouble figuring out how to say what they're thinking when in fact the problem is in their confused thinking.In chapter 9 right now I'm trying to... Well, what I mean is... See, the thing with microcredit...Writing the conclusions in chapter 9, thinking about financial flows going into microfinance, I am discovering territory beyond We Need a Public Credit Bureau on Microcreditors. As I have written or said somewhere, most of this money is going into microcredit, and that creates two risks: bubbles and killing savings with kindness (undermining MFIs' incentives to take savings as an alternative source of capital for lending, as well as to lobby for the right to do so).Now, the second risk could be used to justify this edict: never invest in microcredit. That is, outside investors should never directly finance the lending portfolios of microfinance institutions (MFIs). As supporting evidence, Dennis Whittle's story comes to mind:

I worked with the World Bank in Indonesia back in the late 1980s and early 1990s, when BRI’s microcredit program was already booming. During that time, I tried repeatedly to lend BRI $100 million at subsidized rates to expand their microcredit program. BRI’s answer: "No thanks, that would screw up our discipline."

BRI is by far the leading example of successful microsavings in the self-identified microfinance world. It's great that it never took the loan. On the other hand, it was a century-old government bank. Many MFIs that now take savings started life not long ago as tiny non-profits doing just credit. Should we now kick away the ladder and ban further MFIs from developing along that path? Or is "credit first" a good way to help young institutions achieve the administrative, financial, and political heft they need to move into savings? If we accept the path as legitimate, should the amount of outside financing for microcredit be inversely calibrated to an MFI's maturity?If so, then the tasks of staving off the two risks listed above are similar: both are about saying yes sometimes and no others. And both raise a tough question: how do you legislate moderation? How do you, however approximately, define and enforce norms of moderation?In an ideal world, regulators in each country where microfinance is done would shoulder the technical and moral responsibilities for guiding and restraining the development of the microfinance industry. That would leave outsiders to invest carefree. But we do not live in an ideal world---regulation of microfinance is often completely absent, for both better and worse---so the social investors who dominate finance for microfinance should think about the consequences of their individual and collective choices.An interesting example of a system of moderation is the prescription drug system: certain authorities (doctors) are legally responsible for regulating the flow of substances that can do harm if over- or underused. Probably there can be no counterparts to doctors in the world of investing in microfinance.Before, I proposed the creation an international public credit bureau on microcreditors. It would collect and publish high-frequency data on the assets and liabilities of microcreditors, so that all concerned would be apprised of credit growth at the level of individual MFIs and at the level of countries. Going beyond what I wrote before, the body could also develop additional indicators of (un)healthy growth and promulgate soft standards analogous to the rule of thumb that mortgage payments should not exceed a third of income. It might, suggests Liliana Rojas-Suarez, issue warnings of various severity levels based on these indicators. An external reference point for responsible behavior could help microfinance investment managers dissuade the higher-ups, politicians, customers, and citizens who are too eager for them to pour more money into microcredit. The managers could explain that their hands are tied. It would also help them contain their eager inner demons.It's easy to imagine why this idea might fail, just as America's three credit bureaus failed it in the mortgage crisis. Investors as diverse as the World Bank, Blue Orchard, TIAA-CREF, Kiva, etc., might not find common ground on forming such a body. They might resist such external regulation, however light. Even if they did agree, the guidance might be so muddy as to be ineffectual: the drive to keeping investing is often very strong. And, Daniel Rozas has suggested to me privately, at least one class of investors, microfinance investment vehicle (MIVs), might do pretty well without such a formal, centralized brain for the microfinance investment business. For MIVs, the bubble problem at least is a matter of institutional life and death; while they have contributed to bubbles, they are also quick to learn from these mistakes.That last observation points to an alternative approach: instead of regulating the flows, regulate who can emit them, favoring those constitutionally more apt to act with care. Julie Abrams and Damian von Stauffenberg argued in Role Reversal that public investors ought to exit when private ones enter. It’s a blunt rule, and I've questioned its foundation, but the world might be a better place if it were followed. Perhaps a better distinction would be between generalist institutions such as the World Bank and CARE and specialists such as MIVs and Accion. Among generalists, microfinance is one line of business among a hundred, and staff often rotate to another country or department before consequences of their decisions in the previous one arrive. Notably, CARE withdrew from microcredit, but still organizes savings groups. Maybe all generalist institutions should withdraw from directly financing microcredit. Because of the care required to do it right, it is like surgery. Surgery should be left to the surgeons.If it is impractical to moderate through industry consensus or by narrowing the circle of legitimate investors, then extreme positions become credible alternatives. Should we just celebrate all investment in microfinance as stimulating a flourishing industry, even as we regret the inevitable hiccups? Or should we call for a ban on all pass-through credit for microcredit, emphasizing instead that finance for microfinance should only catalyze improvement, whether in credit, savings, insurance, or transfers? Or---and perhaps this is the same thing another way---if it is this hard to figure out when it is good to support microcredit, is that a sign that we are barking up the wrong tree altogether? Perhaps a fundamental problem here is that the evidence on impact of microcredit on poverty and empowerment is so ambiguous---more so than for microsavings. If the sign on microcredit were more clearly positive, I would not need to engage in such mental contortions to define a healthy role for investing in microcredit.