Americans aren't borrowing too much; rather, they are investingin a better life. And almost everything Sen. Elizabeth Warren hastold you about consumer credit is wrong.

Those are some of the takeaways from a new bookcalled ConsumerCredit and the American Economy, according to one of itsauthors, Todd Zywicki, a law professor at George MasonUniversity.

Zywicki is a longtime vocal critic of the CFPB – the governmentagency that was the brainchild of Warren prior to her becomingsenator and was mandated by the Dodd-Frank Act – which seeks toprotect consumers from abusive financial products andpractices.

But in an interview with ThinkAdvisor,the law professor and author worried that such products andpractices are not clearly defined by stature and that the CFPB'sentire approach is uneconomic.

While admitting his area of expertise is consumer credit, hesaid the debate over whether a fiduciary standard should be imposedon all financial advisors is analogous in that, from an economicperspective, any rule change will have a cost.

In the interview, the bankruptcy law professor escheweddiscussion of securities regulation, but sticking to his area ofexpertise said that “when it comes to consumer credit, Washington'sapproach is to wish away unintended consequences.”

He cited as an example newrules issued late last year by the Office of theComptroller of the Currency that effectively persuaded banks toeliminate direct deposit loans that the OCC deemed as essentiallyhigh-cost payday loans.

But in so doing, the OCC essentially left poor consumers at themercy of payday loan companies and bank overdraft fees by limitingmarket competition and consumer choice.

“You really have to think about the cost of doing things,”Zywicki said, noting that consumers with impaired credit will haveto pay higher interest so well-intended rules that limit theirchoices will effectively increase their costs.

Read more: Zywicki isn't completely anti-regulation…

The free-market oriented law professor says heis not opposed to regulation per se.

“I distinguish between what I think of as market-reinforcing andmarket-replacing regulation,” a distinction he said he feels thatWarren, a Massachusetts Democrat, and many in Washington withsimilar mindsets, fail to grasp.

“Market-replacing regulation includes setting interest rateceilings and banning certain products like payday loans.Market-reinforcing regulation includes sophisticated laws … thatharness the forces of competition [to promote consumer choice],” hesaid.

Apart from regulation, Zywicki's new book sought to clarify twoother key points he thinks that Warren seems not to understand.

One of those issues concerns why people borrow. The professorsaid there is a prevalent belief that “people borrow to live beyondtheir means and sustain a level of expenditure that is not viable”— in other words that other people use consumercredit irresponsibly.

But Zywicki said that is not so. “Households and consumersuse credit for the same reason businesses do: “to buy capitalgoods, and smooth income and expenses; that's overwhelmingly thereason people use credit cards.”

By buying a washing machine, he said, “people don't need toschlep to the laundromat each evening; [that's] no different than aconstruction company buying a back hoe rather than hiring 10 guysto dig a hole with shovels.'

Another key myth, he said, is that people have too much debtbecause of credit cards — that they are goaded into buying thingsthey don't want.

Zywicki said the burden of consumer indebtedness has notincreased over time, but people's purchasing power has increased ascredit choices have expanded.

Forty years ago, he said, someone wanting to buy a newrefrigerator or bedroom set went to the dealer, signed a financeagreement, paid 40% interest plus an application fee and madecostly payments for 36 or more months.

“Today we just put it on a credit card; it's just better” thanthe installment loans of the past.

High-charging personal finance companies that bought the loansretailers made — “all that stuff is gone,” he said, adding that theeffective APRs have come down.

Read more: Bureaucrats doing more harm than good…

Returning to the core subject of regulation,the professor and author said that “history tell us you cannotreduce the need for credit among consumers” and further that one ofthe unintended consequences of regulation is that “it invariablyends up hurting those we want to help.”

In other words, the primary victims of well-intentioned butpaternalistic bureaucrats, he said, are “low-income people who arebearing the brunt” of regulations concerning financial inclusionand servicing the unbanked.

The Credit Card Act of 2009, for example, “absolutely pummeledlow-income consumers” by raising costs and limiting access to moreaffordable credit.

Similarly, the CFPB's qualified mortgage rule “undermines theability of community banks to use their knowledge of customers todesign products that work for them.” By pricing these institutionsout of the market, the ironic result he said — “in light of thefinancial crisis” — is that big banks are “gobbling” marketshare.

Zywicki doesn't disagree with Warren about everything. He agreedwith her that Dodd-Frank has not ended “too big to fail,” and saidthere was “unquestionably a problem with mortgage debt” leading tothe financial crisis.

He added that “we've seen an unbelievable rise in student loandebt, which seems to be a problem, especially when it interactswith one-size-fits-all regulation that creates problems with peoplegetting housing.”

But a key concept he wants readers to understand is thatconsumer loan debt is unlike the federal government's debt, whichhe said entails “borrowing from the future to fund consumptiontoday, such as [future payments to] retirees.”

The difference is that the entitlement state is problematicbecause it is not a form of investment, whereas consumers generallyborrow to buy houses and cars and to increase human capital throughstudent loans.

[The postwar affordable suburban homes] in “Levittown wasfinanced by consumer credit,” he noted. If you think leaving tinyurban apartments with rented furniture for your own home in thesuburbs is a problem, “then credit cards are a problem; but iflives are better off, then you have a different perspective onthings,” he said.

“As long as there has been consumer credit, there have beenpeople who have misused it … and people who have been worried abouthow others use it; but overwhelmingly people use consumer credit tomake their lives better off,” he said.

In 1968, a congressional study found that loansharking was themafia's No. 2 source of revenue. Since people are going to accesscredit, it is best to promote competition and access rather thanleave poor consumers especially few options.

“We need to respect consumers as grown-ups,” Zywicki concluded.“Recognize that consumers make mistakes, but understand that peopleknow better what to do with their lives than well-intentionedbureaucrats.”