Aug. 30 (Bloomberg) — The lowest trick in the world is to take advantage of a family through its Labrador. This summer, someone tried to do that to us.

An envelope arrived featuring an illustration of a boxy black Lab standing midstream, probably waiting to retrieve a duck. This caught my daughter's eye. She has a yellow female puppy.

Then she saw that the letter was addressed to her. Inside was an offer from the only club of which she is a member, the American Kennel Club. AKC would send a gift imprinted with "a beautiful full-color photo representing the breed you've come to love so much." Her dog's own name would be stamped on the gift, because "your dog is special."

Except this wasn't a gift. It was a solicitation for a Platinum Visa credit card. The approach was so innovative that I started a little conversation in my mind with Dennis B. Sprung, the AKC president. But before the Dennis in my head even began to defend himself, my daughter had it figured out. She didn't even have to read that fine print on another page about being 18 or older to qualify. She handed the dog-decorated paper right back, summing up: "This is not for me. I'm 10."

The Labrador Visa captures the issues in a larger debate. People are asking whether citizens, whatever their age, are able to judge when to borrow, and when to say no to the Labrador. Everyone is wondering whether lenders who lure vulnerable citizens are responsible for the subprime troubles.

A number of lawmakers hope to spend the fall pursuing the offending lenders. Senator Charles Schumer, Democrat of New York, says, "Judging by the way lenders are still pushing misleading, deceptive and expensive mortgages, you'd never know there is a crisis."

Protections Backfiring

But there is also another danger here. It is the danger that when the lawmakers move to protect consumers, they inadvertently hurt them.

In the 1950s, 1960s and even the 1970s, people were cautious. They settled for modest homes even when they could afford something better. Everyone who grew up in those years remembers the mood of parsimony. Families like ours can't afford a mutt, no matter what kind, children were told. You didn't hear a lot about Labradors.

Some of this stingy mood was actually due to regulation. The house loan that was available was the kind that came from the local savings and loan. One rule, Regulation Q, prohibited thrifts from paying interest above a ceiling. The Reg Q theory was as well-meaning as today's plans to limit predatory lending.

Opposite Effect

S&Ls were supposed to lend at low rates because they borrowed at low rates. But the reality was that Reg Q rendered the thrifts uncompetitive. Customers put their money where they could get a better rate. With less cash, the thrifts curtailed lending. "This effect is exactly the opposite of what the advocates of Reg Q contend," noted Lawrence Roos, president of the St. Louis Fed, in a rueful 1979 speech.

"A borrower was either prime at the going rate or was subprime and did not get a loan at all," says economist Harvey Rosen of Princeton University in a National Bureau of Economic Research paper. In some cities "prime" was real-estate code for "white."

The result was a two-class society of owners and non-owners, with minorities and the poor stuck in the latter class. One of those concerned was Schumer, who, when he first began to talk about running for Congress at age 29 in 1980, worried aloud about deteriorating housing stock in the Flatbush neighborhood in Brooklyn, New York.

Lending Changes

Then the country changed. Reg Q'S ceiling was phased out in the 1980s. Various innovations enabled borrowing families to tap into the country's financial markets. Loans suddenly were plentiful — and came in many breeds. Fannie Mae and Freddie Mac, the government-sponsored enterprises, get credit for helping to create a liquid market by bundling loans and selling them.

Others, including Rosen, see forces beyond securitization at work. They say that new mortgage products allowed Americans to purchases houses that were consistent with their lifetime earnings potential, not just their weekly pay checks. This in turn gave families with relatively low current incomes access to homeownership.

Blacks, Hispanics, the formerly poor — all profited from innovations in the market for housing finance. Rosen says he believes that Americans began to analyze their ability to afford houses more accurately.

But now lawmakers want to strengthen Washington's role again. The suggestions range from a larger role for Fannie Mae and Freddie Mac to stronger penalties for so-called predatory lenders.

Bigger Threat

Such proposals threaten the economy in a way that a simple subprime problem doesn't. Making Fannie and Freddie even larger merely makes the potential cost of their failures higher.

A big government presence in the loan market generally tends to infantilize borrowers so that they expect an absurd level of protection. They lose the intuition they had as 10-year-olds.

Seen from lenders' point of view, the attacks on subprime lending look perverse. "It used to be that a bank was viewed as racist if it didn't lend to minorities," Rosen says. "Now the bank is labeled as a predator if it does."

Besides, tighter rules don't even achieve their goal of constraining predators. As soon as you block one form of solicitation, the direct-mail people find another. The important thing is sustaining the skeptical 10-year-old in each of us and on the lookout for the next trick. After all, in the field of credit, there will always be the occasional Labrador.

(Amity Shlaes, a senior fellow at the Council on Foreign Relations, is a Bloomberg News columnist. The opinions expressed are her own.

© Copyright 2007 Bloomberg