THE CASE AGAINST SECURED LENDING

In this paper we argue that the secured loan exists because imperfect information allows a bargain that gives the firm cheaper credit and the lender a less risky loan. The costs of this are borne by unsecured creditors, who we argue are likely to be in part ignorant of the security. The consequences are that credit markets become distorted, failing firms are kept alive too long, and unsecured creditors face large losses. The case against the secured loan is, we believe, strong enough to warrant some reform in the system, some of the options for which are discussed.