More on Loans

Ezra responds. Let me clarify something here. Ezra writes:

Ryan Avent argues that, though some loan officers may have been unscrupulous, the real cause of the housing crash was stupid, greedy, borrowers, who wanted more loan in order to buy more house.

That’s not at all what I believe. The housing bubble and decline is a complicated animal, and blame for the situation may be spread around to many actors. I certainly wouldn’t place most of the blame on greedy home buyers. What I did suggest is that most of those borrowers who qualified for prime loans and instead took subprime loans did so in order to borrow more.

I’m not one of those who think that this is entirely a matter of personal responsibility, and that no new regulation is necessary. Not by a long shot. All the same, Ezra’s comments demonstrate that we’re approaching the issue (and many others, I’d guess) from very different viewpoints. He says:

It is perfectly well understood that borrowers, by and large, know nothing of loans. It’s a market that operates with a huge asymmetry of information. And though we know that loan officers are, in fact, loan salesmen, they are not presented that way — instead, they’re offered up as helpful experts waiting to guide you to a safe and secure financial solution. They’re presented, in other words, like loan doctors.

What’s supposed to govern their behavior isn’t merely basic morals and business ethics, but a sense of concern for their company. If too many individuals enter into loans they can’t afford, defaults will rise and the bank will suffer. Which is exactly what’s happened. The loan officers, and above them, the banks, and above them, the regulators, were the ones with the knowledge, power, and authority to head off this mess. This market works, it exists, because we trust them to run it in such a way that does not massively exploit the ignorance of individuals, and does not put the entire economy at risk. They failed. But, unlike with the individual borrowers, they failed when their whole mission in life was to not fail, when they were paid to have the tools and information to not fail, and now, in reconstructing this market, we need to figure out what regulations will keep them from failing again. The behavior of the borrowers, financially stupid though it may have been, is simply not equivalent. This whole banking superstructure has supposedly evolved to help them — to suddenly turn and say that it was a self-interested enterprise they had to outthink the whole time is quite strange.

Somewhere between the idea that consumers are wholly responsible for their own actions and the idea that the state must be an attentive and omnipresent nanny, there has to be some middle ground. I thought, and I thought that others generally thought, that businesses were generally out there to turn a profit, and while this might often encourage them to engage in helpful, service-oriented behavior, I should not assume that any business has my well-being as its first and highest concern. That’s my job. I cannot fathom the notion that customers ought to be able to walk into a lender’s office with no idea what they can afford and expect that they’ll get a product that’s best for them. I can’t imagine excusing customers who “know nothing of loans” and yet borrow five times what they earn in a year.

There is absolutely a limit on the due-diligence that we can expect consumers to undertake. Having to outthink devious loan sharks is one thing. Understanding that it might not be a good idea to borrow massive amounts of money under terms one doesn’t entirely understand is quite another. If we approach the economy from the point of view that consumers are essentially idiots who can be easily played by anyone, anytime, then the entire economy falls apart. Democracy falls apart. We have to begin from the point of view that people will try to look out for themselves, and when they don’t, there should be consequences.


  1. Stuart Buck says:

    What I don’t get is Ezra’s line: in reconstructing this market, we need to figure out what regulations will keep them from failing again.

    Has the need for this been established? As a prima facie matter, I’d think that the financial institutions stuck holding defaulted loans would have a rather large financial incentive to tighten up on credit (aren’t they already doing this?).