An editorial in today’s New York Times by Paul Krugman today listed three concerns about the current mortgage crisis. The third one was this,
Finally, there’s injustice: the subprime boom involved predatory lending — high-interest loans foisted on borrowers who qualified for lower rates — on an epic scale. The Wall Street Journal found that more than 55 percent of subprime loans made at the height of the housing bubble “went to people with credit scores high enough to often qualify for conventional loans with far better terms.”
He calls it “predatory lending” but I submit that, in most cases, that term is far from accurate. It would be more accurately called, “serving the borrower’s greed.”
Why did those borrowers not take out the “conventional loans with far better terms?” Clue number one is that many of them replaced just such loans with the subprime ones. Doing so gave them a lower house payment for a year, or a few years, and allowed them to live a more affluent lifestyle. Their assumption was that before the reset occurred “something would happen” to prevent it. They took a gamble for the sake of immediate gratification and, inevitably, many of them lost.
Paul Krugman regards that as injustice and thinks we should bail them out.
My nephew bought a house for his young family in the San Diego area some time ago and last year I rather casually asked him what kind of mortgage he had on it. He looked at me like I had lost my mind and said that “of course” he had a thirty-year-fixed, and added some remarks about not being stupid enough to go for any of those “crazy loans.”
He is a young man, very much enthusiastic about life and adventure, full of plans and upwardly mobile. And he lives within his means. He doesn’t have to have what he cannot afford. How strange. Downright un-American. How dare he display the flag?
I do agree with Krugman that the Bush/Paulson plan is a bad one, but not for the same reason. He thinks it doesn’t rescue enough borrowers. I think it rescues too many.
The victims of this crisis are portrayed as the people who are losing their homes, but they are preponderantly victims not of predatory lenders but of their own greed and/or financial mismanagement. The main victims of the lack of regulation are the investors who purchased those “innovative instruments” which were preordained to become worthless.
Unregulated capitalism becomes predatory.
You either believe in the “free market” system or you do not. (I do not.)
This bunch, including Krugman, wants to have it both ways. They'd like the market to be free to create the kind of “innovate market instruments” that created the mortgage crisis, but when that inevitably turns to destructive chaos they want to be able to step in and make whole those who were burned in the flames.
And, of course, they want to do that without taking away the riches from those who profited in the process of creating the destruction.
No one in the government or business communities is even talking about any plans for making whole the people and institutions who bought the instruments that have turned to junk. And probably no one should be. If you put lipstick on a pig, it’s still a pig. These investors failed to look past the lipstick and bought the pig.
Caveat emptor, baby, caveat emptor.