Primed for a fix

Ezra Klein and Ryan Avent are having a throw-down over the subprime mortgage market. Did borrowers borrow more than they could afford, or were they rooked by unscrupulous mortgage brokers?

Neither Ryan nor I have any data on how these conversations actually went. But whether it was the loan officer pushing the borrower off the variable-rate cliff or the borrower begging for a bit more rope with which to hang herself or, most likely, a bit of both, doesn't much matter. 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.

To which Ryan responds:

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.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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