Hands Off Sub-Prime Lending

Chris in Paris thinks regulating sub-prime mortgage lending is a no brainer: http://americablog.blogspot.com/2007/03/who-will-get-stuck-with-subprime-bill.html

Chris writes:

“Congress is now talking about putting in place regulations, years too late to have any impact on the economic crisis that this is triggering, but having regulations in place for this sector is basic common sense.”

Appeals to “common sense” always make me suspicious. It usually means that you have no cogent justification for your position and are playing intellectual three-card-monte. I reckon what Chris really means is that some folks are too stupid to be allowed to engage in economic transactions without government supervision.

I am not sure that we are in the midst of a “crisis”. The homeowner in foreclosure is in a crisis, but that doesn’t necessarily mean anything to me. The risk of default was calculated into the lending scheme, and I am sure that there are many debtors with sub-prime loans that are not in default or foreclosure. The lenders and underwriters and secondary markets knew what they were about when these loans were floated, and they made a profit on them. Even with defaults, I reckon this sector will have been profitable. I presume that the borrowers needed the loan proceeds and were in the best position to decide whether to take out the loans. Besides, the loans are secured by the real estate and will not have to be written off altogether.

But for nannies like Chris, stupid poor people have to be protected from themselves and the possibility that their transactions might be imprudent. In some cases, the transactions will be imprudent, but there is no reason to believe that regulators and central planners will be in a better position to make such judgments for people they don’t even know.