jws

Jumpstart Spending With a National Housing Lottery

Why hasn't anyone commented on the similarity between the domestic sub prime lending crisis of today and the banking crisis resulting from banks making high risk loans to South American Countries back in the '70's? The high interest rates were justified by the increased risk the banks were accepting. Only problem was that the banks chose to gamble more than they could afford to lose and went crying to the government when the inevitable happened. Now they have done it again except on a scale so large that it threatens to take down the economy of every country in the world.

Second question: why is there so little discussion of the entire consumer credit industry as a whole? It makes no sense to gloss over the fact that so much of the equity taken out of homes in recent years has gone to pay off credit card debts. I've noted the growth of consumer debt as reported in the newspapers along with the ever increasing emphasis on consumer confidence and retail spending as valid measures of the health of the economy for going on 15 years. As an engineer, it has always seemed painfully obviously to me that it was not sustainable. It's been over two years since the whole house of cards began to collapse and things are still getting worse. Spending is not measure of of an economy. The economy is that which we produce. How equitably that production get distributed, whether nationally or internationally, is finance and politics.

Third question: why hasn't anyone tried to quantify the extent to which the home mortgage lenders have contributed to the increase in home prices by making loans which require an ever increasing fraction of the borrowers earnings to make the payments? Do they think that they were making the difference between whether or not someone could afford a home? What about the market? Are we to believe that the market will not provided lower priced homes when the average prospective home buyer cannot afford any home? If the market does not serve ordinary people, then why should ordinary people defend it. It would make more sense for ordinary people to figure out something else that does serve their needs.

The first step, as I see it, is not to let any individual bank to become so large that we "cannot afford to allow it to fail." Any organization, when its existence is at stake, will look out for its own interests first. The larger a business is, the more harm it will do to it's creditors and customers while trying to save itself; and the easier it is to hide the fact that it is in trouble.

The second step is to bring back the usury laws. There is no reason not to limit credit card interest to a few points over prime. If lenders can't make money that way then they should find themselves some other way to make money. If the loans they are making are so risky that they merit a higher interest rate, then they are a risk to the economy and do not serve either the borrower's or the public's best interest.

The third step will be to stop talking about irresponsible borrowing on the part of consumers and start putting a lot more emphasis on responsible lending. The lenders, after all, are the professionals. They are in the business to lend. The homeowner is not in business to borrow. You don't tell a homeowner that he responsible for the work of an electrician or plumber. You tell him to hire a licensed electrician or plumber, and the towns adopt building codes and provides building inspectors for a nominal fee. The state does not allow substandard construction or unlicensed tradespeople. That would pose serious fire and health risks. Professionals such as doctors, lawyers, and engineers are even more strictly regulated by the state. Why should it allow shoddy lending practices. There is an established legal framework whereby a lender can take away a borrower's home if the borrower defaults. Where is the quid pro quo. Why should the state not demand and receive cooperation from lenders to make sure that the borrower is not likely to default. At one time there was an unwritten social contract between the banks and the communities they served that foreclosure was an embarrassment for all parties involved. If that doesn't work any more, then let's have regulations that provide the banks with sufficient incentive that they will try a lot harder to avoid foreclosure.

Most people will agree that nothing in life is free. For my part, that includes markets. I believe that the free market is a fiction as well. It is time we take a closer look at who pays the costs of trading in an unregulated market and who reaps the profits.