What Explains Krugman?
How is it that one man can be so wrong, so often, about such obvious things. Here he takes up the mantra that of course we need a consumer financial protection agency. If the banks are not duping the gullible then “ why are the most risky loan products sold to the least sophisticated borrowers.”
As usual the wrong question gets the wrong answer. The gullible are being duped because that’s what happens to the gullible. The gullible make bad decisions, live poor, and die before their time. Whose idea was it to make into homeowners people whose lives so far had done nothing to demonstrate they were ready to take on such a responsibility? The number one requirement the federal government imposed on banks so as to make more mortgages for people with low incomes and bad credit was abolish the 20 percent down payment, though everyone knew the size of the down payment was the single best predictor of whether a mortgage would default.
But why is it the best predictor. Some economists like Stanley Liebowitz of U. Texas at
Dallas have made the incentive argument: minimal down payments make it cheap to walk away. That is surely part of it, but not the whole story. Who are these people who can’t come up with down payments? Overwhelmingly they fall into two categories: they are either insufficiently disciplined to save up for a down payment; or even if they have sufficient discipline to save they have decided to buy a house they cannot afford, which is a bad indicator about their judgment.
We have no doubt that the mortgage hustlers targeted fools and weaklings. Who else would they target? But these hustlers were exalted as progressive heroes at the time by some of the very same people who are now condemning them. Angelo Mozilo was all but a saint, according to the folks at Fannie and Freddie and their masters in Congress. Firms like New Century were held up as examples to more cautious bankers, caution in the liberal lexicon being one more code word for racism.
The consumer agency would perpetuate the real cause of the crisis: the politicization of the banking system by the sort of progressives who always want to politicize everything. It would put Barney Frank back in charge of who gets a loan.
Tags: Andrew Redleaf, bankers, banking crisis, banking deregulation, capitalism, economy, Mortgage Crisis, Paul Krugman, Regulation, Richard Vigilante, Whitebox
