by Tyler Cowen
on April 24, 2010 at 4:41 pm
in Current Affairs, Philosophy
Was it predatory lending when they gave money to Greece?
Arnold Kling offers related comment.
it could be. Does the finance minister of greece have a high school diploma?
The point of the quote, as I see it was to mock so-called “predatory lending” charges levied against Wall Street by various commentators in media.
Yes, I was a loan officer and I know for a fact that you have an ethical duty to not secure loans for people who can’t afford them. It was a violation clear and simple if you did so. I ran across an interesting legal blog that I linked on my username: http://lawblog.legalmatch.com/ That blogger did a ton of coverage on this issue.
Another quesion: how can there be predatory lending without an Austrian theory of finance?
If everyone is rational with the financing, there can be no such thing as predatory lending. Everyone would get ahead. Noone gives someone money hoping they won’t get repaid, so without the government enforcement in bankruptcy there can be no such thing as predatory lending. There is a gray area where things done with the money (investments) need to work out in order for the borrower to be able to repay. This is why bankers exist. They seem to have forgot. The gov’t helped them forget. Is it possible that people become less rational with a huge wad of cash in their hands, particularly at the peak of a boome? That question almost answers itself, doesn’t it? Does the government play a role in the availability of credit? So does that one. What is interesting is that the second you stop red-lining, you are instantly predatory lending.
People who believe in predatory lending are closet, one-way, hard form Efficient Market Theorists. Barrowers are completely rational unless tricked into defaulting by unscrupulous lenders…except for The Fed who is completely blameless, of course.
The bankers made mistakes. They thought the loans were good for the money. Even Paul Krugman admitted this.
If everyone is rational with the financing, there can be no such thing as predatory lending.
This seems to establish a false dilemma. People have to choose between being Austrians and being Chicago-style Efficient Markets Hypothesis proponents. Why only those two choices?
Is it possible that people become less rational with a huge wad of cash in their hands, particularly at the peak of a boome? That question almost answers itself, doesn’t it? Does the government play a role in the availability of credit? So does that one.
The first applies equally to Keynesian and Austrian economics. The difference between them is that Keynesians don’t think of recessions as always following boom periods. But the various forms of Keynesians all believe in booms and bubbles.
Sure the government plays a role of credit availability. But the private sector also plays a significant role. These two pretty uncontroversial observations do not prove a unique “Austrian” view of the world.
No it isn’t! Nominal rates matter and not just the spread. The nominal rates are high compared to other countries but nowhere as high to qualify as predatory.
I am still waiting for the first example of someone that borrowed/lent money under terms not disclosed to them at the signing of a contract.
When was the last time you read and understood all the fine-print that goes, say, with your cellphone contract?
“I am still waiting for the first example of someone that borrowed/lent money under terms not disclosed to them at the signing of a contract.”
Maybe some of the predatory-terms were written in the legal fine-print of the mortgages but that does not imply that the typical buyer was aware of them. The disclosure of terms implies that both parties to the contract were substantially aware of what the contract entailed. Hence I do not agree with Yancey that all borrowers were aware of the terms of their contracts.
That last post should read,
In other words, you have no idea, you’re just content to assume that the BORROWERS were swindled.
I think it’s laughable that so many people think the issue here was nasty clauses hidden in reams of documentation,
and not that so many borrowers (and the politicians who pander to them) were too deluded or ignorant to know what
would happen if interest rates ever went up.
“How do you think this works when you’re a Mexican immigrant with an eighth grade education and an IQ of 80, trying to work out what all this means in an unfamiliar legal system, explained in a second language.”
EXACTLY the people we were told were being “underserved” by the pre-boom lending standards. You must be insane if you think
lending to such people could ever work out well.
Exactly. Some of these “arguments” could apply to any transaction. You don’t like what happens after the fact? Hey,
just claim you didn’t understand all the details!
“Isn’t that the usual argument for consumer regulation?”
It’s the usual argument left-liberals make. This may come as a shock to you, but not everyone thinks that way.
Is it not also reasonable to expect the cell phone buyer to ask what penalties exist for late payment, to expect
them to TRY to understand what they’re getting into? Fraud occurs when the buyer receives (deliberately) false
answers to these questions, not the mere fact that that answer is buried at the end of a long document. I just
don’t understand what examples like your’s contribute here.
Of course. Whether the predatory lending should be punished is a second consideration. If you lend with good evidence that the collective debt will be in trouble, all you’re doing is hoping that at least YOU will get paid off — you have no intention about concerning yourself with anyone else’s losses. Either that, or you’re counting quietly on a bailout or to be able to sell the debt before it defaults.
This is an ethical statement, not **necessarily** a legal one. And the reason there IS such an ethical position is because when you dangle some kinds of sweets in front of people who cannot otherwise afford it, you’re **trying to get them** to not attend to their own abilities or interests. The specific hope is that they’ll ignore them for your benefit. This is not a rationally free situation. We can judge those who took the bad loans, for sure, but they are not in the position of power here.
Er, I didn’t think that was merely implicit. Let’s make it explicit:
a. Lots of people ought not to have hundreds of thousands of dollars lent to them. For example, people who haven’t paid off their debts in the past, people whose income obviously isn’t sufficient to make their payments, and people who can’t come up with a down payment somehow are often people who will sooner or later get into trouble in a mortgage.
b. Giving them a mortgage is probably no favor. It’s certainly no favor to the ultimate lenders, and when lots of people do it at once, it can have some pretty disastrous effects.
c. Half the population has an IQ under 100. Structuring large parts of the world so that those people routinely get screwed over in the way the law works is a shitty way to set up a society.
d. All humankind is limited in our ability to know a lot about many different detailed subjects. Hardly anyone is able to independently judge the solvency of his bank, the appropriateness of his treatment for high blood pressure, and the correctness of the wiring in his house. In many cases, there are nice market mechanisms to deal with that–in different situations, insurance companies, Consumer Reports type publications, UL certification, repackaging by bigger vendors with a reputation to uphold, etc., deal with this.
But other times, those mechanisms don’t work out, and we need some level of regulation. That’s a pity, because we’re not very good at regulation, and we open a whole can of public choice/agency problem
worms when we establish it. But there are situations where it seems to be the best way to address the limitations of abilities and knowledge in the world.
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