Sebastian Mallaby writes:
The political pressure to act reflects concern for homeowners. But as the blogger Tyler Cowen has written, there are better ways to target assistance to the deserving poor than by rescuing subprime borrowers. Given that they hold some responsibility for borrowing too much, subprime borrowers are not society’s most unambiguously deserving group. And many of them are not poor, either.
Equally, the pressure to act comes partly from concern that the subprime mess is scaring investors away from whole classes of debt, with indirect effects on the economy. But if investor confidence is the problem, government meddling can backfire. The leading Democratic presidential candidates have proposed, variously, a moratorium on mortgage foreclosures, a freeze in loan rates and other measures to help homeowners at the expense of investors. This is hardly the best way to rebuild market confidence.
This is correct, although of course you would expect me to agree with myself. Mallaby does conclude that the government should do something, by the way.
Now read Paul Krugman’s column on the same topic, from the same day. On a sentence-by-sentence basis, Krugman’s claims hold up (though he probably exaggerates the extent of fraud in order to demonize the lenders). On policy, he argues that the bankruptcy courts should give borrowers a better deal. I, too, favor a looser bankruptcy law, but is this the right context for such a change? The two claims cited by Mallaby are never dealt with:
1. Subprime borrowers are not the most deserving poor, and many are not poor at all
2. Right now is not a good time to penalize credit-constrained banks or rewrite contracts against their interests
Maybe Krugman disagrees with these points, but we never learn why. The duty of the popular economist is to encourage audiences to move beyond simple good-bad stories and think in terms of opportunity costs and unintended consequences. As a writer, Krugman is one of the best clarifiers of all economists, of all time, ever. He has trained himself to specialize in clarification, but on some issues the truth is in fact murky and this psychological tendency to clarify leads him astray.