Subprime Solution?


Columnist Ron Hart, a financial advisor by trade, weighs in on what to do about the subprime lending meltdown:

As a free-market capitalist, I believe that nothing could be worse for us long term [than bailing out people caught in bad loans]. The only thing that Congress should do is ensure that lenders are honest when they push a loan on a borrower. Of late, the market in sub-prime mortgages had become a Wild West of unregulated trickery, in which unscrupulous lenders preyed on those who do not do well in math and reading—especially when it comes in fine print—and who were basically blinded by greed. The credit markets are re-pricing debt values now….

When left unfettered by populist politicians, capitalism does a great job of bringing equilibrium to investments and allows the most prudent to do well….

Just remember this: Do not borrow all that any company wants to lend you, be it credit cards, car title pawn, student loans or mortgages.

More here.

That's sage advice, of course, not to get too deeply into debt.

However, I'm not sure that this sort of argument will be terribly persuasive to those who don't already agree with the idea that efficiency in lending is a good thing. Generally speaking, I think the wider and wider extension of credit is a great development (and one that I personally have benefited from). I do think there's a societal learning curve involved–it takes a while for all of us, especially newbies, to learn how to borrow money, invest in stocks (or mutual funds), take care of our own retirements, etc. When problems, collapses, burst bubbles, etc. occur, the political response often threatens all of the benefits from the declaimed activity. That's a real problem because however difficult the adjustments are in any given time frame (or for any set of individuals), it seems pretty clear that more people are better off by being given enough rope to hang themselves.

It's hard to get good numbers on the sub-prime mess, though the Wash Post says 14 percent of such loans, typically given to borrowers with shaky credit histories, are delinquent.

Former reason staffer Tim Cavanaugh argued for more credit for the near-indigent here and Senior Editor Jacob Sullum looked at the moral (and fiscal) hazards of the state bailing out broke borrowers here.

Contributor James B. Twitchell on the luxurification of American life here.