May 17 2012

Whose fault is the banking and mortgage mess? There is a simple answer, actually

Posted by: Nick Shaxson in: Thoughts

I have quite a few personal friends who are in the financial sector, some of whom are filthy rich. In my experience, most of them deal with all the stuff that’s happened by saying “the whole system is screwed and awful and needs reform but I need to look after my family and children, and I don’t know how to do anything else” (and of course one or two of them simply don’t talk to me about finance, as they don’t feel like having a stand-up fight.) One area where a couple of people have got me annoyed is when they wheel out the financial sector trope that it isn’t the bankers’ fault – it’s those greedy people who took out bigger mortgages than they can afford.

Now there’s an avalanche of stuff out there in the UK press following comments about the financial and mortgage crisis by the hapless UK Defence Secretary Philip Hammond, who has just claimed that people who took out loans were “consenting adults” who, in some cases, were now be seeking to blame others for their actions.

“Some people are unwilling to accept responsibility for the consequences of their own choices. . . . Households were spending more than they earned. That’s why household debt rose.
. . .
Governments can pontificate all they like but it’s individual decisions that matter.”

So who is to blame? The banks? Or the households? Actually there is a really simple way to cut through all the crap here.

The way to do this is to look at it from a policy perspective, and ask how you do something about the problem.

And this brings you to two policy alternatives.

  1. If you think the problem is the ‘greed’ of feckless borrowers, then you legislate against greed.
  2. If you think the problem is the irresponsibility of reckless lenders who knew they’d be bailed out, then you legislate against the banks.

So you have two alternatives. Either you put individual house owners in prison, or fine them heavily, or something, for borrowing too much.

Or you put in place appropriate financial legislation, and act on the lending side.

One of those two alternatives is clearly stupid, the other is not.

Very simple, really.

OK, there is a third way too, which should complement the second of those two options. That is the Land Value Tax.

one comment

Locke 5th May, 2012 5.02 pm

Sadly the financiers who believe in the ‘greed of the feckless’ theory already have a own punishment in mind. It involves bailiffs, courts, re-possession and paying interest and arrangement fees approximately forever.

We need another test to decide if a lot of that lending was predatory or not.

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