Friday, September 7, 2007

Sub Prime Paradox

Not so very long ago, politicians and other pushy types demanded that banks should loan more money to more people without worrying about details like, can the borrower make the payments? Any bank's failure to obey was undeniable evidence of unforgivable discrimination.

Since politicians carry the heavy hammers of legislation and regulation -- why do you think they love being politicians? -- lenders obeyed. At first, things looked pretty good. Then something went wrong. Something always goes wrong. That's something else politicians love. It's their job security.

What went wrong is simply this, in the witty words of Michael Lewis, "This is what happens when you loan money to poor people."

Now the politicians and other pushy types insist that the banks acted unfairly by loaning money to people they knew could not make the payments. According to the revisionist history of the angry mob toting the hammers, the diabolically clever bankers' wanted make a bunch of bad loans, just so they could go around foreclosing. That's ridiculous, of course. It's like saying that Moët & Chandon makes champagne so drinkers can wreck their lives with alcohol.

No legitimate business wants to harm its customers. Why? Because customers leave. In a competitive economy, one where customers have more than one or two choices, they can choose to do business with those companies with reliable track records and reputations for customer service. The Chinese, relative newcomers to capitalism, are learning that lesson first hand, as concerns about lead-based paint in toys manufactured in China lead more and more parents to throw out anything made in China. No government action required. As the old saying goes, it takes a long time to build a good reputation, and only a moment to destroy it. The Chinese government is learning that in a capitalist economy, a consumer with a choice is a powerful force.

Unfortunately, the hammer toting crowd in the US imagines the consumer as a powerless victim of dark forces arrayed against him and aiming for his destruction. The truth is the most dangerous threat comes from the politicians themselves. They had large role to play in creating this mess. Now, paradoxically, they want to claim credit for its resolution. They are the last place we should look for solutions.

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