“Let’s Treat Borrowers Like Adults”:

My latest Wall Street Journal contribution, “Let’s Treat Borrowers Like Adults: The problems with a financial products safety panel” is available here.

The basic point of the piece is that there were a lot of bad loans that were made over the past decade (duh). But the primary problem with these loans was the combination of bad Federal Reserve monetary policy and the bad incentives that they created for borrowers when house values fell. Although there certainly were borrowers who were defrauded by lenders (and lenders defrauded by borrowers) the underlying problem was caused by incentives and rational responses to those incentives.

But this means that many of the loans that were made presented profound issues of safety and soundness for the banking system. But not problems of consumer protection. When a borrower who put nothing down rationally and knowingly responds to incentives to walk away from an underwater house, especially in a state with an anti-deficiency law which makes this strategy largely costless, this presents a major problem of safety and soundness. But it is not a consumer protection issue. Treating it as a consumer protection issue when it isn’t, I argue, could have severe unintended consequences for competition, consumer choice, and the safety and soundness of the banking industry, as well as creating a problematic new bureaucracy.