Responsibility. Not a Bankrupt Concept

by Don Boudreaux on July 8, 2009

in Financial Markets, Frenetic Fiddling, Nanny State, Regulation

My colleague at GMU Law Todd Zywicki explains in today's Wall Street Journal why adults should be treated as adults — even when it comes to their finances.

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{ 5 comments }

vidyohs July 8, 2009 at 10:15 am

What strikes me about this article, and many many others like it, in explaining the many reasons why so many people defaulted on their mortgages is that it comes after the passage of the TARP and the porkulous bill. The damage of foolish hubris (to go back a couple of threads) has already been done.

In my own observation, it seems that government has learned the lesson of speed in the drafting, passing, and implementing new laws or spending bills; they have to get it done before the majority of the public learns the truth, after which they know they could not get it done.

Of course when addressing the public they use the term emergency to justify this swift action, and in essence it is an emergency for them for the stated reason in my last paragraph.

Emergency should translate in the mind of John Q. Public, as "Look out, they are going to try and screw us again."

Obviously a lot of us knew this and I am being redundant; but, there is also an enormous majority out there that does not, and they need to learn it.

Bill D July 8, 2009 at 10:44 am

A few quick observations:

As society we are looking to deleverage, so credit necessarily should become more scarce (fewer loans) and more costly (higher rates, fewer perks).

In the current environment of too big to fail, the risks of no doc, low downpayment loans are put on taxpayers, not banks. As a taxpayer, I'm all for minimum 20% downpayment mortgages.

Much of the credit "inovation" is paid for by the people who can least afford it. I've paid my bill late not more than a couple of times and I always pay the entire balance. I'm being subsidised by the poor person who carrys a balance and has trouble paying on time. See http://blogs.reuters.com/felix-salmon/2009/06/23/credit-card-datapoint-of-the-day/

Zywicki is right in theory, but in practice there is a significant portion of the population that is nowhere financially literate enough to be able to reason through many of the tradeoffs that are part of modern financial products.

Perhaps there could be a test that would qualify people for suitability of financial products. The higher the score, the more complex products that would be available to the person. It could also replace the existing "sophisticated investor" test; the likely outcome being more people considered as "sophisticated".

Geckonomist July 8, 2009 at 11:22 am

I don't like the way the author uses "europe" as evidence to prove his point. Variable rates are indeed common in the UK & Spain, but quite rare in the rest.
Secondly, as far as I am aware you are everywhere in Europe liable for the loan, so walking away can be painful if you happen to have other assets.
Thirdly, I do believe that a fixed rate 30year loan should be considered the gold standard. And looking at the money printing presses running red hot in the developed world, the gold standard is likely to make you a lot of money.

Gil July 9, 2009 at 1:34 am

So, in others words, people shouldn't be allowed to claim bankruptcy but do their best to pay off their loans no matter how long it takes (e.g. what Mark Twain did). But one problem is what happens when a borrower drops dead before the loan is repaid? In some areas – the next of kin then become reponsible for a debt regardless of whether they had any part in enjoying the benefits of the borrowed money.

Crusader July 9, 2009 at 6:31 pm

The fallacy of conservatives is they think everyone should be in isolation. The reality is the community has to take care of each other – that is OUR moral imperative.

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