Government regulation has been a recent topic in the news due to the financial straights of many banking and mortgage firms. However, all of these discussions on air and in in print take place after the fact, trying to evaluate how the loss of money and market strength could have been avoided by government oversight.
This view seems flawed in two ways, twisting arguments to protect the consumer and to help the consumer. At first glance, it may seem that these positions are one; however, the logic behind each approaches from very different directions.
The sometimes glaucoma-ridden eyes of Big Brother are asked to look over specific industries and actions when it seems that consumers are being exploited by the party under regulation. This argument sounds noble at first, working for a suffering citizen often in the face of corporate avarice.
This argument simply further marginalizes the "common" consumer that is being protected in two ways. In context of sub-prime mortgages, many people were obtaining loans above the prime rate because of a poor credit history, making them risky borrowers. These mortgages often had an option to only pay the accruing interest on the mortgage, with clauses that the interest rate stays at a low fixed rate for a short period of time. After this time had elapse, the mortgage rate jumped to a higher adjustable rate, requiring households that utilized these mortgages to pay more per month.
This type of mortgage is looked down upon by many, since it seems to take advantage of the consumer through the shifting rate. Yet, this presumes that the consumer is too stupid to understand that the rate will shift. Gone are the lofty and noble calls of pro-regulation experts, replaced with a gritty view of the world that looks at people as too stupid to understand the contracts they enter. Subsequently, these people should be prevented from ever doing so by government action.
The other part of this argument is even more vital. By preventing these people from obtaining such loans, society benefits from a more stable economy. Thus, regulation is deemed to be for the public interest. This argument loses much of its altruism, as now it isn't the so-called victims of these unregulated actions that will benefit. Everyone else will benefit by preventing their poorly thought out actions, especially by preventing banks from losing funds due to their risky actions.
This facet leads directly into the argument against regulation. It starts out quite egalitarian, assuming that the consumer is smart enough to deal with these loans. If these consumers default on their loans, the lenders that lose their funds to a risky borrower are simply incurring the high cost of their action. All pay a price for risky choices, but it doesn't matter that much as long as the choice is provided, which proves freedom of choice.
Freedom of choice walks underneath the giant umbrella of capitalism. Oh, that wonderful system that exploits workers in the eyes of half the world and provides a progressive, consumer-satisfying society in the eyes of the other half. Free markets provide a flexible system that allows for profit. Sub-prime mortgage loans were made to people with poor credit because banks saw an area to make profit since the cost of funds in the late 1990s and early 2000s was relatively cheap for both lender and borrower (or so they thought). Banks gave these cheap funds at high rates to borrowers, understanding their investment was risky (hence the high interest rates) and making their free choice.
Americans take pride in home ownership. It seems analysts and experts have forgotten the American dream. People with bad credit want homes too, and that is what the sub-prime mortgage allowed - a chance to finally reach the dream under which they were raised. With regulation against sub-prime lending, these would-be-homeowners wouldn't have been able to enter what they called their home each day for the several years they had a home. Should the government regulate by taking away the choice to risk home ownership, especially when banks are willing to provide them the funds to do this?
The issue of regulation is much more complex than people most people are willing to observe. Greenspan's recent book, The Age of Turbulence: Adventures in a New World, addresses these issues slightly. But even he walks carefully around the issue, failing to go into depth of why the consumer must be protected or why they must be allowed to make their choice. He called for regulation in the cases of Freddie Mac and Fannie Mae while simultaneously arguing that the risk of economic duress is worth home ownership. It is a confusing view, especially in light of his high regard for capitalism.
With or without regulation, the losers are those who do not have strong credit. They are either prevented from obtaining homes or they are exploited by high rates. Banks suffer a similar, yet less important, situation; prevented from making additional profits or they lose heavily from the risks they take. There is no right answer here. Every action has costs and benefits.
At the most, any regulation enacted should simply make sure that the costs and benefits of their actions are known. This will not be enough to stop the pitfalls of either situation highlighted above, but people should be entitled to make poor decisions. Without the right to freely make those decisions, we move further away from the dream that seems to drive so many Americans.
When approaching any decision, people must see the world through the other half's eyes. Avoiding such a consideration only leads to the further obstruction of government to positively influence our lives.
