22 April 2010

Arnold Kling is always worth listening to when it comes to financial regulation

Here are his thoughts about the new "reform" package:
My instinct is to call the proposed legislation a "blame deflection bill" rather than financial reform. But I admit that I have not read the whole bill. Has anyone?

My impression is that the following things are not in it.

1. No exit strategy from government support for subsidized, lenient mortgage credit. No curbs on Freddie and Fannie, whose market share has skyrocketed in the past year and a half. No increase in down payment requirements for FHA, which is in deep doo-doo.

2. No change to the role of credit rating agencies, as far as I know. It seems to me that one thing that everyone, left and right, can agree on is that the regulators outsourced their function to the credit rating agencies, and this worked out badly. As far as I know, the bill does not correct this flaw. Perhaps it tries to, but other provisions have gotten more attention.

3. Nothing to address the issue of "cognitive capture." The regulators will still get their analysis of the financial sector from the CEO's of the largest banks.
My preliminary reaction is that this will change nothing. I doubt it would have averted last year's troubles, to say nothing of whatever troubles the future holds.

I wonder if congress could wrap up a thousand pages worth of congratulatory proclamations to women's high school basketball state champions and tax breaks for the East Texas Spinach and Beet Farmers collective and take out menus from Capitol Hill Chinese take-outs and put a cover page on it called "Our Very Serious and Important Financial Reform Package That Will Help the Little Guy and Protect Him from Bogie Men in Power Ties Reform Bill for American Bank Reform Reform Package of 2010 Reform Main Street Hooray Wall Street Booooooo Reform."  Just send out a press release about how things have been reformed, and laws have been passed, and not to worry this is going to fix everything and Congress is going to kiss our booboos and make it all better.  I bet a significant fraction of voters would actually believe that congress had really achieved reform.  (Or if they hadn't it must be because of "special interests.")

This is the important part of Kling's post though:
Finally--and this will get me in big trouble--I have to rant about the notion of a consumer financial protection agency. I know that it's axiomatic that poor people are helpless victims. But in the case of these mortgages, that is a really hard sell. The banks did not take from poor people. They gave to poor people. If you were lucky enough to get one of these exotic mortgages when house prices were still going up, then you got to reap a nice profit on your house. If you were not so lucky, you lost...close to nothing. I'm sorry, but if you borrowed up to 100 percent of the value of the house or more, then all you really lost were your moving expenses.

What about predatory lending? As I understand it, the idea of predatory lending is to saddle the borrower with an expensive mortgage so that you can foreclose on the property and sell it at a profit. How many times did that happen? Have you read of a single instance in the past three years where the bank made a profit on a foreclosure?

I am always ready to feel sorry for poor people because of their poverty. But I cannot feel sorry for somebody who was given a basically free option on a house and the option didn't happen to come into the money.
Well that's not going to get him in trouble with me.

Getting kicked out of your house is a tremendous pain in the ass. But if your foreclosed upon because you have negative equity then it isn't your house. You just live there. It belongs to somebody else.

(Hell, even if you have a mortgage and positive equity the house is only partially yours. And the guy who owns the rest of it has some rights too.)

This idea that house prices must remain forever "high" and mortgage rates must remain permanently "low" is unadulterated lunacy. Why do we want high home prices? So people can sell them and get lots of money? And then what do they do? Go buy another house, paying another high price for it.  Net gain to society: at best zero.

Why do we want mortgage rates to be low? Yeah, it makes it easier to borrow a bunch of money and pay your mortgage, but it makes it harder to save money for a down payment or for anything else you may want to spend money on in the future that is not housing. Is there any rational reason to encourage people to borrow and discourage people from saving?

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