On So-Called “Irresponsible” Borrowers


Along with the absurd, Santelli-led revolt of the overclass against efforts to help middle class homeowners, there’s been a larger sense that “reasonable” people can all agree that there’s “plenty of blame to go around” and that on some level “irresponsible borrowers” deserve to take their lumps in all of this. I have my doubts.

When someone applies for a mortgage, there are two parties to the transaction. On one side of it is a teacher or a blogger or an electrician or a lawyer or a nurse or a guy who manages a Home Depot. On the side is a guy who, for a living, as a professional, works in the “deciding on what terms to offer people mortgages” business who works, for a living, at a financial services business. Businesses like that got in the habit of making loans with little regard to actual prospects for long-term payment on the theory that since house prices were rising, the borrower could always sell or refinance. That, to repeat, wasn’t the judgment of electricians and store managers; it was the judgment of people who were professional mortgage-offerers. They, in turn, were being lax in part because they were finding it very easy to sell the mortgages off as securities. And it was easy to sell the mortgages as securities irregardless of their quality, because big sophisticated financial services firms devised tactics for slicing and dicing the securities into packages that could be easily resold. Those packages could, in turn, be easily resold because they had high ratings from the bond agencies. These ratings were based on models which held that a nationwide decline in housing prices was impossible. The ratings agencies and the modeling firms were, in turn, regulated by the U.S. government. And in addition to the formal regulatory agencies, there are a variety of public officials—the Chairman of the Federal Reserve, the President, the Secretary of the Treasury—who have a kind of generalized responsibility for oversight of the economy. Beyond the political system, the American media offers extensive coverage of business and real estate.


There really is plenty of blame to go around here. But I just don’t see how more than a tiny fraction of it could possible adhere to our electrician or teacher or secretary who’s decided, basically, that the financial services professionals and government regulators know what they’re doing. Now could she have known better? Sure. She could have been reading Dean Baker and Paul Krugman and others. The idea that this lending was all being undertaken on a false premise that a nationwide housing bust was impossible wasn’t a highly guarded secret. I was, for example, familiar with the chart above and with the analysis suggesting that a bust was, in fact, likely. And I believed that analysis. But at the same time, I write about U.S. public policy debates for a living. If there’s a dissident line of thinking that, despite its general unpopularity, is popular among left-of-center economists—well, that’s the kind of thing I know a lot about. But our nurse? Why would she know?

Think back to 2006. It’s not as if CNBC and your paper’s real estate section were rigorously probing this question. Alan Greenspan and Hank Paulson weren’t saying “the economy seems dangerously vulnerable to the possibility of a nationwide decline in real estate prices, something that major financial institutions’ models say is impossible but that history says is likely.” And to be fair and non-partisan, it’s not as if Harry Reid was saying it either.

And I just don’t think it’s the responsibility of individuals to know that all the experts, and all the conventional wisdom, are secretly wrong. All kinds of people have been buying iPhones because everyone says they’re great. And if this November, the iPhones all suddenly explode injuring tons of people, I think there’ll be a lot of blame to go around. But really just about none of that blame will land on iPhone owners—it would land on Apple and AT&T and regulators and gadget reviewers and everyone else. If not, if the people who run the country and its media don’t actually expect their pronouncements to be taken seriously, then really they ought to all quit and make way for people who take their responsibilities seriously.