Excusing Irresponsibility

Liberal writer Matthew Yglesias recently wondered aloud on his blog who is really responsible for the wave of mortgage defaults sweeping the nation. His conclusion? Not those who took out the mortgages.

Yglesias argues that of the two parties involved in a mortgage agreement, one is typically a "teacher or a blogger or an electrician or a lawyer or a nurse..." and the other is "a guy who, for a living, as a professional, works in the 'deciding on what terms to offer people mortgages' business". Yglesias' argument is that the lender is the expert, and should be held responsible to a much greater degree than the borrower, who may know very little or nothing about mortgages.

He decides that only a "tiny fraction" of the blame can be assigned to the borrower, since the borrower trusted the financial experts (both the lender and the government regulators who oversee the lender). In a nutshell, Yglesias says that the average borrower cannot be expected to know whether or not they are making a wise financial decision, and therefore they cannot be held responsible when their decision turns out to be bad.

There are some big problems with this kind of thinking. The first is that, contrary to what Yglesias says, there were countless people who, given the same publicly-available information about housing markets, chose to pay a higher, fixed rate rather than trying to get a lower rate and gamble on the future with an adjustable-rate mortgage (ARM). This suggests not only that an eventual drop in housing prices was somewhat forseeable, it also shows that many, many average borrowers are perfectly capable of managing risk in a responsible way.

Many commentators called the behavior of lenders during the housing bubble "greedy". Insofar as the lenders made unwise decisions out of a desire to make money, ignoring commonsense principles of finance, this could be a fair labeling. But why is it that Yglesias does not see the behavior of the borrowers, who were securing very low ARM rates in an attempt to maximize their savings, as greedy? The lender's greed in giving out questionable loans and the borrower's greed in exploiting suspiciously-low rates are merely two sides of the same coin.

Apparently Yglesias is of the opinion that the borrowers were clueless rather than greedy, and knew no better than to take the terms offered them by unscrupulous lenders. This brings us to another problem with Yglesias' thinking.

It is impossible to differentiate between those who might have been somehow duped into taking untenable loans, and those who knowingly took the loans on risky terms, hoping to cash in on the housing bubble. Since we cannot know this, Yglesias is basically proposing that everyone must be treated like children. They did not know what they were doing, he says. They are just victims.

Are we really to believe that these borrowers, who were in many cases building large homes obviously far beyond their means, were all (or even mostly) unwittingly manipulated by lenders? Even if the lenders were somewhat unscrupulous, is the borrower not obliged to actually understand the binding agreement they are signing?

According to Yglesias, American citizens have no such responsibility. If a lender puts a piece of paper in front of you and tells you it's a good deal, you cannot be blamed for signing it or held responsible for any problems that arise from signing it.

If we make this leap of logic and absolve these adults of their contractual obligations -- on the premise that they were basically too inept and irresponsible to enter into financial agreements in the first place -- we are undermining the most basic principles of responsibility upon which our society is based. It is hard to think of any greater moral hazard than this wholesale nullification of responsibility.

It is certainly regrettable that so many homes are facing foreclosure. However, is it really so horrible that these borrowers must give up the homes that they could never afford in the first place? Are we compelled to protect them from living in a smaller home or renting like the millions of Americans who acted responsibly? How does it help our suffering economy when we reward those who contributed to its collapse through their irresponsible actions?

There is no reason that these borrowers should be arbitrarily declared immune from the basic financial realities that face us all. The kind of infantilizing proposed by Yglesias would do little to help our nation's economy, while sending all the wrong messages at a time when financial responsibility is more important than ever. This kind of clumsy attempt by the government to shield people from responsibility for their mistakes does far more harm than good.