The New Foundation

http://www.futureofcapitalism.com/2009/06/the-new-foundation

From the Treasury Department's report (pdf), "Financial Regulatory Reform: A New Foundation":

in the run-up to the financial crisis, mortgage companies and other firms outside of the purview of bank regulation exploited that lack of clear accountability by selling mortgages and other products that were overly complicated and unsuited to borrowers' financial situation. Banks and thrifts followed suit, with disastrous results for consumers and the financial system.

Desirable as it might seem, preventing sellers from selling products that are unsuited to the buyers' financial situation seems a task that might be a bit much even for the formidable abilities of the Obama administration. There's a paternalistic streak to the idea. If banks are to be stopped by the government from selling products that are unsuited to borrowers' financial situations, why pick just on them? There are plenty of gamblers in Las Vegas and Atlantic City who are making bets that are unsuited to their financial situations, plenty of shoppers in Manhattan jewelry stores buying diamonds unsuited to their financial situation, and plenty of would-be buyers test-driving luxury sedans and sports cars that are unsuited to borrowers' financial situations. For that matter, there are plenty of private colleges and universities out there selling students and their parents educations with tuition bills that are unsuited to the financial situations of the parents or the students. In most of these transactions, the person expected to know the most about their financial situation and to make the judgment about whether to go ahead with the puchase is the buyer, not the seller. In the matter of the mortgages, as the economics paper mentioned in this post points out, many of them actually were affordable to the borrower when they were originated, but have become problematic because since that time, the value of the property has declined with the overall drop in house prices, or because the borrower has lost his or her job along with the overall rise in unemployment.

by Editor  |  Jun 17, 2009 at 3:26 pm Related Topics:  Capital Markets Regulation receive the latest by email: subscribe to the free futureofcapitalism.com mailing list