Ryan Avent argues that, though some loan officers may have been unscrupulous, the real cause of the housing crash was stupid, greedy, borrowers, who wanted more loan in order to buy more house. This, Ryan says, is why so many ended up in the subprime market when they qualified for fixed rate mortgages. And maybe so. Neither Ryan nor I have any data on how these conversations actually went. But whether it was the loan officer pushing the borrower off the variable-rate cliff or the borrower begging for a bit more rope with which to hang herself or, most likely, a bit of both, doesn't much matter. It is perfectly well understood that borrowers, by and large, know nothing of loans. It's a market that operates with a huge asymmetry of information. And though we know that loan officers are, in fact, loan salesmen, they are not presented that way -- instead, they're offered up as helpful experts waiting to guide you to a safe and secure financial solution. They're presented, in other words, like loan doctors. What's supposed to govern their behavior isn't merely basic morals and business ethics, but a sense of concern for their company. If too many individuals enter into loans they can't afford, defaults will rise and the bank will suffer. Which is exactly what's happened. The loan officers, and above them, the banks, and above them, the regulators, were the ones with the knowledge, power, and authority to head off this mess. This market works, it exists, because we trust them to run it in such a way that does not massively exploit the ignorance of individuals, and does not put the entire economy at risk. They failed. But, unlike with the individual borrowers, they failed when their whole mission in life was to not fail, when they were paid to have the tools and information to not fail, and now, in reconstructing this market, we need to figure out what regulations will keep them from failing again. The behavior of the borrowers, financially stupid though it may have been, is simply not equivalent. This whole banking superstructure has supposedly evolved to help them -- to suddenly turn and say that it was a self-interested enterprise they had to outthink the whole time is quite strange.
