These earlier posts touched on what is often ignored among the handwringers in regard to the current downturn in the subprime mortgage market — that is, the beneficial risk-taking that resulted from innovation in the securitization of subprime mortgages. That risk-taking helped fuel the robust mortgage market over the past several years for folks who otherwise would not have had an opportunity to choose whether to take the risk of home ownership. Following along those lines, MR’s Alex Tabarrok makes a good point about the bias of many of the handwringers:
Yeah, we get it. Credit is ok for us, the “sober” borrowers but poor people can’t handle credit. Too much credit among the poor generates decay and social pathology. Credit must be regulated. We can’t, for example, have credit stores in poor neighborhoods. Don’t you know that credit is bad for people without self-discipline? Let the poor buy on installment credit? That’s unconscionable. Today’s furor over sub-prime mortgages is the same old story. [. . .]
The fact that there are defaults is partly a learning process in response to financial innovation, and thus evolution, but also partly a simple matter of risk. Defaults are to be expected. I see no reason to expect contagion. All lending statistics must now be marked to the global financial market which means that diversification is now more extensive than ever before and thus net risk is lower. Moreover, the whole point of recent financial innovation (and reformed bankruptcy law) has been to reallocate risk away from borrowers and towards those lenders in the world wide market for capital who are in the best position to handle the risk.
The democratization of credit worries the credit snobs. The credit snobs fear that capitalism isn’t just for the rich.
Touche’!
