Caveat Empty

Congress recently passed a bill that includes the establishment of a Bureau of Consumer Financial Protection, designed to prevent the kinds of consumer debt so many consumers took on during the recent housing bubble, with mortgages they had no hope of paying for without continuously increasing borrowing, ostensibly made possible by the theoretically ever-increasing value of their homes.  The economic insanity inherent in this proposition was of course a root cause of both the real estate bubble and its inevitable bursting.  The new Bureau will also deal with generators of unmanageable consumer debt such as credit cards (with their usurious interest rates) among other enticements for borrowing beyond one’s means.

Conservatives basically opposed this government agency on the grounds that people need to be responsible for their own actions, suffering the consequences of their own bad decisions.  Caveat emptor they say — let the buyer beware, and if duped, it’s the buyer’s own fault.  Liberals favored the legislation as both a regulatory punch in the mouth of lending institutions that encouraged people to assume unpayable debt, and a protective arm around the shoulder of consumers so financially challenged as to not understand that you cannot for long make monthly mortgage payments greater than your monthly income.

As a matter of principle, the conservatives have a point.  The government should not protect people from their own mistakes.  As a matter of practicality, the point is nonsense.  When the seller is willing to say whatever it takes and commit whatever fraud is necessary to make the sale, regulation is required.

Plain and simple, the financial institutions have been on a binge of “entrapment.”  In jurisprudence, that means even a person who commits a crime cannot be convicted if that crime was encouraged by a law officer.  Similarly, a buyer should not be responsible for actions that result from a seller’s malfeasance.  Clearly, consumers have been urged, persuaded and promoted by institutional lenders to ignore basic budgeting common sense and grade school arithmetic, and to embrace the financial fallacy of never-ending, double-digit annual growth in the value of their houses.  They have been encouraged to allow mortgage brokers to engage in whatever misrepresentations and manipulations were necessary to meet the absurdly lax standards banks accepted for these ridiculously named sub-prime loans, which more accurately ought to be called sucker bets.

What eventually happened to these loans is yet another story of the financial institutions running wild absent any effective restriction to create a global network of debt restructurings so esoteric, so opaque, so complicated that even the most educated economists hadn’t a clue as to how they worked or their implications.  The losses are still being counted.

Yes, consumers were indeed ignorant and/or unsophisticated and maybe in some cases as greedy as their tempters.  But at the end of the day, they were prime-plus marks for an unconscionable con game.   Caveat emptor cannot excuse it.  Government has the responsibility to prevent it.