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Originally Posted by bookworm_020
The fact the regulations are lax enough to allow loans to people who can't afford them is the real cause of the problem. Untill this is delt with, the situation will not improve.
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The incentive of failure is the only regulation that needs to be enacted, and the market has that already except where the state mucks it up. If they didn't have the reassurance that the Fed will bail out bad loans or purchase them (in some circumstances), there would be a lot less reason to accept subprime lenders. And yes, some people would still take on that high-risk venture, and eventually be rewarded with bankruptcy.
As far as loans to people who can't afford them goes, that would be an extraordinarily difficult to construct, and ultimately ineffective piece of legislation. For one thing, loans, by their very definition, go to people who can't afford the principle right now (Sorry, it's fun to be a smartass sometimes
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In addition, there are a lot of low-income families and individuals who need loans. Blanket legeislation about loan eligibility would hurt them a lot. What if a young person needs a loan for a car so they can go to work? A bank could look at that person, their credit history and any factors that may warrant explanation, and talk with them face to face to determine eligibility. A law can't do that.
Another important factor is the Federal Reserve's tampering with interest rates. Gnerally speaking, at least from the Austrian and Chicagoan schools of economics' points of view, when interest rates rise, the economy slows down before recovering and pushing ahead to the next bull market. Since the Fed sets interest rates under the guise of controlling inflation or spurring economic growth, they tamper with this cycle. When it is set too low, it encourages lending and therefore expansion of the money supply, often outpacing the value of alll national commerce and resulting in inflation. (Different economists prefer different methods for measuring this, GDP and GNP being two of the most popular. Others prefer time-based economic growth indexes and the like)
Of course, the Fed can't keep rates low forever, and the more they artificially inflate the economy, the farther down it has to go to before it settles into its' natural cycle. If the Fed continues lowering rates beyond this point, runaway inflation results from borrowers scrambling to accquire loans to pay off creditors, a natural consequence of trying to cram too much commerce into a national pool of resources that can only support so much at one time. (Their ventures fail because of increasing prices of goods, labor, too much competition, lack of demand, etc.) This period usually precedes an economic crash or severe recession as the means of capital generation equalize with the money supply.
Also, let's not forget Federal legislation to encourage subprime lending like the CRA and Fair Lending. Estimates typically put as much as 40% or as little as 20% of bad loans into this category. Certainly not the majority of them, but a significant chunk nonetheless.
So basically, there is a lot of regulation going on that is not helpful at all, and not a lot of interest in restoring the powerful self-regulatory forces of the market.
Finally, there's the all-important consideration that we know what happens when the government gets its' hands in things. I suspect that finding an American who believes that their government is efficient and effective would be something of a rarity. As such, why on earth would you ever let them have any kind of direct role in the management of something so central to the economy as lending? Unless, of course, you want an inefficient and ineffective economy.
It might also be worth noting the correaltion between the nations listed highest one the index of economic freedom and the nations with the highest PPP (Purchasing Power per Capita) GDP per capita, and average annual income. (Norway being one notable exception, and remmber that we are talking about economic freedom, not necessarily the left or right wing affiliation of the government. Believe it or not, welfare states can coexsist with economic freedom, to a degree. Of course, they never do as well as lassiez-faire states, but that's another matter)
On the bright side of things, the inevitable onslaught of banking regulations, controls, and economy-punishing legislation that is sure to assail us before long will be of great benefit to business lawyers, God bless their dear souls, and that's something we can all be happy about
