The subprime mortgage story: a problem of the weak

Most everyone is weak sometime. I'm basically tossing a coin when I choose health care benefits.

Ok, so I don't know anyone who isn't tossing a coin when they choose health care benefits. It's just that some of us know we're gambling while other players are more naive. The truth is the guy at the other end of the table wrote the rules -- he knows the game much better than we can.

When it comes to mortgages things are simpler for us. We're not sub-prime (yet), the products we buy are relatively simple and definitely generic -- there are lots of eyes on our side.

In the sub-prime market the game is trickier and the players have fewer resources than we. Those players get fleeced:

Lost in a Flood of Debt - Bob Herbert - New York Times

... There is some truth to the assertion that a lot of buyers signed up for deals they should have known they couldn’t afford. But it won’t do for the fat cats to fall back on empty phrases like “buyer beware.”

The subprime mortgage frenzy was a shameful, highly-charged phenomenon, motivated by greed and played out on a field of rampant exploitation. The victims deserved more protection than they got. As Paul Leonard, director of the California office of the Center for Responsible Lending, told me this week: “You shouldn’t have a marketplace that’s a ‘buyer beware’ marketplace for the most important financial transaction of most people’s lives.”

It’s not too much to ask that when Americans of modest means put their economic futures on the line, we have regulations in place to see that they are not ripped off...

The players get fleeced, the CEO walks, and some investors win, some lose.

So what ought we to do for the players who get taken, what do we do for the weak?

If you're a social Darwinist or neo-Calvinist this is just one more way that the market eliminates the unfit. If you're Libertarian the strong owe no duty to the weak, and you're probably a social Darwinist as well. If you're conservative there's a good chance you're either a religious neo-Calvinist or de facto social Darwinist -- but there's probably a portion that favors some state protection for the weak.

For neo-Liberals like me then the transiently strong definitely owe a duty to the currently weak. The question is not if something ought to be done, but rather what's the most pragmatic course given the reality of politics, the power of the market, and the inevitability of unintended consequences.