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« Good at what they do | Main | Failed religion »

Jul 25, 2010

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justcorbly

I know economics has pretensions to being a science, what with all the numbers and graphs and formulae and stuff. But, how can you quantify the willingness of people to lie, cheat and steal? Given enough people like that, they can wreak a lot of havoc. It seems to me that much of what brought on the financial collapse of 2008 and triggered the recession that was Bush's last party gift to us all, was unethical behavior by people with a lot of money and a desire to have even more money. Worse yet, some of them thought that if it made them money, it had to be OK.

Andrew Brod

I have two problems with Klein's piece. The first is the notion that what went on with mortgages at the retail level is as important as what went on at the investment banks.

My take on this sorry episode in financial history is that the retail shenanigans were driven by the lack of effective regulation of the tranching and securitization of mortgages to generate mortgage-backed securities. Mortgage brokers wouldn't have pushed subprime mortgages as hard if the upstream financial institutions hadn't urged them to keep doing it (because they had what they thought was a sure-fire and no-risk way to handle the dubious mortgages).

To be sure, the human toll at the retail end needs to be counted. But the policy focus should be at the other end. If not for the Wall Street crimes, the Main Street pain wouldn't have been felt.

Second, while I think Klein's piece is mostly about mortgage shenanigans, he brings payday lending into the picture and paints it with the same brush. About this I'm not so sure. For some time now I've been skeptical of criticism of payday lending. I may be wrong, but Klein doesn't make the case that I'm wrong.

The book by Gary Rivlin might do a better job, but Klein's account of Rivlin's case against payday lending is far from substantive. The only specific problem mentioned in connection with payday lending is that such loans are marketed aggressively.

But it's a biiiig leap to go from that to the idea that payday lenders' profits depend on making loans that can't be repaid (the "bleed them and bleed them" part). The research generally used to support this claim confounds many loans with sequentially unpaid loans. There's no question that payday lenders profit by making more loans. But not by making bad loans.

Klein says it's gotten worse during the recession of 2008-09: "Businesses that thrive on people needing access to emergency funds boom when unemployment skyrockets and wages dip and millions find themselves struggling to make rent each month." Well, duh! And businesses that thrive on people needing food boom when they're hungry. So the solution is to make it harder for people to obtain those emergency funds?

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