2012 January 16 Monday
Steve Randy Waldman On Lender Relationships

Back in 2010 Steve Randy Waldman gave an interview (which I've only just found) on consumer lending that makes some interesting points: consumer behavior toward lenders should change because lender behavior toward consumers has changed.

The financial industry has changed the economic and legal landscape surrounding consumer lending so that it simply bears no resemblance at all to interpersonal loans among people of good will in continuing relationships. But those are the norms they ask borrowers to adopt with respect to repayment. That act, demanding others act in accordance with standards from which one exempts oneself, is morally offensive. In a society which, despite economic difference, accepts no social class, ones moral obligation is to behave towards others as others must behave towards you. It is clear that, in general, banks and the special purpose entities that increasingly replace them treat their transactions with borrowers as hard-nosed business arrangements which they are willing to pursue on adversarial terms when doing so is in their interest. Borrowers should do the same. To do otherwise is to reward the cynical immorality of others, which serves no social good.

I see a growing bias toward favoring lenders basically because the lenders are powerful. For example, the Irish government was induced to bail out Irish bank bondholders at the expense of Irish taxpayers. The bail-out wasn't just for checking account depositors. It was for German and other European banks which had lent the Irish banks lots of money. The whole European debt crisis has basically played out as an attempt to prevent imprudent lenders (buyers of sovereign debt and bank debt as well as banks that lent for real estate bubbles) from having to take a bath due to their imprudence

Student debt in the US is another example where the political deck has been stacked in favor of lender. US student debt is near impossible to reduce in bankruptcy. To my knowledge it is unique in this respect. Effectively students are entering into debt peonage due to the power and corruption of both lenders and universities. They are like cigarette companies that tempt successive generations of youth into harmful addiction.

My problem with the lenders: If profligate irresponsible spenders act in ways harmful to the the commonwealth (and I think they do) then their enablers also harm society as a whole. Why should we protect these enablers by forcing others (and not just the borrowers) to bail them out? Lenders are morally culpable for creating financial bubbles and enabling irresponsible borrowing.

Share |      By Randall Parker at 2012 January 16 12:20 PM  Economics Inequality


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