Wednesday, December 19, 2007

Obligations on lenders not to create impossible debts for customers

This proposed policy seems to me a sensible notion with applicability in Australia.

US lending institutions will now be required to show customers they can afford the loans they offer them. Lenders would also be required to reveal all hidden charges in loans and commissions. If they did provide inaccurate information they could then be sued by customers for limited compensation. The measure applies to new mortgages only where the lending rate is 3% points or more higher than the Treasury rate. In my experience, the Australian banks, in particular, are thoroughly irresponsible in terms of how they offer credit card and home mortgage debt. They generally offer too much debt!

In Australia lending institution employees are offered financial rewards to sell people expensive debt that in some cases they cannot afford. Recently I was offered credit card debt with a leading bank for in excess of $40,000 at an interest rate of 18%. I obviously did not accept - given my mortgage and other obligations it would have been unwise to do so and a personal loan would be a better option anyway - but those less knowledgeable might. A friend buying his first home worked out that he could just afford to borrow $200,000 given his income and that of his wife. The bank offered double that. There are countless stories of this type in Australia.

Objecting to dumb lending practices that leave the less-than-well-informed in difficult situations is not nanny-statism. It is recognition that stupid lending policies by inept institutions impose broader social costs beyond individual bankruptcy and default. I would prefer a return to the older regulated system where credit was rationed on the basis of demonstrated ability to repay and where, without default risks, interest rates would be somewhat lower. But I know things have gone too far to return to such a regulated system. These more modest moves proposed by Bernanke's are a reasonable 'second-best' policy alternative that Australia should think about mimicking - hopefully before we get into our own sub-prime mortgage mess.


conrad said...

The problem is how to do it. When I got my loan, I was offered essentially as much as I could possibly afford minus about $150 per week (or whatever the tiny number was -- I remember it being close double the maximum I thought was reasonable -- but then, I want to have a life too). There's always some lender willing to take the risk, and strict rules affect those that might pay it back in the future easily (e.g., those who just got a medical degree). The other problem is is that if someone really did use laws to restrict credit, housing would subsequently fall, and I can't imagine that being electorally popular, so no-one is going to do it, even if you happen to think it is a good idea.

Anonymous said...

Harry, I'm afraid that stepping in between adults who want to contract with one another while citing 'broader social costs' is virtually the modern definition of nanny-statism. You'd do better just to accept that and make your case without worrying about what others will call it.


whyisitso said...

Quite so, Anonymous (number 3728, or was that number 8721?). It's no use simply asserting that something that is obviously nanny-statism is NOT nanny-statism.

For all Harry's often declared devotion to capitalism and people taking personal responsibility I do think he often tok wit fok tong. I reckon he's spent too long in a leftie university environment for his own good.

hc said...

Your case is typical Conrad.

Anon and whyisitso, Stepping in between adults to address an informational imbalance is not nanny-statism. You are not denying access to credit - simply ensuring that people can afford it. How on earth could you look at the catastrophic situation in the US sub-prime market - a problem that threatens the world economy and deny it is necessary is beyond me.

The competitive model only works when agents are well-informed.

Spiros said...

What you people don't appreciate is that Harry is an old fashioned conservative. It is part of the conservative credo that paternalistic intervention in people's lives is justified for the good of society.

It may or may not be a good thing to do, but it isn't leftism.

Harry, you should have taken the credit card. They weren't offering you a $40K loan, they were offering you the option to take out a loan. You probably wouldn't ever exercise the option, but you never know, you might be overseas one day and need to make a quick and large payment, such as for s medical emergency.

By the way, I see that Brendon Nelson has proclaimed WorkChoices to be dead. Would you like to be a pallbearer at the funeral?

whyisitso said...

"paternalistic intervention in people's lives is justified for the good of society. It may or may not be a good thing to do, but it isn't leftism."

It's about as good a definition of leftism as you'll get.

conrad said...

Actually, I'll support HC, in terms of the need for more information. I asked a few people before going through a broker, and I was never told how much I'd be left with, the effect of that on interest rate rises, the effect of fuel price rises on expenses, how much more I would need if I had a kid (not a bad thing to know in my age group) etc. In fact, there are all manner of things I wasn't told. I wasn't generally even asked what my expenses were. The situation wasn't much different to buying a used car. Given this, it doesn't surprise me that problems are popping up all over the place because of it.

I don't think we should restrict people stupidly borrowing if they really must, but I don't see why some of these basic things shouldn't be offered and easily available -- Even most of the websites where it could all be automated don't have many of these simple things. Is it that they are just slack, or is that they deliberately dont want people to know?

Spiros said...

In that case. whyisitso, you must think that Bob Menzies, B.A. Santamaria, General Franco, Pat Buchanan and the entire British Conservative Party (pre Thatcher) were all leftists.

whyisitso said...

Don't know much about Pat Buchanan, but give me Thatcher any day over the Tory upper classes that preceded her in leading the Tory party. Menzies was a creature of his day, as Australia lapsed deep into leftism culminating in the Whitlam and even the Fraser government. He went along with it but only to a point. You can only piss against the wind up to a limit in this country without being totally saturated. Santamaria - if only the Reds believed in God he'd have supported them.

As for Fascists, well you tell me the difference between them and the commos! Peas in a pod. There is even a respectable case to be made that Hitler was a leftist.

There are degrees of leftism and I'll concede that Harry's got a long way to go before we can call him a leftist - but the straws in the wind are not encouraging.

Spiros said...

"There is even a respectable case to be made that Hitler was a leftist."

That's the great thing about the internet. Just when you think ypu've heard it all, along comes a comment like that one.

It really is the silly season.

Bring Back CL's blog said...

that was a nazi comment spiros!

Harry in australia the lending standards of the banks are much much better than in the US possibly because there is less securitisation.

Any problems can be usually attributed to brokers.

conrad said...

At least in terms of personal lending, I can't imagine how Australia could be much worse than the US (who cares if it is brokers selling the loans or the bank directly?). I suspect that there is just a cultural difference, and we also haven't seen massive declines in property value. If we do see that, or unemployment goes back up a few percent, I'm sure we we'll start seeing similar problems here too, and I'm sure we'll find someone to blame (e.g, it was the broker's fault even though we subcontracted them etc.)

hc said...

The estimated costs of the subprime crisis in the US are estimated in this morning's AFR as $500b.

I am neither a leftist or a libertarian. I believe in Economics 101 - markets are great but they sometimes fail and sometimes government intervention can improve things.

w said...

"markets are great but they sometimes fail and sometimes government intervention can improve things."

The former is indisputably a reasonable observation, but their is absolutely no evidence for the latter. In fact most of my observations over the last 40 years are that the exact opposite is true.

whyisitso said...

I hit enter too soon re that last comment.

whyisitso said...

And "their" should be "there" in the second paragraph. Don't want to appear too much like Homer with his total disregard for the correct use of the English language.

Bring Back CL's blog said...

whyisitso obvviously lives in a dreamworld.

We saw great market failure in the 60s not as much now in terms of collusion.

It is ONLY because of the ACCC the market can act as it should otherwise we would still have robber barons

Anonymous said...

B.A. Santamaria, General Franco, Pat Buchanan and the entire British Conservative Party (pre Thatcher) were all leftists.

Yes. Conservative leftists.


Ignore Homer. He generally has no idea what he's talking about and makes idiotic comments all over the web.

He's enthralled with Nazi economics at the moment and is raving about it. SO refer to him by his correct title... Unbertormtrooper homer.