What a Strange Post

Another cat-fight has broken out in the not-so-close knit circle of economists - this time amongst the group of economics professors with free time on their hands between grading papers, otherwise known as econo-bloggers.

It seems that Nouriel Roubini is getting way too much ink and TV time for the likes of Alex Tabarrok at Marginal Revolution. This is what went up earlier today at MR on the subject of subprime loans and class distinction:

The Credit Snobs
I rather like the title "voodoo priest of free market economics" so I am happy to take the blame for the sub-prime mortgage defaults and at the same time stick a few pins in Nouriel Roubini.

Roubini and others generating hysteria about defaults in the mortgage market are credit snobs - they think credit is something that only the rich can handle. Just look at the language that Roubini uses to analogize borrowers - they are "reckless patients" who "spent the last few years on a diet of booze, drugs and artery clogging junk food." Similarly, the Washington Post tells us that it's the end of the "borrowing binge."

Yeah, we get it. Credit is ok for us, the "sober" borrowers but poor people can't handle credit.
...
Basic economics says that people should borrow so that they can consume based upon their permanent income. Modern day financial markets are finally making this possibility a reality. Combine financial innovation, strong US economic performance and a global savings glut and it makes sense that credit should become easier to obtain. We see the benefits of financial innovation in bringing credit to the poor not just in the United States but around the world. Will Roubini next be calling for the retraction of Muhammad Yunus's Nobel Prize?

The fact that there are defaults is partly a learning process in response to financial innovation, and thus evolution, but also partly a simple matter of risk. Defaults are to be expected. I see no reason to expect contagion.
...
The democratization of credit worries the credit snobs. The credit snobs fear that capitalism isn't just for the rich.

Reow!

It sounds like a certain associate economics professor at George Mason University is lobbying for a job at the Federal Reserve. It's surprising that "reaching out to the unbanked" was somehow left out while discussing the recent "savings glut" and "financial innovations", key buzzwords in a Fed lexicon that explains how more money and credit invariably better the world.

Reading a few selected comments makes for even more fun:

It's a lot worse than being a credit snob and absurdly blaming the sub-prime mortgage lenders, who are just responding to market signals, distorted though they are.

And who's the Big Distorter, who goes unmentioned by Roubini? That would be Easy Al Greenspan, just named Stocks, Futures and Options magaine's "2007 American Hero." Easy Al's two-step monetary binges of the second half of 1999 (to head of the pseudo-Y2K problem), and post-9/11 should get him a long jail stretch at the very least.

Posted by: Bill Stepp at Mar 21, 2007 7:48:00 AM

What a strange post... I suppose I am a credit snob. I disagree with the idea of pink slip loans and paycheck loans because I've seen how they devastate a community and hurt the very people we pro-free market people are trying to help--those with the goals and means to pull themselves up the ses ladder. Would sub-prime have been as big a problem if the marketing of such loans hadn't been as facile, rooted in floating interest loans, etc?

Surely you're smart enough to see that people see the (pre-crash) effects of easy credit and leap to the conclusion that the way to prevent the effects is to remove the cause. Why on earth would you resort to ad hominem instead of using your usual analytic and normative talents?

Posted by: tsoodonym at Mar 21, 2007 8:23:13 AM

"I've seen how they devastate a community and hurt the very people we pro-free market people are trying to help--those with the goals and means to pull themselves up the ses ladder."

They have the goals and the means, but apparently not the financial acumen? Wouldn't this be like any other "protect them from themselves" situation where education, not legislation, is the answer? The sad fact is that our public schools and colleges are failing miserably at financial education, and this is simply just one more symptom of that failing.

Posted by: Brian at Mar 21, 2007 8:45:30 AM

If poor people aren't worse at making financial decisions, then why are they poor?

Posted by: Anderson at Mar 21, 2007 9:11:02 AM

Alex needs to post more.

Posted by: eddie at Mar 21, 2007 9:57:32 AM

AT's post, caricatured though it may be, matches my experience. Before, people were like, "OMG! Why won't you lend to the poor? You jerks! Don't you understand that they need access to credit in order to advance? Here, let's throw up a bunch of regulations so that you have to rigorously document why you denied someone a loan."

Now that lenders did that, it has become: "You idiots! What were you thinking? Don't you understand these people can't pay you back?"

Posted by: Person at Mar 21, 2007 10:02:09 AM

Alex,

I'm afraid there's a whopping fallacy in your argument at least a mile wide and just as deep.

You cite the example of Mohammed Yunus, yet you fail (perhaps egregiously, perhaps not) to cite the critical difference between the microfinance his bank provides and tens of millions in dud mortgages written by Joe's Loans For Bums, Inc.

The Gramman Bank demands collateral.

Not financial collateral, for sure - but social collateral. If Gramman borrowers don't repay their loans, Yunus tells their neighbours and friends. It's a pretty good way of keeping the loan book healthy.

Does that make Yunus a 'credit snob'? Maybe yes, maybe no - but it means his bank specialising in $25 loans holds more true to basic banking principles than any number of bum outfits selling 'new' and /or 'creative' products.

Maybe he should be appointed to the Fed. Or the SEC. Or George Mason University.

Incidentally, radicals like you always, always put the cart before the horse. If credit is easy, what incentive is there to save? And thus to work?

I mean, I'm no economist, but is that point so simple it doesn't need to be said?

Posted by: Martin at Mar 21, 2007 10:18:58 AM

The comments section goes on and on as might be expected - the contrast of micro-credit in other parts of the world with subprime lending in the U.S. really is a fascinating discussion full of many important, real-world implications for the future of money and banking.

Here at this blog, there is a pronounced internal conflict where a libertarian bent is often at odds with the need for some sort of nanny state. Like many other complicated issues, far too many see this choice in much more clear-cut terms - it's one or the other, no gray areas please.

If only it were that simple.