The Nanny State We Need

Now consider a positive example of the government telling us how to behave: Starting January 10, it will be much harder to take on a bigger mortgage than you can repay. That's the result of new mortgage rules going into effect that require lenders to make a serious effort to ensure that consumers can afford the mortgages they get and sets tighter guidelines about debt-to-income ratios.

 

We all know why those rules are needed: Because during the last housing boom, lenders handed out mortgages to anyone with a pulse, including lots of borrowers who couldn't afford the homes they were buying. Why did so many people bite off more than they could chew? In part, because as Barbara Ehrenreich argued in her book Bright-Sided, Americans have a love affair with positive thinking. Many of us think we'll do a lot better in the future than we will, and so we make bad decisions based on those projections. Of course we'll earn more money next year, so why not get that big house? Most famously, a large percentage of Americans believe they'll be rich one day -- when the terrifying truth is that many of those optimists actually have a better chance of slipping into poverty. 

 

Libertarians believe that government shouldn't be in the business of stopping people from making bad decisions. Summing up the libertarian philosophy (in regard to the minimum wage) Cato's Mark Calabria said recently that "contracts between consenting adults that don't physically harm others should be respected and hence not banned."

 

But people's bad decisions do harm others. If I end up in a coma for twenty years after a biking accident, everyone in my health insurance pool will pay for that. Now, I would argue that biking without a helmet doesn't inflict enough societal costs to mandate state intervention. Clearly, though, imprudent mortgage borrowing is another story -- since this behavior helped bring down the global economy a few years back. And what's especially insidious is the way in which mortgage brokers and lenders were actively encouraging people to behave badly. In effect, they were debt pushers -- tempting people to get into over their heads at every turn. Lenders are still engaging in this behavior with credit cards and payday loans, but the mortgage rules that soon take effect will curb this activity in regard to the biggest loans consumers can get. And that's a good thing.

 

Government should stay out of our lives as much as possible, which is why I'm for scrapping drug laws, lowering the drinking age, and getting rid of any number of insufferable laws around children's safety. But government should definitely stop us from doing really stupid things that can have big and dangerous consequences.

 

If greedy lenders want to again conspire with bright-sided Americans to blow up the global economy, we should stop them. And that's exactly what the new mortgage rules will try to do.