Ramblings of Tungsten

I usually stay away from commenting on economics because it really isn’t my area of expertise but since there is talk of bailing out some of the lending companies who gave out sub-prime housing loans I thought I would take a moment to explain why I have big problems with this idea.

My fundamental problem with bailing these lending firms out is the suspension of risk. The whole point behind sub-prime lending is that it is risky and if a firm does too much of it or does it improperly then they are likely to get burned when their lendees start to default on their loans and rightly so. “No risk no reward” is a fundamentally American school of thought but I think it is important to note that high risk shouldn’t guarantee a high reward or any reward necessarily. In fact, high risk should generally yield no reward otherwise it would not be risky to begin with. If we choose to bail these lenders out for bad practices then we are setting a terrible precedent. And, it would be painfully hypocritical, although not surprising given their corporate favoritism in most decisions, for an administration that stresses personal responsibility so strongly to then turn around and alleviate these struggling lending firms of the risk they took when they made these sub-prime loans.

Personally, in regard to the lending firms, I say let them fail. Yes it will be bad for the economy in the short term to have some of our major financial institutions in hardship. This hardship will cause a ripple effect through the housing marking and some aspects of the economy will recess. And, jobs will be lost just like when the tech bubble burst. But, just like when the tech bubble burst, leaner meaner more innovative lending firms will fill the void left by their bloated forbearers and the housing sector will begin to recover and likely stabilize at a less insane rate than it somehow maintained from the mid 90s on to ought six.

I know I am somewhat over simplifying the situation but I do think it is important the companies be held accountable to the assumed risk of their given business.