As a libertarian fanboy, the words “economy” and “regulation” don’t sit well with me when used in the same sentence. Wealth redistribution? The very thought makes me shudder. Taxes? 99.5% of the time, I feel we can do without. Welfare?
You get the idea.
But I do recognize that regulation does have its place in the market. I believe that regulation works best when it either encourages competition or ensures that consumers have access to information about goods they are buying.
Before I continue, I should say that my formal economics education is limited. I’ve only taken three economics classes in college. I read blogs about economics and listen to my friends (who are hardcore economics majors) talk. Long story short, it’s safe to say that my opinions about the economy are every bit as valid as the average Joe’s, and no more than that.
Therefore, it’s entirely possible that my initial criticisms of market regulation, in the context of the sub-prime mortgage market, were completely off base. I’m talking specifically about the sale of sub-prime mortgages to investors hoping to make a profit off of the interest. (Quick note: for a bit of clarification, check out the two videos I linked to on this post.)
Does the sub-prime loan market need to be regulated? Before, I thought that there was no reason at all to regulate our market. Let the free market do it’s thing and all that. But now, I’m thinking… maybe.
Specifically, I’m thinking about how firms package sub-prime mortgages that they’re trying to sell. Investors who purchase those mortgages should be able to quickly identify what type of mortgage they are purchasing and what type of risk is associated with it. The contracts that are used to sell sub-prime mortgages are ridiculously long and confusing (as seen on the 60 minutes video). Investors likely didn’t know what they were buying into.
Part of me thinks that it wouldn’t be a bad move if government created a standardized procedure for writing easy-to-understand contracts that result in the sale of sub-prime mortgages to firms. That way, firms would be able to better understand the investments they are making.
But like I said, I’m not entirely sold on the idea that those should be regulated either. Despite the fact that the contracts were impossible to understand, the firm was taking a risk in making that sort of purchase without knowing about their investment. Unless the firms were out-and-out lied to, part of me thinks that ultimately, their investments are their responsibility.
On top of that, I have my doubts that government can create a standardized contract that would be efficient for firms to use.
Anyway, if you’re reading this, I would welcome your thoughts on market regulations in the context of our current economic crisis.