aneeshm
Deity
The current crisis crisis has led me to ask this question - do people need laws protecting them from their own stupidity?
And by "people", I mean not merely those who took out mortgages they couldn't hope to pay, but also the entire chain of people who made that possible - from the regulatory authorities who caved to sentiment and removed to 12:1 leverage cap, to the investment banks' managements who leveraged themselves into an impossible situation, to the people who engineered the financial instruments which concealed the risk inherent to these investments, to the mortgage salesman who offered NINA loans to people who he knew couldn't pay them back so that he could get his commission. In the free-market economy, we are all plebeians.
Other examples of these laws are those against predatory lending, which do not allow interest rates to be above a certain limit. The reason these laws were necessary in India was because many moneylenders were offering loans to peasants at ridiculously high interest rates (40%, 60%, 80% per annum were all normal in the feudal time, before land reforms), thus forcing that man into a debt spiral to the death. The stupid person in this example is, of course, the peasant, who would take a loan for a non-productive purpose without properly understanding how much it would take to pay it back. Had he been a perfectly rational actor, as classical economics assumes, then he wouldn't have taken than loan. But he isn't a perfectly rational actor and is, like most of the population, dumb, and completely incapable of assessing the consequences for his life of that action.
In fact, as one examines different sectors of the economy, one is unwillingly forced into the conclusion that most actors in the market are perversely irrational, and in the majority of cases take decisions which are massively detrimental to their self-interest. It is at this point where classical economics breaks down - in the sense that one of its assumptions no longer holds.
One way we can deal with this is by using the evolutionary approach - if a man makes a stupid decision, well, too bad, it's his problem. An economic version of the survival of the fittest. Rationality will be introduced in the system by means of the extremely painful correction it metes out to those who take decisions which are not rational. Each generation will learn from the mistakes of the previous one, and if it doesn't, it will pay the price.
However, this ignores the fact that collective and cultural memory is finite, and a lesson learned by one generation is ofter forgotten within one or two more generations.
So I repeat the question:
Do people need laws protecting them from their own stupidity?
And by "people", I mean not merely those who took out mortgages they couldn't hope to pay, but also the entire chain of people who made that possible - from the regulatory authorities who caved to sentiment and removed to 12:1 leverage cap, to the investment banks' managements who leveraged themselves into an impossible situation, to the people who engineered the financial instruments which concealed the risk inherent to these investments, to the mortgage salesman who offered NINA loans to people who he knew couldn't pay them back so that he could get his commission. In the free-market economy, we are all plebeians.
Other examples of these laws are those against predatory lending, which do not allow interest rates to be above a certain limit. The reason these laws were necessary in India was because many moneylenders were offering loans to peasants at ridiculously high interest rates (40%, 60%, 80% per annum were all normal in the feudal time, before land reforms), thus forcing that man into a debt spiral to the death. The stupid person in this example is, of course, the peasant, who would take a loan for a non-productive purpose without properly understanding how much it would take to pay it back. Had he been a perfectly rational actor, as classical economics assumes, then he wouldn't have taken than loan. But he isn't a perfectly rational actor and is, like most of the population, dumb, and completely incapable of assessing the consequences for his life of that action.
In fact, as one examines different sectors of the economy, one is unwillingly forced into the conclusion that most actors in the market are perversely irrational, and in the majority of cases take decisions which are massively detrimental to their self-interest. It is at this point where classical economics breaks down - in the sense that one of its assumptions no longer holds.
One way we can deal with this is by using the evolutionary approach - if a man makes a stupid decision, well, too bad, it's his problem. An economic version of the survival of the fittest. Rationality will be introduced in the system by means of the extremely painful correction it metes out to those who take decisions which are not rational. Each generation will learn from the mistakes of the previous one, and if it doesn't, it will pay the price.
However, this ignores the fact that collective and cultural memory is finite, and a lesson learned by one generation is ofter forgotten within one or two more generations.
So I repeat the question:
Do people need laws protecting them from their own stupidity?
