Banks' lending practices and consumers' own poor judgment got us into our current economic mess.  Make an argument for or against the idea that the government should step in and set certain...

Banks' lending practices and consumers' own poor judgment got us into our current economic mess.  Make an argument for or against the idea that the government should step in and set certain standards for people to be lent money to.

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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To argue that the government should not do this, you should focus on the idea that the government is not the most effective judge of who is and is not creditworthy.  The government lacks the expertise and the flexibility to make rules that will prevent both reckless lending and overly tight lending.

The banks are the entities that should decide who is worthy of credit.  They are the ones who have a long history of determining what sorts of traits make people good risks.  It is true that the banks made bad decisions in the recent real estate bubble.  But you can argue that this came about because of government pressure to lend to high risk people and because of the government's willingness to create moral hazard by guaranteeing loans.

What the government should do is to make it clear that they will not rescue lenders who make bad loans.  If that were clear, banks would have an incentive to loan only to people who were good risks.  This would reduce the number of people who would be able to get loans, but it would make economic disasters such as the recent financial crisis less likely to occur.

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