What types of consumer protections should have been in place to prevent the massive collapse of these institutions in the future?
Our financial institutions, primarily banks and mortgage companies, went through the worst downturn they have seen since the Great Depression -- with several large institutions failing or being taken over by the U.S. government. Most economist agree that one of the major problems was the sub-prime lending practices in which our financial institutions were engaged and also the lack of oversight by the federal government regarding "exotic investments." For those of you that do not know what "sub-prime" lending is, it is the practice of lending to individuals whose credit rating is low or questionable. There are three types ofconsumers in this problem: (depositors); and the investors in the bank itself. Please keep in mind that Congress is attempting to answer this very same question.
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I do not think that there should have been any further consumer protection laws in place. The only way to prevent this sort of thing is to have better consumer education.
One of the reasons why there was so much subprime lending is that people wanted that. They wanted to be able to buy houses even if they were not really creditworthy and the government supported that because it felt that people owning homes rather than renting is a good thing. Most of the people who ended up in bad loans were complicit rather than innocent victims who got fooled.
The other problem is that people did not really understand that housing prices were in a bubble. They voluntarily took things like mortgages with balloon payments because they were sure their house values would increase and they could refinance. This is something that cannot be cured by consumer protection laws.
Much of what happened to cause the collapse was caused by people willingly taking loans they should not have taken. If the banks had not loaned to them, they would have been angry and put pressure on the politicians to loosen the rules. It is very hard to protect people from their own desires. Therefore, I do not think any further consumer protection laws should have been in place.
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