In 1980, Anthony Kronman wrote a brilliant article on “Contract Law and Distributive Justice,” in which he basically argued that a rigorous adherence to core libertarian principles regarding just transactions — there should be no force or fraud involved in a truly voluntary transaction — would move one in the direction of paying careful attention to the distribution of economic power between the individuals entering into a contractual arrangement, and thus to the distribution of economic resources in society as a whole. It’s an interesting idea, and I thought of it as I read Matt’s take on irresponsible borrowers.
There really is plenty of blame to go around here. But I just don’t see how more than a tiny fraction of it could possible adhere to our electrician or teacher or secretary who’s decided, basically, that the financial services professionals and government regulators know what they’re doing. Now could she have known better? Sure. She could have been reading Dean Baker and Paul Krugman and others. The idea that this lending was all being undertaken on a false premise that a nationwide housing bust was impossible wasn’t a highly guarded secret. I was, for example, familiar with the chart above and with the analysis suggesting that a bust was, in fact, likely. And I believed that analysis. But at the same time, I write about U.S. public policy debates for a living. If there’s a dissident line of thinking that, despite its general unpopularity, is popular among left-of-center economists—well, that’s the kind of thing I know a lot about. But our nurse? Why would she know?
Though I’m sympathetic to Kronman’s analysis, Matt’s take gives me pause. I was thinking to myself, “down this road lies ruin.” But that’s too strong. Let’s extend the logic a little further and caveat emptor vanishes entirely. I’m reminded of Keith Joseph’s notion of the “pocket-money society.” And you have to wonder about Megan McArdle’s renter/owner distinction: what do we do about those who were, in Matt’s case, reading Baker and Krugman, or who were just cautious about taking on heavy obligations? We’re tilting the economic balance in important, perceptible ways that will disadvantage people on the basis of their time-preferences.