Bluematter.

I am having trouble deciding who irritates me the most, fanatics on the right or fanatics on the left (extremists, on the other hand, I like a lot). Today it's the left, and Nobel Laureate Joseph Stiglitz no less (hat tip Mark Thoma):

There are times when being proven right brings no pleasure. For several years, I argued that America's economy was being supported by a housing bubble that had replaced the stock market bubble of the 1990's. But no bubble can expand forever. With middle-class incomes in the United States stagnating, Americans could not afford ever more expensive homes. [...]

[...] Record-low interest rates in 2001, 2002 and 2003 did not lead Americans to invest more - there was already excess capacity. Instead, easy money stimulated the economy by inducing households to refinance their mortgages, and to spend some of their capital.

It is one thing to borrow to make an investment, which strengthens balance sheets; it is another thing to borrow to finance a vacation or a consumption binge. But this is what Alan Greenspan encouraged Americans to do. When normal mortgages did not prime the pump enough, he encouraged them to take out variable-rate mortgages - at a time when interest rates had nowhere to go but up.

Predatory lenders went further, offering negative amortisation loans, so the amount owed went up year after year. Sometime in the future, payments would rise, but borrowers were told, again, not to worry: house prices would rise faster, making it easy to refinance with another negative amortisation loan. The only way (in this view) not to win was to sit on the sidelines. All of this amounted to a human and economic disaster in the making. Now reality has hit: newspapers report cases of borrowers whose mortgage payments exceed their entire income. [...]

But lower short-term interest rates have led to higher medium-term interest rates, which are more relevant for the mortgage market, perhaps because of increasing worries about inflationary pressures. It may make sense for central banks (or Fannie Mae, America's major government-sponsored mortgage company) to buy mortgage-backed securities in order to help provide market liquidity. But those from whom they buy them should provide a guarantee, so the public does not have to pay the price for their bad investment decisions. Equity owners in banks should not get a free ride. [...]

It is the victims of predatory lenders who need government help. With mortgages amounting to 95% or more of the value of the house, debt restructuring will not be easy. What is required is to give individuals with excessive indebtedness an expedited way to a fresh start - for example, a special bankruptcy provision allowing them to recover, say, 75% of the equity they originally put into the house, with the lenders bearing the cost.

So, let me get this straight. People took on massive variable-rate mortgages (rather than the more expensive fixed rate ones that offer protection against the risk of rising interest rates) because the lenders said that house prices can only go up. Furthermore, Alan Greenspan apparently told them 'to borrow to finance a vacation or a consumption binge'. And, even more to the point, a lot of people took on those big bad mortgages*. Hence, there is a strong moral case that the government should arrange for them to be compensated.

I'm not against bail-outs in general, because politics and economic policy should be guided by practical considerations, not by a desire to be 'fair' in each situation. I am not dismissive (or supportive) of Stiglitz's case that government should give some money to these people to avoid 'a human and economic disaster in the making'. But to argue that the people that invested in housing do not bear any responsibility for their actions and are somehow entitled to compensation on moral grounds is simply ridiculous.

*the number of affected individuals is central to Stiglitz's argument. If you borrow money to start a company and the company fails, too bad. But if you and a lot of other people borrow to invest in the housing market the moral calculus is completely transformed.