Dispensing with the libertarian objection to regulating mortgages

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The David Laibson plan for doing away with misleading teaser-rate mortgages (ban prepayment penalties, he says), introduced in this blog last week, has been getting some attention from econobloggers. It has also generated this appalled response from self-proclaimed “real-world libertarian” Kip Esquire:

It takes a special kind of arrogant, “central planner wannabe” mentality to insist that restricting the ability of competent consenting adults to enter into strictly private contracts with one another actually makes them better off.

It’s cute when such malcontents lament having “too many toothpastes,” but when they set their sights on the financial markets, it’s time to get very, very nervous.

I think he’s got it backwards. Trying to regulate how many toothpastes can be sold, which the Indian “License Raj” did for decades, is a recipe for unmitigated economic disaster. But there are good reasons why governments get into regulating financial products. They have to do with the oft-demonstrated inability of lots of otherwise productive and useful members of the society to make rational long-term financial decisions and the huge information imbalances between customers and financial institutions. Also, people make dramatically different financial decisions depending on how the options are presented to them, which complicates talk of “competent consenting adults” in such matters.

Now you could still take a principled libertarian stance and argue that, whatever is best for most people, any infringement of individual freedom is wrong. But there are already federal laws restricting lending, and and they’re not going away. The question isn’t whether mortgage lending is going to be regulated, it’s how. And the Laibson proposal seems to be an elegant way to combat a particularly predatory kind of lending without getting too complicated or intrusive about it.

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