Regulate All Lenders

George Soros lays out his plan for fixing the US mortgage system in the FT today: essentially, it's a Demark-style covered-bond system which imposes extremely rigorous regulation and homogenization on all mortgage lenders. Under his preferred system, says Soros, "loan-to-value ratios and underwriting standards are strictly enforced by a single, strong regulator".

This is quite un-American, and won't happen, but that doesn't mean it shouldn't. A large part of the reason for the current housing mess was regulatory arbitrage: while banks and GSEs were regulated quite assiduously (although not assiduously enough), other lenders -- anyone who didn't take deposits, basically -- had essentially no regulation at all.

Lenders are a crucial part of any financial system, and it's high time that they were properly regulated -- all of them. That includes not only subprime mortgage lenders but also payday lenders, credit-card companies, car loan shops, the lot. What's more, the regulation should be at the federal, not state level, thereby preventing all these companies from simply officially setting up shop in Delaware and then operating nationwide with effective impunity.

The lack of regulation of lenders can only really be justified on the grounds of homo economicus: that individuals won't take out loans which do them no good and lots of harm. But of course they do, every day, to the point at which credit-card companies nowadays make their biggest profits from accounts which go into arrears. Slapping enormous fees onto people who can't afford to pay back their loans might be profitable, but it's unhealthy from a systemic perspective, and it's high time a regulator had the power and authority to crack down on such activity.