"But this is a strange thing to have settled on: It is the lenders' responsibility to make sure that their customers can afford repayment. "
I don't think it's strange at all. The lender is the one that assumes the risk that it may not get the money back. Thus, it's up to the lender to do whatever verification it deems necessary (and legal).
Yeah sure. It's not strange that the lender should choose to do this given the facts. That isn't strange.
What is strange is that if the lenders choose not to do this, & lend (ie sell) as much as people will borrow (buy) like most other markets, there will be a massive default rate. Presumable a person should be able to work out if they can repay a loan before taking it. Presumably they don't want to have a loan they cannot afford to repay.
Common sense (& the assumptions underlying economic theory) would suggest that this should be enough to make sure people don't loan too much in all but end cases.
The reason I say it's strange is that the running assumption that doesn't even seem to need to be mentioned any more in these sorts of articles is that consumers are determined to take out loans they can't repay & the banks, governments or whoever else need to police this. Supposedly, a big chunk of this 'crisis' (the sub-prime) comes down to that: banks not policing enough.
It's strange that no one thinks it's strange to assume that everyone wants to bankrupt themselves.
Wait if you don't pay back the loan it's "free money" so I don't think people who get into lot's of debt and then default are necessarily idiots. People pay back loans so they can get more loans or get rid of the lean on the car / home. Borrowing 200k and making a 50/50 bet could be a great investment if you could live without credit for a few years.
The credit crysis comes down to bad statistics. When lenders assume a default rate and ignore how dependent this is on the economy they make bad decisions. Home loans in Detroit are a great example of this.
If you are talking about a moral hazard on the consumer side I have to say I think it's rubbish.
The possibility & unpredictability of a bailout & the terms under which you can get free money are such that it's insanely risky trying to take advantage of it. Swaying stock prices by a couple of percent b is one thing. An individual risking all of his own wealth is something else. Virtually no sophisticated investors would take advantage of it.
The overwhelming market signal should remain: do not borrow more then you can repay.
I don't think it's strange at all. The lender is the one that assumes the risk that it may not get the money back. Thus, it's up to the lender to do whatever verification it deems necessary (and legal).