Category Archives: Econ & Money: Mortgage Mess

Last week it was the British government doing it. Now mainstream US economists are proposing that we respond to the mortgage crisis with some home-grown lemon socialism.

I understand the importance of keeping markets liquid. But I have absolutely no desire at all to bail out the shareholders of the banks that made stupid choices, and actually not so much desire to do income transfers to people who bought bigger houses than mine and can't pay for them.

Isn't there some way to do the income transfer from the intermediaries who made all the profits and created the moral hazards?

Note: “lemon socialism” has been defined as the subsidization of weaker firms at the expense of stronger firms, but I believe the better definition to be “a form of market organization in which the private sector is allowed (or encouraged) to take above-average risks and pocket the gains, but the public is required to shoulder the ultimate losses.”

Another example of lemon socialism is when the public is asked to take over ownership of loss-making enterprises which have suffered from under-investment while private profits were being taken. But that was last round.

Calculated Risk has a graph which shows Homeownership Rate: Cliff Diving.

What this means is that the home ownership rate today is back to where it was in, say, 2001 and still falling.

In other words, most of the million or so families who have been foreclosed on this year are not buying new homes — how could they get the credit? — but renting (if they can pass the credit check for that!) or moving in with family. Or living rough? (Or is that what comes next?)

It's a risky thing to do on the day of the NH primary, when in all likelihood the results — whatever they are — will bring forth a flood of bloggy eloquence, but here goes: I nominate the following blog post at Calculated Risk, a post which has nothing to do with politics, only a little to do with the mortgage crisis, and everything to do with the tyranny of corporate (or, really, any) systems and mental blinders, as the best blog post of the day.

Turns Out Judges Don't Like “Efficient” Servicers

Does this mean what I think it does?

Credit Crisis? Just Wait for a Replay: One of the more remarkable facts about the subprime crisis is that total losses to the financial system may be about equal to the amount of subprime loans that were issued. On the face of it, that appears absurd, since many such loans will be paid off, and those that default will not be total losses. But, Mr. Seides said in an interview, “the financial leverage placed on the underlying assets was so high” that the losses multiplied, as the profits did when times were good.

“When there is more leverage” and things go wrong, he said, “there are more losses.”

They resold layered participations in the same underlying loan so many times that it ends up with leverage over 100%? Given that substantial profits are taken out along the way, how does that work even if everyone pays off like they are supposed to?

Update: Krugman is puzzled too.

The “super-SIV” bailout fund — which never made much sense, and for which the commitments had been dropping almost daily, is now officially dead before being born: Big Fund to Prop Up Securities Is Scrapped. Its death leaves some egg on the face of the Treasury, which had suggested this was part of the answer to the emerging mortgage crisis.

Note that this is different from the other Treasury scheme to have banks adopt some FICO-score based criteria to allow some fraction of the people who would otherwise default next year to refinance instead (so long as they are up to date on payments, etc. etc.). That band-aid makes some economic sense and may survive, although it's only a few drops in the leaky bucket.