Economics: December 2011 Archives
I'm reading Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon
For example, mortgage originators were making bad loans to unqualified borrowers and then selling bundles of these loans as mortgage-backed securities to Fannie Mae, Freddie Mac, and a host of investment banks. The book emphasizes over and over that these loan originators had a poor incentive to produce high-quality (or at least honestly-described) mortgages because they knew they wouldn't be holding on to them. This is an obvious agency problem, and I couldn't understand from the book why the investors weren't on the lookout for it.
Yet about 2/3 of the way in, the authors mention that under the terms of the securitization agreement, the originators had to buy back all loans that were materially misrepresented and all loans where the borrower defaulted early in the loan's term. In other words, the purchasers had sought to protect themselves from agency risks by requiring the originators to shoulder substantial default risks. In that case, why didn't the originators pay more attention to the quality of the loans?
As it happens, according to the book, the loan portfolios were so toxic that the originators would have gone bankrupt if forced to buy them all back, which would have cut off the flow of new loans, so the investment banks didn't force them to take a loss. But that just raises more questions: Could threatening bankruptcy really have been the originators' plan for protecting themselves from the consequences of their poor loans? How did the investment banks not see that coming?
So far, when it comes right down to it, I've reached two conclusions:
(1) Unscrupulous sociopaths can make a lot of money in the financial markets, especial during the manic phase of an asset bubble.
(2) I've got to figure out how to get a piece of that.
Update: Not directly connected, but I've just noticed that Charles Mackay's Extraordinary Popular Delusions and the Madness of Crowds
Here's something I never thought about before: It's time to stop using pennies.
Aside from its actual subject -- the uselessness of pennies -- this video is also worth watching because it's a terrific example of how to make an argument. It's clear, it's concise, and in four minutes and 31 seconds I went from not thinking about pennies to being completely convinced they should be eliminated. They fail as money.
And frankly, the nickel doesn't look to good either. Let's just drop the last digit from prices and be done with it.
(Hat tip: Alex Tabarrok)
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