Friday, March 30, 2007

I Share Goolsbee's Lack of Outrage

I was happy to find a kindred spirit in Austan Goolsbee The hand wringing over the subprime meltdown has left me a little confused.

Money was cheap and to steal a phrase from the A Bronx Tale the subprime borrowers "took a shot, what I am going to say." That is, they tried to stretch their way into a house. When you take a shot, sometimes you miss. There is nothing wrong with that. Would you prefer that they never had a shot in the first place? Maybe the lenders where too desperate and let people in the door they shouldn't have. Maybe. I am still not sure about that.

There is uncertainty in the world and sometimes even calculated risks don't pan out. Either way, however, its the lender that ends up holding the bag. The subprime borrower looses his house, but he didn't have a house to begin with. And his credit? His credit was already subprime, whats really the loss there.

I just don't see who is made better off by preventing these transactions from happening.


hat tip to Mankiw

12 comments:

Anonymous said...

"The subprime borrower looses his house, but he didn't have a house to begin with. And his credit? His credit was already subprime, whats really the loss there."

Karl, perhaps you didn't know this, but a couple years ago, when interest rates were much lower, millions of subprime borrowers, eager to buy a house, signed mortgage agreements with teaser rates that would be fixed for, say 3-5 years, and then they would skyrocket. Most of these people never bothered to consider just how high their monthly payments would be after the initial teaser rate. (Other people simply didn't understand the mortgage altogether). The point is that now literally thousands of people each day are finding out that the teaser rate just exprired. Now they are having to face extremely high payments, and that, my friend is a massive loss. It is estimated that more than 3 million people across the country will have this problem. What's worse, since home prices have been stagnant across the country, (and even dropped in some areas), there is the phenomenon of "negative equity" - people owing more than their home is worth. When this happens, combined with the expiration of millions of teaser rates, you have millions of foreclosures; but remember, since there is negative equity, and since the housing market is terrible now, in many parts of the country, when the bank takes your home to sell it , it will have trouble selling it, and even if it did sell it, it wouldn't be enought to cover the loan amount, so the difference would be the borrower's liability. Hope this helps.

James M. Jensen II said...

Some people do stupid things and always will. We don't want to let them go destitute, but overall I think asking them to pay for the consequences of irrational decisions is reasonable.

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