Bailouts are bad

Monday, August 27, 2007

Beware Bailouts: Financial Page: The New Yorker

Nine years later, it’s been another terrible August on Wall Street. The meltdown of the market in subprime loans, which over the past six months has led to the shuttering of many home lenders and mortgage brokers, has spilled over into the broader credit market.

The wife linked to this article in the comments of my earlier post, and I thought it was a good article.  In fact, it’s the article I would have written if it weren’t much easier to just type up an uninformed rant because you don’t really know all the details.

The Fed’s decision to flood the system with cheap money will create a textbook case of what’s usually called moral hazard: insulating fund managers from the consequences of their errors will encourage similarly risky bets in the future.

All of these mortgage lenders SHOULD be going under.  They took on too much risk, and it came back to bite them.  That’s how risk works.  If you balance it, you make money.  If you take on too much, you go broke.

The article goes on to talk about how the subprime mortgage implosion may or may not hurt the broader economy.  I would be more inclined to see government intervention to mitigate the adverse effects on the broader economy - we are innocent, and having the government help out because someone else screwed up the economy is much more palatable to economic conservatives such as myself.

Anyway, it’s an interesting article.  Thanks to the wife for pointing it out.

Posted in: Real Estate