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N.Y. Times on the Mortgage Crisis:

The mortgage crisis is moving into the mainstream. According to this and other stories, "everyone" is surprised at the crisis. Of course, Volokh Conspiracy readers learned back in June 2005 that mortgage companies had "gone out of their collective minds" (and beyond) and that I felt "sorry for whoever owns these loans, because some decent fraction of the mortgage holders are going to walk away from their six-figure paper losses, either because they can't afford the adjustable-rate increases, or simply because they'd rather saddle someone else with their loss." What I didn't add at that time was that interest-only, no-doc loans were an open invitation to fraud, such that a significant percentage of loans have become non-performing almost immediately.

Advantage: Volokh Conspiracy!

Byomtov (mail):
So how much did you make shorting these stocks?
3.10.2007 6:36pm
Zoe1 (mail):
Prof. Bernstein,

Are you sure that everyone was surprised at the crisis? I'm not sure the article says that. Based on my skim, the article contains the line: "I guess we are a bit surprised at how fast this has unraveled, said Tom Zimmerman, head of asset-backed securities research at UBS, in a recent conference call with investors. That's surprise at the speed, not the event. Or am I missing other parts of the article?
3.10.2007 6:39pm
Michael Benson (mail) (www):
Do you have any analysis as to why they are granting these loans? What is driving the psychology of the bubble?
3.10.2007 6:47pm
Stacy (mail) (www):
"Do you have any analysis as to why they are granting these loans? What is driving the psychology of the bubble?"

My guess: the same herd mentality that drives people to keep bidding up a hot stock even though everyone knows the fundamental value was 30 points ago.

Many people know in their gut that the cliff is approaching, and of course anyone with common sense and/or some historical knowledge has known all along that the easy credit was going to cause a bubble followed by a crash. But if you're in the industry, and everyone is convinced the other shoe isn't going to drop, then jumping early just makes you look like a dummy while everyone else is still raking it in. Well, until the wheels come off...
3.10.2007 7:04pm
dearieme:
In corporate life, it is better to be wrong in the right company than to be right on your own.
3.10.2007 7:05pm
Tony D'Amato (www):
Some people have advocated that the government should regulate mortgages and, as in the good old days, require that the new homeowner put down 20% cash with an 80% mortgage maximum. In those days, there were very few defaults.

But who wants governmnt regulation? Who wants federal bank monopolies over mortgages?

The result has been a cut-throat competition to give mortgages. Some double mortgages have given new homeowners 103% of their purchase price. When "teaser" interest rates are de minimus, and people are allowed to "fake" their income statements, it's no wonder that waiters and busboys have bought dozens of McMansions in California, Nevada, and Arizona. So long as home prices went up, they cashed out big time. After all, if you make $100,000 profit buying and selling a McMansion, and your down payment is zero or even negative, you get rich quick.

But when prices started down in mid-2005, these speculators kept playing their game, and others joined in. Then, as some people (like this blog) correctly warned that the house of cards would come tumble down, they lost credibility because the house of cards stayed up a lot longer than it should have. Even today, many people are in denial about the whole sorry mess.

I did well buying some puts on the sub-primes though I sweated it out almost till expiration day.

Hard times is just around the corner. One commentator (Peter Schiff) quoted a Bloomberg piece the other day when one of the happy talking heads said, "The US economy is in excellent shape except for the housing sector." Schiff said that's like a doctor telling a patient that he is in excellent health except for the javelin sticking out of his chest.
3.10.2007 7:13pm
unhyphenatedconservative (mail):
The local real estate bar association just had a meeting where mortgage fraud was a huge subject. The prediction is that its going to hit the fan because DOJ is devoting more resources to it.
3.10.2007 8:09pm
ReVonna LaSchatze:
Go David!
3.10.2007 8:30pm
davidbernstein (mail):
I thought about buying some puts on the mortgage cos last year, but never pulled the trigger. Damn!
3.10.2007 8:49pm
Viscus (mail) (www):
I like markets. I really do. But it seems to me that if your argument that even mortgage companies behave irrationally i.e. have "gone out of their collective minds" this indicates in turn that we shouldn't always expect such great results from markets, absent government intervention.

As we say in computer science, garbage-in garbage-out. Are we to believe that the irrationality of even sophisticated market actors (and mortgage companies are probably more sophisticated than average, don't you think??) nonetheless produces "optimal" results? That is, you are going to put in all this garbage (irrational collective insanity) and expect to get gold out?

Ultimately, what this means is that the best argument that market advocates can make is that markets, although subject to collective irrationality, are likely to outperform government. But really, that argument is only likely to be right some of the time. Especially when you consider all the ways that government can be configured and the possibility of using government in a limited fashion to correct for particular cognitive deficiencies which arise commonly in particular situations.

In other words, I think that thinking that markets are collectively irrational flies in the face of thinking that markets are blatantly superior for everything beyond enforcing contracts and protecting property, and that the government should not even have a limited role beyond that. It just does not fly.

There is only one conclusion. Sometimes, we may be better off with government intervention carefully crafted to correct for cognitive deficiencies and put forth after careful contemplation. Certainly, such thinking would be in sync with the founders, who gave permitted state governments and even the federal government to go significantly beyond enforcing contracts and protecting property and providing for national defense.

Two conclusions.
(1) Libertarianism is anti-originalist. AND
(2) Libertarianism flies in the face of what we know about market actors. Even libertarians like Bernstein admit (and even emphasize) that market actors have irrational tendencies.
3.10.2007 9:20pm
DavidBernstein (mail):
Visc, I can give a much longer answer to you, but I'll suffice with this: the mortgage companies that behaved irrationally are rapidly going bankrupt and going out of business. Gov't agencies almost never go out of business, no matter how royally they screw up, or no matter how obsolete their original function, for that matter.
3.10.2007 9:42pm
Advantage?:
Readers of VC would not, however, have learned much about one of the most important law-related stories of our day, the emerging US Attorneys scandal.

All the news that fits.
3.10.2007 10:07pm
Viscus (mail) (www):
Politician do go out of business. And the people controlling government assets (i.e. positions of power) also change.

Actually, if you look at most assets in the private sector, most of them are not left unused either. Instead, control over them is transferred to someone else. So, in a sense, private sector assets do not "go out of business" either, just the person who controls them changes.

So, what I see are mechanisms of accountability that work in very similar ways. Accountability via a change in who has control over something, whether a government position and government assets or a private position and private assets. Of course, in both instances, there are cases where there is too little accountability (and perhaps other situations where there is too much, as in there is always someone looking over your shoulder when you make a decision).

Overall, you will have no problem arguing that there are some (many even) specific cases where government should stay out. But, I think that when your argument is not limited to some (or many) cases, but instead is transformed into some sort of inflexible general principle, that you lose the argument. Especially in light of systematic market actor irrationality.

By the way, how much damage will these collectively irrational mortgage holders do to the U.S. economy (which really means, to the economic opportunities and of course, logically and inevitably, the personal relationships, physical health -- I have read somewhere that stress is bad for your health -- and mental well-being of many, many individuals) before they are finally held accountable? And even after they are held accountable, how long will a recovery take? And even after they are held accountable, isn't it likely that some of the bad apples will be replaced by other bad apples? Just as one can criticize government mechanisms for not holding people accountable soon enough, one can likewise criticize market mechanisms that allow market actors to do this much damage before they are finally held to account.

Your best argument is merely that dealing with the massively bad consequences of market actors not held accountable soon enough (and in some contexts never held accountable or, alternatively, not held accountable enough) is the lessor evil. But really, is it always the lessor evil?? Always is where libertarians lose to pragmatists. I just can't see always winning when you concede that there is systematic and "collective irrationality."
3.10.2007 10:09pm
WannaBuyaTulip? (mail):
The mortgage bubble should not be a surprise to anyone who has studied history. It was preceded by the dotcom bubble. It will be followed by some other bubble, maybe in commodities, or in precious metals. There are bubbles because various central banks have decided, with no doubt the best of intentions, to insanely increase the money supply without limit. There's also mob psychology: see my name? This has happened before: Mississippi bubble with John Law's money, South Seas bubble, Revolutionary French Assignats. The list is long, and the number of times it has happened is impressive.

There was a flurry of talk last week about the "carry trade"; borrowing Yen at essentially zero interest to buy US or other government debt that pays 4% or more. This trade is a direct result of the Japanese central bank policy. There is so much liquidity sloshing around the world, looking for someplace to go, that it is bound to pump up some market or other. For a while, it sloshed into the housing market, and into the lenders for the housing market.

In order to make the loans that the lenders had to make in order to get the returns they had to have, lending standards had to go down. Back in the days when S&L's, banks and credit unions loaned money to local people to build a house or a business, those loan payments were a big part of the institution's income. Now that all mortgages are bundled up in a big ball and sold as a Mortgage Backed Security (MBS) to banks that resell them to mutual funds, overseas funds, pension funds the game is different, and it doesn't take too many defaulting mortgages to poison an MBS. The Implode-O-Meter website documents what is happening to subprime lenders as their MBS's go sour, and they are forced to pay up: they go bankrupt. Think about that when watching Bubblevision and hearing Kudlow or Cramer rant about how subprime woes can't possibly affect the larger lending institutions.

NonDisclaimer: I made money off of two rounds of puts on Fremont, and currently have puts on Countrywide, along with several other companies involved in the building "boom".
3.10.2007 11:02pm
Tony D'Amato (www):
Puts can still be bought, not on the sub-primes but on the Alt-A mortgage companies, who are still in a state of denial about the whole thing.

The dynamics are logical. The sub-prime mortgages get foreclosed; the houses can't be sold at the foreclosure price because no one is giving out any more sub-primes; the houses are dumped; price pressure is brought on the next tranche of mortgages, the so-called Alt-A's.
3.10.2007 11:04pm
Stacy (mail) (www):
Viscus, you don't realize it but you're talking about "market failure" as a standard for situations that require regulation. You (as well as certain libertarians) should do some research on that term.
3.10.2007 11:07pm
advisory opinion:
Viscus schrieb:

the people controlling government assets (i.e. positions of power) also change


Yes. Of course turnover in the public sector based on performance and competence is as high as that of the private sector.

Good grief.

Try understanding Bernstein's point before you launch into
drivelous disquisitions that do not address the point.
3.10.2007 11:11pm
WannaBuyaTulip (mail):
Don't forget what foreclosure will do to the housing market. Banks are not in the real estate business and they don't like to own houses. They will sell foreclosed houses as quickly as possible, and if doing that takes down adjacent home prices it isn't their problem. The housing market has not bottomed.
3.10.2007 11:34pm
Viscus (mail) (www):
Stacy writes:


[Y]ou don't realize it but you're talking about "market failure" as a standard for situations that require regulation.


That is funny. I don't remember getting an A+ in an honors level intermediate microeconomics course due to my inability understand the term "market failure" or "externality" or all the rest of those cute economics terms.

I am fine with utilitarian economists to the extent they acknowledge the need to address externalities and market failures. In this instance, I wasn't criticizing utilitarian economists. I was criticizing libertarians, who, you correctly suggest, should familiarize themselves with not only the term "market failure" but specific systemtatic examples of the same.
3.10.2007 11:55pm
Viscus (mail) (www):
advisory opinion,

Unfortunately, due to my "I don't respond to people who are both jerks and incredibly asanine when they are named advisory opinion" rule, I am rendered speechless by your brilliantly stupid point, which, by the way, assumes a specific structure for government programs and furthermore fails to take into consideration other variables into the calculus, as though none other are needed.
3.11.2007 12:00am
A. Zarkov (mail):
Viscus:

The culprit is the government. Freddie and Sally buy these junk mortgages, and they are supposed to be "quasi governmental organizations." The federal government is supposed to have a "moral obligation" not to let them go bankrupt. But the real problem lies with the credit rating agencies like Standard and Poor's and Moody's. They help sell repackaged junk by giving them too high a rating for the risk involved. In the US there are five corporations that have received the designation Nationally Recognized Statistical Rating Organization. Note the appearance of the word "national." Need I remind you that Orange County got the highest rating from these folks just before they went bankrupt? Their response: "We evaluate credit risk, not market risk." I might add that a well-known business law professor at UCLA said the same thing with a straight face to a student I know. You can read all about this subject in a very good book, Infectious Greed by Partnoy.
3.11.2007 12:21am
advisory opinion:

Viscus, you don't realize it but you're talking about "market failure" as a standard for situations that require regulation.

You (as well as certain libertarians) should do some research on that term.


You're asking "viscus" to research a term? Snigger.

Wait till you see his comical definition for "economic takings."
3.11.2007 12:27am
advisory opinion:

Unfortunately, due to my "I don't respond to people who are both jerks and incredibly asanine [sic] when they are named advisory opinion" rule, I am rendered speechless by your brilliantly stupid point, which, by the way . . .


Self parody at its best. :)
3.11.2007 12:28am
A. Zarkov (mail):
"So, in a sense, private sector assets do not "go out of business" either, just the person who controls them changes."

Are Pan American and TWA are still in business operating under a different name with someone else in control? Isn't it more likely that virtually all of their assets got sent to the scrap heap? Now how many government entities really go out of business? I can think of only two: The Civil Aeronautics Board and the Interstate Commerce Commission. But the real difference between the private and government sectors is accountability. For example, the Oakland Fire storm in October 1991 (I was in it) was mostly the fault of the Oakland Fire Department. Some homeowners sued, but Judge Agritellis said, "no you can't recover damages for their negligence because they have sovereign immunity."

All that being said, I really agree with you about markets. They often don't function as advertised, and we need the hand of government to help keep them at least a little honest and stable.
3.11.2007 12:52am
Viscus (mail) (www):
advisory opinion,

Since I obviously did respond to you, you should have interpreted me as meaning respond substantively. However, I do enjoy responding in a way that reveals that you are lacking a little something upstairs. So, for example, I pointed out that you apparently think that your brilliantly stupid point was somehow decisive (to the extent it is even applicable) and that there aren't many other variable in play. A point of view that no one except a moron could hold. See, that isn't responding to you substantively - that is merely revealing that you are a moron. Don't think that your sniggers or inability to make simple distinctions, or provide reasonable interpretations impresses anyone with even a bit of intelligence.

Carry on with your stupidity. I am sure that you will do so regardless of my instructions. I should note, that your failure to acknowledge that you failed to take into consideration the other factors in the calculus, (thus rendering your "argument" fatally and substantively flawed) has not been addressed by you. Your problem is that you lack the intelligence to engage in substantive debate, and thus hide behind sarcasm. Impressive. Very impressive.
3.11.2007 1:31am
Viscus (mail) (www):
Zarkov,

I have noted that book you recommend, and will look for it next time I am at the bookstore. To address the point you made:


Isn't it more likely that virtually all of their assets got sent to the scrap heap?


I honestly don't know about the specific facts regarding TWA and Pan Am. However, it strikes me as highly unlikely that there assets were discarded, rather than sold to another private sector actor who then made use of them. More than likely, that private sector actor would in turn offer such assets for use to the public, though hopefully manage them in a more economically viable way. This would be especially likely if they owned (rather than leased) any massively expensive passenger jets.

Organizationally, such private sector jets might be painted with another companies' name. But they still would exist and be used. So, the only thing that has really changed is the organization (and hence people) who are controlling these private sector assets. So, in a sense, there hasn't been a real going out of business, but rather, merely a change of control.

The examples you are giving are examples of the destruction of the government function in question altogether. A private sector analogue would be if the entire passenger jet sector went out of business (rather than merely experiencing a change in the people who control the assets used in that sector).

How many private sector industries do you know that really go out of business? Maybe some relocate to other countries, like textile manufacturing. But that is, again, nothing more than a change in control. Further, I don't think that the fact that government functions are more difficult to outsource constitutes the meat of the libertarian objection to government.

Overall, there is a going out of business all the time in politics. The EPA under Bush is a significantly different creature than the EPA under Clinton. Indeed, the difference is probably as significant as say, the difference between JetBlue versus Southwest.

A better libertarian objection might be that government units cannot compete simultaneously, in the way that JetBlue and Southwest can. But this is only sometimes true. An imperfect analogue would be the competition between Eliot Spitzer as the Attorney General from New York versus the SEC in investigations. Futhermore, there is no reason to think that we cannot structure government such that there is competition, when that is thought to be desirable.

My point is not that government and business are interchangeable. Clearly they are not. My point is rather that the differences are overblown. Especially when one asserts or implies that there is a total lack of competition in the public sector and especially when they suggest that this is a systematic rather than particular issue facing government or that lack of competition now within a particular government sector somehow proves that competition is impossible to the extent that competition is desirable. The bottom line, I suppose, is that certain individuals seem to have very dogmatic views concerning government and its possibities that are simply unpersuasive.
3.11.2007 1:53am
edgardo (mail):
Sorry, David. I don't see the advantage for VC. First, you have misread the NYT. The only reason for them to publish this story now is because they believe they have to diversify their portfolio of bad news (or attack lines) against Republicans. Second, most likely both the NYT and you are wrong about the economy-wide implications of ongoing adjustments in housing and mortgage markets (to make it short: when oil prices increased sharply three years ago many experts predicted all sorts of problems and a recession). Third, you say that the loans were an open invitation to fraud; albeit not a lawyer, I think you're wrong because all investments are risky and this is not enough to call them fraud. It seems as if you want to support your previous point by calling them fraud. I think you have not understood the nature of these loans and how--if there were no government intervention--the market would have taken care of the problems to service some of these loans.
3.11.2007 4:49am
hey (mail):
For more interesting analysis on how and why Ratings Agencies don't keep up with what debtors are actually doing and how derivatives (such as mortgage backed securities) typically have higher than advertised risk, read Traders, Guns, and Money. Excellent book by a foremer derivatives trader.

To Viscus: markets behave irrationally sometimes because they are made up of people, who are mostly rational (and nearly entirely so once you take in psychological utility) but not always. Government regulation embeds the decisionmaking power into a very few concentrated hands who don't have to pay for their mistakes and who change over power very slowly. These people are simply a subset of the same slightly irrational fools who are in the market, just insulated from the effects of their decisions and with a rather severe principal/agent problem added to the mix. To think that this is a step forward is one of the more common irrationalities that humans are prone to, especially well educated people who see themselves or their cohort being the people in charge of making the decisions.

An eloquent discussion of the fallacies behind technocracy can be found in The Future and Its Enemies. That you think you've scored some big point by finding irrationalities in a market shows that you really don't understand what markets are and what they do. What's the benefit of shorting something? Why do we talk about efficient markets over the long term? Why is it that active managers underperform the index after fees and especially after taxes? What are arbitrageurs and what do they do?

If you want to bring in the government into a sector of the economy, go ask people how well the shoe supply in the USSR worked vs the US, how long it takes to get a phone in India vs the US, how long it took for TV to be introduced around the world.
3.11.2007 5:21am
Stacy (mail) (www):
viscus: "That is funny. I don't remember getting an A+ in an honors level intermediate microeconomics course due to my inability understand the term "market failure" or "externality" or all the rest of those cute economics terms. "

Well, that's how your post came across. None of us are mind readers, so if you're using a certain frame of reference, you need to use the words that go with it.

And apparantly we're in agreement that the role of regulation in correcting market failures is a significant hole in libertarian view of government involvement in the economy.
3.11.2007 3:58pm
Helicopter Ben (mail):
Viscus and Stacy, would either of you care to discuss market failures that are caused by government? Such as the failure of the Federal Reserve Bank system to preserve the value of the dollar for the last 90-odd years, leading to all manner of economic distortions specifically including the housing bubble that has led to the mortgage crisis in question?

Somehow, I do not think so. But, I could be wrong...
3.11.2007 7:00pm
MnZ (mail):

A better libertarian objection might be that government units cannot compete simultaneously, in the way that JetBlue and Southwest can.


Viscus, another Libertarian objection is that, unlike private firms, new government units are not easily created. Theory and experience has demonstrated that both private and public institutions can develop "blind spots" (i.e., cognative biases) that make it difficult for them to recognize good ideas. For example, existing computer companies in the 1970s did not recognize the importance of the PC, even though they had technology (and even the engineers) right at hand. There is a great story about Steve Jobs and Steve Wozniak (founders of Apple). Both Jobs and Wozniak tried to pitch the idea for the Apple I to each of their employers (Atari and HP). According to what I read, Atari basically said that they were too busy at that time while HP didn't even see a market for the idea. Instead, they quit their jobs and founded Apple.
3.11.2007 7:09pm
David M. Nieporent (www):
How many private sector industries do you know that really go out of business? Maybe some relocate to other countries, like textile manufacturing. But that is, again, nothing more than a change in control.
No, that's really going out of business. It's really going out of business when the assets are sold off piecemeal. PanAm was not a bunch of jets and refueling tucks. Those are just tools. Auctioning it off is not just "changing control". Selling the shares is a change of control.
3.11.2007 7:39pm
Housing Bear (mail):

How many private sector industries go out of business? Trot on over to the Implode-O-Meter

http://ml-implode.com/

and start counting subprime lenders that are gone, vanished, staff laid off, buildings sold, storefront offices closed, lines of credit vaporized, is that enough "out of business" for you?

Then tell me what you think will happen to Fannie Mae in the future. Will it be allowed to go out of business when liabilities exceed assets? Or will Uncle Sugar bail it out, because it's really just a branch of government? You tell me.
3.11.2007 8:50pm
Stacy (mail) (www):
"Viscus and Stacy, would either of you care to discuss market failures that are caused by government? Such as the failure of the Federal Reserve Bank system to preserve the value of the dollar for the last 90-odd years, leading to all manner of economic distortions specifically including the housing bubble that has led to the mortgage crisis in question? "

That's not what market failure means. A "market failure" is the result of an "externality", which means something that people want (or want not to) consume, but that for some reason can't or won't be bought or sold in the free market. A simple and fairly noncontroversial example:

I run an auto repair shop. You bring your car to my shop and buy 4 quarts of oil and and my labor to change it for you. Transaction complete, you go on your way. Then I throw the used oil in the creek behind my shop, and it flows behind the town where someone's dog drinks it and gets sick. The oil in the creek is an "externality" because it's an additional byproduct of the market in oil changes. It may or may not be yours or my problem, but it will be somebody's. The fact that our free market transaction created this pollution for others to deal with at their own expense is a "market failure". Nobody buys or sells the oil pollution, but it is produced and consumed nonetheless.

There are a couple of approaches to correcting the market failure. One would be for the government to order me to properly dispose of the used oil. I would charge you more to make up for any cost associated with that. The other approach is for the owner of the sick dog to charge me for the vet bill (probably via a lawsuit) which I would also pass onto you by raising my prices. Either way, the market is "corrected" because the "externality" is now "internalized"--you're paying the full cost of your oil change which includes the cost to safely dispose of the old oil.
3.11.2007 11:06pm
Curiouser:
Will borrowers be able to, as David suggests, "walk away from their six-figure paper losses,"? Or will we now see a cottage industry spring up for the next few years of collection lawyers going after the borrowers even after they have lost their houses in foreclosure, to collect on those losses?
3.11.2007 11:36pm
Helicopter Ben (mail):
That's not what market failure means. A "market failure" is the result of an "externality", which means something that people want (or want not to) consume, but that for some reason can't or won't be bought or sold in the free market.

Well, there are people who want a sound currency that does not lose 3% or more in value every year, but the market doesn't seem to be able to provide it. Lack of a decent store of value results in all manner of financial distortions that hurt 3rd parties, from pension funds that go broke to working poor that find themselves priced out of decent housing.

Of course, this "market failure" merely gives government more opportunities to "help", by further interfering in the marketplace &thus further distorting the economy. Care to discuss this?
3.12.2007 12:41am
Truth Seeker:
The fact that our free market transaction created this pollution for others to deal with at their own expense is a "market failure".

The free market didn't create the pollution, the government regulataion that made it difficult to get rid of the oil in any other economical way did. You wouldn't put it in the creek if another free marketer was allowed to dispose of it for you economically. When you see a problem in a market, it is usually cause by some government regulation that had an unintended side effect.
3.12.2007 12:42am
Mortgage Me:
David, delurking to let you know that I carry a loan on my house on precisely those terms - fully mortgaged, interest only and almost no docs - and although I am honest and plan to pay for the house and eventually refinance etc., I can assure you that if the going gets tough financially the loan company will be stuck with any loss on the house, not me.
3.12.2007 2:21am
Tony D'Amato (www):
If a "market failure" is just the result of an "externality," then how would you explain a successful combination in restraint of trade? (Or do you need another externality, namely the antitrust law, as a market deus ex machina?)
3.12.2007 3:01am
Stacy (mail) (www):
The free market didn't create the pollution, the government regulataion that made it difficult to get rid of the oil in any other economical way did. You wouldn't put it in the creek if another free marketer was allowed to dispose of it for you economically. When you see a problem in a market, it is usually cause by some government regulation that had an unintended side effect.

The free market transaction does create the pollution, or at least the problem of disposing of the used oil, because you can't change your oil without having to do something with the used oil. The key is that there's no market incentive for either of us to do anything beyond throwing it in the creek.

If there were someone offering the service of disposing of the oil, then in my example I would do as you say and purchase that service from them--passing the cost onto HB, since disposal is a necessary part of changing his oil. Of course he would be essentially paying for that out of the goodness of his heart, and in the real world it's quite likely that my competitors would undercut me by throwing their oil in the creek, avoiding the disposal cost. He'd go to them and I would go out of business, and used oil would generally be thrown in the creek. That's the market failure.
3.12.2007 9:12am
Aleks:
Re; Some people have advocated that the government should regulate mortgages and, as in the good old days, require that the new homeowner put down 20% cash with an 80% mortgage maximum.

This will not happen for the very good reason that, with housing prices now through the roof, too few people can come up with that 20% down, unless they already own a home and can sell it to raise the cash. In effect such a rigid requirement would freeze out anyone who is not already a home-owner (unless s/he is personally wealthy to start with, or has realtives who are). IMO, the issue here has not been the lack of downpayments; there were always loans that allowed only nominal down payments and that's what PMI is for. Rather the problem has been A) The failure to document and verify a borrower's income and assets allowing people to claim whatever they need to qualify and B) the proliferation of risky and unwise mortgage deals, replacing the traditional conventional, fixed 30 year product with all manner of complicated and poorly understood arrangements.

Re: The sub-prime mortgages get foreclosed; the houses can't be sold at the foreclosure price because no one is giving out any more sub-prime

It isn't the property that is "sub-prime" it's the borrower. Even if sub-prime loans go away completely, there are still non-sub-prime borrowers out there who could (in principel at least) purchase such houses at foreclosure auctions. If nothing else, the housing remains viable as rental property.

Re: Or will we now see a cottage industry spring up for the next few years of collection lawyers going after the borrowers even after they have lost their houses in foreclosure, to collect on those losses?

In most cases the losses will be covered by PMI, which is insurance the lender purchases (charging the premiums to the borrower) whenever the borrower has less than 20% equity in the property. If the borrower defaults the insurance makes up the difference for the lender, so there is usually no residual amount owned after a foreclosure sale. (The borrower of course forfeits any equity he might have had; PMI only reimburses the lender).
3.12.2007 3:35pm