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« The next Islamic revolution | Main | Seal hunt hunt »

Mar 24, 2009


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I've been a lttle confused by all the doomsday pronouncements about the plan. It doesn't seem all that awful to me. In fact it looks to me like it has a real possibility of helping the situation. But I figure Krugman is a lot smarter than me on this topic. I think the same of Roubini. Now I'm REALLY confused.

Ed Cone

Don't forget Stiglitz, who hates it, too.

Much of the criticism (e.g, "robbery") seems based on the socialization of risk and privatization of profit in the lending plan.

Roubini says it's worth it to get things moving -- and he believes there will be stress-testing behind the scenes that may force some tougher actions as well.

I'm leery of arguments that make the perfect the enemy of the good, and I wonder if there's an element of that in some criticisms.

Let's hope Roubini is right.


Apropos of Krugman, some musical comic relief (though I'm not sure it is intended as such).


There has been talk that these assets - both the securities of bundled mortgages and individual mortgages on banks books - are impossible to price. This is evidenced by Krugman's worth $150 or $50 example.

I hope these hedge funds spend time to decide on prices. Consider an 80% mortgage on a $250k home (face value of note $200k) sold in 2006 in FL & NC. Consider equal rates of default - the home in FL would probably sell for $125k, while the one in NC would sell for over $200k. Put in a fixed cost of $50k for the foreclosure, and the FL note ends up worth 37.5% of face, while the NC note is at 75% of face. Whether a mortgage is not past due, 30/60/90/120+ days past due shoud influence how valuable the loan is too.

What I hope is that banks that choose not to sell have their assets marked to the prices received of the banks that did choose to sell. Some of these may even be the same asset - two banks owning the same tranche of a Merrill or Lehman bunched basket of mortgages. If that is integrated into the stress tests, then these purchases serve a very useful function.

The idea of hold-to-maturity is tiresome. How many people you know have actually paid off a mortgage not through a sale or refinance? The average length of a mortgage was 7 years pre-bubble, and with the current rate of foreclosures and refinances due to low rates, I would guess less than 25% of mortgages originated in 2003-2007 will still be active in 2011.

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