September 08, 2007

On moral hazards

Sir, one prime problem with subprime mortgages is that it is given subprime terms and so, if a lender would agree to write off a 20% of the value of all subprime mortgages and give the current debtor prime terms, it would not be something outrageous to have the government chip in offering some partial payment guarantee on the balance owed, callable only if the loan is delinquent after a cool-it-of period of perhaps two years, and thereby allow the prime terms to be warranted.

That this could imply the moral hazard of allowing some guilty and bad intentioned borrowers to benefit? Absolutely, exactly in the same way that moral hazard exists when bailing out investors. The final question, as always, is just what side of the equation you most need (or want) to benefit, the debtor or the investor.

To do nothing then?... and have the housing market crash, which could of course help some youngster to at last afford buying a house, but make it harder for other youngster to find a job. You see? It is not easy, even for politicians, as life is only about a continuous choice among so many different moral hazards.