Thursday, January 21, 2010

Another Economist Guesses

For as much as I know, this analogy over at Volokh makes sense. First, it sounds like how human beings come to operate, with small but frequent payoffs overwhelming our caution about catastrophic losses; second, it sounds even more like how financial competition works - if you don't take that small extra payoff, your customers go elsewhere; third, it sounds like the type of thing that governments and politicians love, being able to keep everyone cheery and reporting back to them what a good job they're doing; fourth, I trust Taleb.

So I guess I find this plausible on the basis of knowing something about human nature, not about knowing economics. Making loans that are 1% riskier is a great way to make money (almost the same number of people pay you back), so 2% is the new envelope-stretcher. And it's great for poorer people - mostly - because most of them do pay the mortgage and get a leg up they wouldn't have had. Add in that everyone is congratulating you because a lot of those poorer people are minorities, and it becomes hard to stop making those loans. It works great until it doesn't work anymore.

Okay, now that you've seen that, this post by another law prawf on the same site should be discouraging.

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