Anytime I hear, "University of Chicago (blah blah blah). I get a headache.
Goolsbee Responds to Krugman
by CalculatedRisk on 3/23/2009 10:19:00 PM
Austan Goolsbee, of the White House Council of Economic Advisers responds to Paul Krugman on Hardball. (ht David)
A couple of comments: Goolsbee claims "if the private guy makes money, the government makes money. If the private guy loses money, the government loses money." Goolsbee is correct on an individual pool, but investors can buy multiple pools and Nemo has an excellent example of how the investors can make money, and the government lose money.
Nemo's example:
https://self-evident.org/?p=502Goolsbee should read that example.
-snip- Goolsbee essentially agrees with Krugman's column:
The Geithner scheme would offer a one-way bet: if asset values go up, the investors profit, but if they go down, the investors can walk away from their debt. So this isn’t really about letting markets work. It’s just an indirect, disguised way to subsidize purchases of bad assets.
It's not a complete one-way bet on any individual pool because the investors do put a small amount of money down - and that small amount is at risk. But Krugman was referring to the non-recourse debt and he is correct...."
Dr. Goolsbee: I’ll Stop Impersonating an Economist If You Quit Underwriting Mortgage Loansby Tanta on 3/30/2007 09:31:00 AM
I have described borrower-initiated fraud-for-housing loans as “self-underwritten.” The idea is that the borrower knows what the lender’s qualification standards are, knows he doesn’t meet those standards, and knows he cannot negotiate those standards away. His choices are, then, to accept the denial of credit, buy a cheaper house, or to lie or misrepresent the facts of his income, assets, employment, occupancy, and so on such that he appears to meet the standards. I call this “self-underwritten” because it rests on the borrower’s belief that he is a better judge of his prospects for carrying the loan successfully than the lender is; this belief allows him to justify his behavior as something other than criminal.
snip
Dr. Austan Goolsbee, a Real Economist™, presents the third way of understanding the issue in
“’Irresponsible’ Mortgages Have Opened Doors to Many of the Excluded":"A study conducted by Kristopher Gerardi and Paul S. Willen from the Federal Reserve Bank of Boston and Harvey S. Rosen of Princeton, "Do Households Benefit from Financial Deregulation and Innovation? The Case of the Mortgage Market" (National Bureau of Economic Research Working Paper 12967), shows that the three decades from 1970 to 2000 witnessed an incredible flowering of new types of home loans. These innovations mainly served to give people power to make their own decisions about housing, and they ended up being quite sensible with their newfound access to capital.
These economists followed thousands of people over their lives and examined the evidence for whether mortgage markets have become more efficient over time. Lost in the current discussion about borrowers’ income levels in the subprime market is the fact that someone with a low income now but who stands to earn much more in the future would, in a perfect market, be able to borrow from a bank to buy a house. That is how economists view the efficiency of a capital market: people’s decisions unrestricted by the amount of money they have right now.
And this study shows that measured this way, the mortgage market has become more perfect, not more irresponsible. People tend to make good decisions about their own economic prospects. As Professor Rosen said in an interview, “Our findings suggest that people make sensible housing decisions in that the size of house they buy today relates to their future income, not just their current income and that the innovations in mortgages over 30 years gave many people the opportunity to own a home that they would not have otherwise had, just because they didn’t have enough assets in the bank at the moment they needed the house.”
http://www.nytimes.com/2007/03/29/business/29scene.htmlThe first time I (Tanta) read this I was, actually, so speechless that I could only respond with a quotation from our wise commenter mp: toad bones. Also, dog balls.
http://www.calculatedriskblog.com/2007/03/dr-goolsbee-ill-stop-impersonating.html
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