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February 17, 2013

Latest Posts from Economist's View

Latest Posts from Economist's View

Posted: 14 Feb 2013 12:03 AM PST
Posted: 13 Feb 2013 02:26 PM PST
I need to read this paper:
Asset Quality Misrepresentation by Financial Intermediaries: Evidence from RMBS Market, by Tomasz Piskorski, Amit Seru, and James Witkin: Abstract: We contend that buyers received false information about the true quality of assets in contractual disclosures by intermediaries during the sale of mortgages in the $2 trillion non-agency market. We construct two measures of misrepresentation of asset quality -- misreported occupancy status of borrower and misreported second liens -- by comparing the characteristics of mortgages disclosed to the investors at the time of sale with actual characteristics of these loans at that time that are available in a dataset matched by a credit bureau. About one out of every ten loans has one of these misrepresentations. These misrepresentations are not likely to be an artifact of matching error between datasets that contain actual characteristics and those that are reported to investors. At least part of this misrepresentation likely occurs within the boundaries of the financial industry (i.e., not by borrowers). The propensity of intermediaries to sell misrepresented loans increased as the housing market boomed, peaking in 2006. These misrepresentations are costly for investors, as ex post delinquencies of such loans are more than 60% higher when compared with otherwise similar loans. Lenders seem to be partly aware of this risk, charging a higher interest rate on misrepresented loans relative to otherwise similar loans, but the interest rate markup on misrepresented loans does not fully reflect their higher default risk. Using measures of pricing used in the literature, we find no evidence that these misrepresentations were priced in the securities at their issuance. A significant degree of misrepresentation exists across all reputable intermediaries involved in sale of mortgages. The propensity to misrepresent seems to be unrelated to measures of incentives for top management, to quality of risk management inside these firms or to regulatory environment in a region. Misrepresentations on just two relatively easy-to-quantify dimensions of asset quality could result in forced repurchases of mortgages by intermediaries in upwards of $160 billion.
Posted: 13 Feb 2013 11:46 AM PST
How would you respond to Greg Clark?:
...Many commentators automatically assume that low intergenerational mobility rates represent a social tragedy. I do not understand this reflexive wailing and beating of breasts in response to the finding of slow mobility rates. The fact that the social competence of children is highly predictable once we know the status of their parents, grandparents and great-grandparents is not a threat to the American Way of Life and the ideals of the open society.
The children of earlier elites will not succeed because they are born with a silver spoon in their mouth, and an automatic ticket to the Ivy League. They will succeed because they have inherited the talent, energy, drive, and resilience to overcome the many obstacles they will face in life. Life is still a struggle for all who hope to have economic and social success. It is just that we can predict who will be likely to possess the necessary characteristics from their ancestry.
Quickly: I don't buy that individuals in all of these groups have an equal chance to reach their potential, whatever that might be. I do buy that the barriers that prevent an equal chance to realize potential have been present for a long, long time.
Posted: 13 Feb 2013 10:24 AM PST
Paul Krugman explains why the false charge that government housing policy caused the financial crisis and recession is harmful:
...No, the CRA wasn't responsible for the epidemic of bad lending; no, Fannie and Freddie didn't cause the housing bubble; no, the "high-risk" loans of the GSEs weren't remotely as risky as subprime.
This really isn't about the GSEs, it's about the BSEs — the Blame Someone Else crowd. Faced with overwhelming, catastrophic evidence that their faith in unregulated financial markets was wrong, they have responded by rewriting history to defend their prejudices.
This strikes me as a bigger deal than whether Rubio slurped his water; he and his party are now committed to the belief that their pre-crisis doctrine was perfect, that there are no lessons from the worst financial crisis in three generations except that we should have even less regulation. And given another shot at power, they'll test that thesis by giving the bankers a chance to do it all over again.
I've taken this myth on more times than I can remember, and the evidence against the claim that housing policy caused our problems is very clear. But the myth isn't going away. First, it's a convenient story for the Republican view that trying to help poor people is bad for them, and bad for everyone else too. Social insurance such as unemployment compensation makes them lazy, raising the minimum wage actually hurts them overall, attempts to help lower income households purchase a house crash the economy, and so on. It's all at odds with the evidence but it gives them, as Krugman notes, a shield against tax increases, regulations, and so on that are needed to deal with these problems. The second reason is just as important, there's no political cost to making these claims. One of the most prominent members of the Republican Party can give an address to the nation in response to the State of the Union that makes false claims, and nothing happens. Telling easily rebutted falsehoods brings little media response from traditional media outlets, but take a drink of water...

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