Arnold Kling  

The S Word

PRINT
Subtle Wisdom... The Security Rating Game...

One word I never see in the press coverage of the housing crisis is "speculator." Whether it is yet another silly economist's op-ed* or a front-page story, the press talks about distressed homeowners, not the people with second and third homes that make up at least one fifth of troubled borrowers.

[*UPDATE: oops--I meant to say "economist's silly op-ed, not silly economist's op-ed. I meant to denounce the content, not the people.

I do stand by my denunciation of the content. The borrowers are not a collection of innocent victims who deserve to be bailed out at others' expense. I understand very well that if these were old-fashioned loans, not securitized loans, then the lender might do a more discriminating job of deciding whether to do a workout. But to say that "justice" is on the side of the borrowers is baloneous.]

The large speculative component poses a problem. If you don't bail out speculators, then the mortgage securities will remain illiquid, because the securities will include some loans that are guaranteed by government and some loans that are not, because they went to speculators. If you do bail out speculators, then the "justice" (to borrow from the title of the silly op-ed) of the bailout is really questionable.

The persistent failure to take into account housing speculators makes it very difficult for me to have any confidence that either the press or the policymakers have a handle on what is going on.


Comments and Sharing





COMMENTS (8 to date)
sean writes:

i agree wholeheartedly about the distressing lack of talk about speculators, but i think you're too quick to judge the "silly" op-ed. john geanakoplos has been working in the mortgage market, bridging the academy and the real world, for 2 decades. he is one of the most qualified economists out there to be making proposals like this.

and honestly manipulating the current legal responsibilities of the master servicers makes sense in a lot of ways

Snark writes:

"[...] makes it very difficult for me to have any confidence that either the press or the policymakers have a handle on what is going on."

They understand perfectly well what's going on. They're just betting the limit that the public doesn't.

Susan P. Koniak writes:

Nothing in our plan forecloses "speculators" from being treated differently by trustees, if a good argument could be made for it.

And thanks, Sean, you are, of course, right about John Geanakoplos. It is "silly" to dismiss him with that word.

Christopher writes:

I agree with the above comment. However, that is what is so scary about it. And as of yet I don't see much in mainstream media demonizing them for having a handle on what is going on and yet failing to act approporiately. They are buying votes with lies. And we the citizens don't seem to have much recourse accept with our vote which to me is the least of two evils.

Z. Ambrus writes:

Maybe it's just me, but I don't see a great difference between (1) a person who buys a house with a mortgage he can't afford in the long-term, under the assumption that rising prices will allow him to *sell it* at a profit in the near future; and (2) a person who buys a house with a mortgage he can't afford in the long-term, under the assumption that rising prices will allow him to *refinance it* at a profit in the near future.

They are both speculators, yet we feel sorry for the second while we heap reproach on the first.

rvturnage writes:

"the press talks about distressed homeowners, not the people with second and third homes that make up at least one fifth of troubled borrowers"

While I agree with the post, I was curious about the 1/5 figure you mentioned...I've often felt like a large part of those in foreclosure were in this group, but never saw any hard and fast numbers...do you have any to back this up, or is it a "guesstimate"?

Steve Sailer writes:

Yes, I have a comic short story coming out in the next issue of The American Conservative about two brothers-in-law who in 2005 go in together to buy an exurban McMansion as a speculative investment, end up renting it out, and the disaster that unleashes on the neighborhood.

Dr. T writes:

The situation is worse than Dr. King stated. Not only do we have speculators lining up for handouts, but also hundreds of thousands of California home buyers (who, by law, are protected from non-home asset losses after a foreclosure). The California 'sub-prime' buyers risked less than the speculators when they bought expensive homes. The sub-prime home buyers in California have no equity in their homes, so all they lose in a foreclosure is the cost of moving.

Many citizens have lost hundreds of thousands of dollars in this economic downturn that was caused in large part by irresponsible lending and borrowing. I am outraged that contributors to the cause of the problem (banks, mortgage companies, home buyers, etc.) will receive bailout money, while innocent bystanders just get to watch their retirement and investment funds turn into vapor. The government chooses to support the fools and the gamblers while screwing the financially conservative families. Well, that will only worsen if Obama becomes president. Maybe I should be consoled by the fact that I now have $500,000 less for the government to redistribute to 'more deserving' citizens.

Comments for this entry have been closed
Return to top