Lessons learned

Two quotes on the subprime problem:

From commenter David Nieropont:

There are many nuances related to mortgages. For instance, if you default, what are your rights in foreclosure? How can you redeem, and when? But it wasn't any nuances that tripped people up. "The monthly payment is more than I can afford" is not a "nuance."

Ryan Avent on the new plan to freeze mortgage teasers:

. . . the lesson here appears to be that if you see everyone else borrowing well beyond their means, you should too, since the government cannot credibly allow large numbers of homeowners to go into foreclosure.

This plan is by no means going to end the crisis; for one thing, many of the subprime borrowers who are in trouble seemingly can't make the payments with the teaser rates. But the market is currently in the grips of terror: how bad will it get when rates reset? This may allay those fears enough to ease the credit crunch.

But there are downside costs--we live in an imperfect world. One will be distortion of the housing markets; people with those artificially cheap subprime mortgages won't be able to move, and by stalling the decline of house prices, this may drag it out to ill effect. Another will be the moral hazard. Bankers and consumers just learned that no matter how stupid they are, the government will bail them out.

Overall, I'm pretty sure the cost is worth it. But I worry that if this works, and things settle down, we'll see the financial industry's appetite for risk grow even more voracious, and along with its tendency to mistake beta for alpha.