Liveblogging: Moral hazard

Obama's campaign has been talking a lot about transparency in mortgage and credit markets going forward. I interviewed Austan Goolsbee today (podcast to come) and his point was that the damage in the mortgage market has been done, but that there's still time to streamline procedures in the credit card market to make them more transparent to consumers. Hillary, on the other hand, is looking for a retroactive bailout: ease bankruptcy procedures to allow people who took out unaffordable mortgages to get out from under their onerous payments.

This is stupid. I reported on the bankruptcy bill for The Economist, and I'm on the record as thinking that it was an unnecessary sop to the credit card companies. It's not that don't I believe that, theoretically, bankruptcy laws might be too generous, leaving creditors no recourse against borrowers engaging in predatory strategic behavior. But in practice, I see no evidence that this is a problem. Before and after the bankruptcy bill, credit has been very easy to get. There was no need to improve access to credit by reliable buyers by tightening the screws on the less credit-worthy. The bill smacked of creditors attempting to retroactively rewrite the terms under which they loaned money, in their own favor. And there is substantial evidence, as I wrote for the Economist, that tightening up bankruptcy laws has a dampening effect on entrepreneurship, and other economically valuable risk-taking behavior.

But altering the bankruptcy laws will help sub-prime borrowers not one whit. Sub-prime borrowers--if they can afford their payment--can still keep their homes right now; bankruptcy lets borrowers cut deals with secured lenders, while shedding their unsecured debt. (This is why unsecured debt carries a much, much higher rate of interest.) There is some talk about allowing judges to unilaterally rewrite the terms of mortgages, but this creates as many problems as it solves: the expansion of housing credit to poor people has been a pretty good idea, and that rule is likely to cut it off.

Short of that, easing bankruptcy will make things slightly easier on people who borrowed too much money. But it will have little effect on the subprime crisis.