International Law

No Love for Bailout?

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From CNN, we learn more about what some investment banks think about the failed bailout.

"People are very seriously concerned that there's no panacea from legislative action," said Daniel Alpert, managing director of Westwood Capital, a New York-based investment bank.

"Fundamentally, none of the problems gets solved by the bailout.

This may solve the freeze-up of the capital market but it doesn't address the decline in housing prices," Alpert said, adding that he expects to see more consolidation in the banking sector since there probably are many more mortgage-related writedowns still to come."

Suppose we are back in the winter of the 1630's and the market for futures of tulips has "frozen up", that is there are no bidders at the daily auctions.  No matter how low the bids, nobody wants to stake even their valueless promissory notes on "purchasing" unknown tulip bulbs, which be lifted in the spring.

The auctions sporadically came to a halt over the Lowlands, as people realized that they were buying something that they didn't want, tulip bulbs, with promises that had no value, their promissory notes. They also realized, because of the auction process, that everyone else had come to the same realization. Was this credit crunch a disaster for the Lowlands? No, eventually, within months, the local governments simply forbade the use of the Courts to settle any legal liabilities arising from either the promissory notes or future contracts on the grounds that these debts were gambling debts and so unenforceable on public policy grounds.

The moralists continued to rage against the corrupting nature of tulips: 200 years later Holland is at the centre of bulb business, and continues to hold that position of superiority. 

Today, we are rightly concerned that we have not managed to treat the purchase of a house as the correct mix of investment and savings - savings which we can draw down to pay for the improvements in our houses, which raise the neighbourhood's investment values.

Any long term solution will involve solving the following puzzle: if a consumer's mortgage for $X on a property now worth $Y, X greater than Y, what incentives can the mortgagor give the consumer to encourage continued payments when consumer has every rational interest to walk away from the declining asset value?

Full post as published by Misleading Advertising Law on September 29, 2008 (boomark / email).