Tuesday, July 08, 2008

Fed Prevents Last Failure

The Fed announces new rules on lending practices that, if implemented a decade ago - would have prevented the mortgage 'crisis'.

To prevent a repeat of the current mortgage mess, Bernanke said the Fed will adopt rules cracking down on a range of shady lending practices that have burned many of the nation's riskiest "subprime" borrowers — those with spotty credit or low incomes — who were hardest hit by the housing and credit debacles.

The plan, which will be voted on at a Fed board meeting on Monday, would apply to new loans made by thousands of lenders of all types, including banks and brokers.

Under the proposal unveiled last December, the rules would restrict lenders from penalizing risky borrowers who pay loans off early, require lenders to make sure these borrowers set aside money to pay for taxes and insurance and bar lenders from making loans without proof of a borrower's income. It also would prohibit lenders from engaging in a pattern or practice of lending without considering a borrower's ability to repay a home loan from sources other than the home's value.

For what it's worth, I actually don't have an issue with the last item.  Much of the mess, as I understand it, was caused by the mistaken belief that housing prices never - or perhaps can't - fall.  Allowing buyers to take out loans without even asking them to state income or asking them how they plan to repay the loan was the worst sort of negligence.

As for the rest, most of it appears to be relatively minor meddling, though I'm not overly thrilled with it.  Of course, the devil is in the details.  What is a "risky" borrower?  And why does the government get to decide whether I have to escrow my taxes or save for them on my own?

The one open question is what will prohibiting early payoff penalties do to the market?  Are these penalties common?  Are they only imposed on certain classes of borrowers?  Will the inability to collect these penalties push rates higher to cover the loss or will additional closing fees be added to collect the penalty from every borrower instead of just those that pay off early?

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Tuesday, July 01, 2008

Does Oil Have an Income Effect?

Given that the oil is an inelastic commodity in the short term given that there are not a lot of substitutes and little opportunities to not consume oil.  Could it cause changes similar to changes in income for other goods and services?

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Principles 9 and 10

I promised to share my views on Mankiw's 10 Principles of Economics and have hit a bit of a roadblock with the last two.  I don't really have much to say.

9: Prices Rise When the Government Prints Too Much Money
10: Society Faces a Short-Term Trade-off between Inflation and Unemployment

I suppose they are true.  It makes sense that they are true.  But in today's modern economy where the people in positions to do something about it does it really matter anymore?

I guess in the sense that you have to cover the basics before you get to the meaty stuff it may.  Can anyone convince me that I am wrong?

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How Useful Is Economics?

My professor insists that it is possible to determine the shift in a demand curve given some change in technology, supply or other variable.

I overstated my case stating that these were guesses (highly educated guesses, I would have been better off saying estimates) and that it isn't possible to 'know' what the new demand curve would be until you could observe it.

What are your thoughts? Is it possible to know what a demand curve will be if you change certain determinants?