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Ranjit Mathoda

The causes of the real estate bubble are likely the structure of the industry, coupled with low interest rates. In 2005 I sketched out why there may be a real estate bubble, in my post "On buying land (aka, how to tell if there is a real estate bubble)": http://mathoda.com/archives/12


"One can expect regulators to mainly follow rather than lead the market in assessing riskiness and other asset characteristics."

............ then why have them at all? If, as is the case today and was during the multi-billion dollar S&L meltdown the taxpayer is the lender of last resort (ie bag holder) should our regulators NOT play the role of the stodgy, conservative banker of yesteryear who seems to have given his post to young 'hotshots' who can design all sorts of complex derivatives that hide the underlying risk from the ultimate buyer.

..........as a matter of common sense, is a market rising well beyond historical rates, a reason to lower margin requirements (down payment) and play fast and loose with interest only, negative amort?? and low doc, no doc loans? And all "securitized" by a worn out or "flipped" small LA bungalow sitting atop a lot "the market" thinks is worth $400,000?

.....Becker seems nearly ready toy with going completely deregulated, and it is tempting to let them do as they please as long as they are playing with only their funds. But, my guess is that would take us back to the 30's, depression and all; FHA,VA, other federal guarantees have helped most of us buy homes on reasonable terms, and federal backing requires that they be the regulators. BTW who, "decided" that asset equity ratios could soar so high in just a couple of years?

"For example, the Fed has proposed limits on how much mortgage interest rates can exceed the prime rate for low-income borrowers with poor credit ratings. This would be a foolish intervention into the details of credit contracts that have all the defects of usury laws."

......... Well, probably not. At some price point a "low income--poor credit risk" should not be a borrower. While a high income-- poor credit rating guy might be able to handle exorbitant interest rates (with help from the deductibility of interest) the low income-poor credit guy will be set up for failure.


"This movement came to an end with the passage of the Americans with Disabilities Act of 1990 under the administration of George W. Bush."

You mean "the administration of George H. W. Bush" which lasted 1989-1993.


I find it bizarre that there is no mention of the repeal of Glass-Steagall. Prof. Becker is the only economist I've heard blaming the housing bubble on regulated commercial banks, to be fair most other economists I read are significantly farther left but the problem is blamed by many others on the unregulated investment activities of banks and most of the subprime problems on nonbank mortgage originators. For example the way I understood a part of Citi's problems was that despite that Citi's own regulated mortgage origination was seeing a normal default rate the unregulated IB section was seeing big losses on repackaged mortgages originated by Countrywide and the like. Clearly banks are hurting badly because of the credit crunch and collapse of the bubble, but the difference seems to be that hedge funds have just been aggressively selling short, while large banks have a wide range of investments they need to protect. If the market turns around hedge funds could find themselves on the wrong end again, like they did last summer. However it seems clear that the holders of mortgages not originated by banks are the worst off and that bank mortgages are partially being hit by the negative externalities of the subprime foreclosures.


"This movement came to an end with the passage of the Americans with Disabilities Act of 1990 under the administration of George W. Bush. Since then some sectors, such as labor markets and product safety, have been regulated much more extensively, while others, including commercial and investment banking, have had no further declines in the extent of regulation. Despite the considerable and tangible successes of this deregulation ..."

Becker makes it seem as if the american with disabilities act was a negative. Surely Becker isn't suggesting that a world completely free of all regualtion is better than a world where, at a minimum, disabled people can be treated fairly and in a non-discriminatory manner? I would think a Chicago economist who cares about efficiency above all else could appreciate the efficiency losses caused by discrimination in the labor market.

Brent Wheeler

As usual both strong pieces thanks. I would have liked to see it pointed out that the moral hazard issue you both identify - and use as a base to build cogent sounding cases for regulation of capital ratios - might be less of a problem if the govt had not intervened in the first place.

There is an awfully inefficient feel to a situation where Bear Stearns comes unstuck, the Fed digs it out - or allows the digging, then finds itself having to regulate in case someone else takes the kind of risk which might call for another intervention!

I realise there might be other grounds to intervene (though I remain unconvinced about any transfer of taxpayer wealth to shareholders who took ex ante risk), but as an argument this really has the feel an "infinite regulatory regress" to it.


Dear Mr. Becker,

I have heard much speculation about how the Federal Reserve Bank orchestrated "bailout" of Bear Stearns by JP Morgan. Many insist, semantics aside, that this constitutes the creation of a moral hazard. While I understand how this bailout may create incentive for risky behavior in the future, I do not understand why such is the case.

In the case of Bear Stearns many employees lost a substantial portion of their future income and savings. The share price of Bear Stearns, once quoted at $170 per share, has plummeted to less than $10 per share. Bear Stearns firm pension plans, year end bonuses and personal savings were by and large tied to the price of the stock. It has been often quoted in the press that employees held sixty percent of all outstanding Bear Stearns shares. Unless there exists an extreme short-term incentive, this type of near-sighted dynamic inconsistency seems implausible.

It would appear that something besides the reliance on a future bailout is causing such time inconsistency. I believe the true culprit of the failure is the existence of the large cash bonus. A more long term employee profit incentive seems like a proper solution.


The true culprit was the timely lack of any significant shareholder able to exert influence and control over management and thus preserve the value of the equity. A stronger owner may have insisted on less leverage at Bear years ago.

If I owned a valuable business, I'd pay cash bonus in a good year and no bonus in a bad year. I would not want my employees to feel like I forced or coerced them into buying equity, or mislead them about the equity (dividends, etc).

Excessive employee ownership may be too communal, and I've noticed numerous examples where employee-owners are helpless stooges.


Perhaps "appropriate" regulation would be the watchword? Mentioned in these articles are changes in asset/equity ratios, and of course the zero down loans, 'take out refi's based on sweetheart appraisals; in short a wholesale flinging to the winds of the ratios and safeguards that have served us well since the reforms of the Depression era.

Sure, we've government backing for runs on a bank and even for those getting into trouble, but the banking industry should be expected to weather something of a storm on their own, but it looks as though the first gusts of a storm still brewing have laid them on their beam ends. Every major bank and financial institution has economists on their staff armed with sophisticated computer modeling software and access to the best data, but failed to tighten their own lending criteria (if such exists anymore??) even as they must have known the 20 or 50 "hot markets" were a prime example of market top froth.

Virtually any other business would be allowed to go broke and be sold for break up value, but, as with the S&L mess "WE" will have little choice but to bail them out in order to, attempt, to preserve a functioning system. Afterwards? They'll promise to be more circumspect, at least until, some admin or Congress falls prey to a lobbyists lure of less regulation, and freedom to expand and consolidate that offers a windfall to those taking on the most leverage.

It will be GOOD, when, one day all of these "free marketeers" are largely replaced by those who view capitalism as a powerful engine of production but a machine whose task is that of serving US, not the other way around, and that like any powerful engine requires governance, regulation, and constant maintenance, and especially so as tech and "globalism" present such fast changing paradigms.

Now that we are facing melt-down it seems that all of the "post Keynesian" "free market" set are placing their hopes on the too little and much too late Keynesian spurring of kicking loose a few bucks for the masses to try to pay for their fuel or take a couple swipes at their consumer credit.

....... tis a shame that policies were not enacted much earlier, like two decades ago, that would have kept lower incomes, at least, a bit ahead of inflation (even if they were going to be denied their share of the productivity gains of the era)so that a small oil shock or rising food price would not have knocked so many out of their saddles.

Like what? Like strengthening the right to collective bargaining instead of weakening it. Advancing the min wage not just to keep pace with inflation (which would result in $10 today) but to index a portion of the productivity gains to the min wage that it might be somewhat closer to a living wage than it is. (In moderately priced OK a study indicated the minimum cost to live independently is about $18/hr.)

While over the "free marketeer" years ALL of the attention has gone to the negative aspects of an increased min wage, it is time to look at the positive aspects of folks not being on some sort of welfare after working all week, and what their having a spendable buck in their pocket would do to mop up some of the excess capacity.

DO we believe in capitalism and an employer paying for the costs and factors of production? Or are we going to fall for the Walmart model in which this richest of companies relies upon over one billion of their labor costs being born by various forms of welfare. In such a model how does "the market" identify and reward efficient use of capital, raw materials and labor?

Many things to be decided and if we are to prevail we'd better make a lot of decisions soon.

Hans Bader

I am glad to see the professor cite the very costly and vague Americans with Disabilities Act (the ADA) as an example of regulation so heavy-handed that it effectively ended an era of jobs-creating deregulatory policies.

The ADA imposed $100 billion plus costs on employers without increasing the percentage of disabled people employed at all. Disabled employment actually went down. That is because the ADA is so burdensome and vague that it makes employers afraid to hire disabled people, since employers are required to give them special treatment -- so-called "reasonable accommodations" -- rather than just giving them non-discriminatory treatment. And because it defines disability to cover more than people with traditional physical disabilities that can be readily accommodated without altering work rules (like just putting in an inexpensive ramp for someone in a wheelchair).

Congress is poised to make the ADA much more burdensome still by passing the so-called ADA Restoration Act, which would define virtually everyone in America (including anyone who wears eyeglasses or has emotional issues) as disabled. Politicians like Obama support this devastatingly burdensome bill, despite the criticism it has drawn from economists and others.

The ADA Restoration Act would not "restore" anything. It is so extreme that it would overturn a unanimous Supreme Court decision joined in by liberal and conservative justices alike, and other decisions decided by a 7-to-2 or better margin.


Cap asset-to-equity ratio and bail out when necessary? Why is that more desirable than a bottom-up approach? Enact usury laws and bail out individuals when necessary.


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