Monday, July 20, 2009

Robert Shiller on sub primes...

Robert Shiller talks about sub prime mortgages here. He argues that a consumer protection agency should promote plain vanilla debt products for consumers - including sub prime loans. I think this is quite reasonable. In the same way that the junk bond market was hugely successful by financing lower credit quality borrowers, the sub prime loan market can also be successful and fill a gap in the market place. The key is to ensure that those making the loans fully bear the risk of the loans that they are making, and that those taking the loans fully understand the terms.

Felix Salmon disagrees and thinks this is a bad idea. But I think Felix is off the mark here. His criticisms of Shiller's argument are all based on sub prime borrowers getting loans that they couldn't repay. A transparent sub prime market where lenders bear risk would reduce the chance of this happening.