Re: Paul D. on this year's Nobel--especially V. Smith

[Clifford Poirot <cpoirot@xxxxxxxxxxx>]

Sven,

Uncertainty in U.S. mortage markets is to a large degree mediated by Fannie
Mae-a quasi public company that intervenes to provide liquidity and
insurance in mortgage markets. The only uncertainty U.S. consumers bear when
taking out a mortgage, is the uncertainty that they can maintain the current
flow of income over the future, or the uncertainty regarding interest rate
fluctuations (which can of course be resolved by refinancing). Add to this
that home mortgage interest and local property taxes are tax deductible, and
you have a huge government presence in the mortgage market.

There has been an explosion in the U.S. of predatory lending and expansion
into sub-prime markets, with consumers in these markets paying huge fees for
loans. This market has exposed some fairly large financial entities to large
losses in the sub-prime market.

So I don't think your example is well drawn. To the extent the U.S. mortgage
market is insulated from macroeconomic uncertainty, it is so because of
government involvement in the mortgage market. To the extent that it is not
insulated from macroeconomic uncertainty, it is often due to a lack of
regulatory oversight in the sub-prime market.

At its worst, the sub-prime market involves some really horrific scams-such
as "pay day" loans, where people are effectively granted credit on the basis
of post-dated checks for large fees, collateralized in part by pay checks.
These loans come with relatively large late fees and collection fees as well
as the threat of prosecution for check fraud.

-----Original Message-----
From: Sven R Larson [mailto:slarson@xxxxxxxxxxxx]
Sent: Thursday, October 17, 2002 9:00 AM
To: pkt@xxxxxxxxxxxxxxxx
Subject: Re: Paul D. on this year's Nobel--especially V. Smith


This is exactly the point I was making before. The problem with
deregulation is that it involves the transfer of the burden of
macroeconomic uncertainty from the regulators to the consumers (given
full deregulation). My impression is that the California legislators
had a pretty good idea of the problems that came with this but did not
bother to find a suitable full deregulation solution. Instead they
ended up with a half-half bad mixture of regulation and deregulation.
If you can solve the transfer of macroeconomic uncertainty you can
also deregulate to the full extent. The ONLY reason for maintaining
regulation is that the burden of macroeconomic uncertainty will be
unbearable for consumers. Consumer credit, mortgage, auto lease, home
insurance are all markets where macroeconomic uncertainty is borne by
consumers. Generally - GENERALLY - this works well when paired with
sound fiscal policy. Therefore, generally - GENERALLY - deregulation
of energy markets should work. Besides, New York and New England have
also deregulated, with less problems than California. Experiences from
Europe are not as encouraging.

/srl

Bob McKenzie wrote:
>
> Mr. Liu doesn't have it right.  First of all, the "public" wasn't sold
> anything nor did it "doubt" the claims of lower consumer prices.  It's
> easy enough to check the record - the dereg bill (AB 1966) was
> completely rewritten mostly behind closed doors and then sailed through
> each house on unanimous votes.  No one of significance noticed that
> half, not all, of the "market" was unhooked or noted what that
> would/could mean.  So Vernon Smith's argument - that deregulation
> should be total or complete - is not only valid but admirable in light
> of the many calls to re-regulate based on the false impression (and in
> part the on the deliberately misleading charge by some) that "dereg"
> didn't work.
>
> Bob McKenzie
>
--
Dr. Sven R Larson
Department of Economics
Skidmore College
815, North Broadway
Saratoga Springs, NY 12866
(518) 580-5278