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Quote of the day: Moral Hazard

Posted By Barry Ritholtz On August 16, 2007 @ 12:22 pm In Credit,Derivatives,Psychology | Comments Disabled

I don’t agree with everything in this Op-Ed, but these couple of paras caught my eye:

"The current crisis is the result of the normal ebb and
flows of credit cycles, and the free market will amply handle the
correction that is already happening. Calls for Federal Reserve
intervention or for other governmental involvement — including an
increase of the Fannie Mae/Freddie Mac lending limits — must be
rejected.

In the free market, those that made bad credit
decisions must be allowed to pay the price, and only by paying dearly
can lessons truly be learned. Borrowers who were unwitting and took on
too much debt must learn that there are consequences for their actions.
Homebuilders that built too many homes or overpaid for land need to
face the consequences. Wall Street firms that provided credit to all of
these activities with too much laxity must also pay a price. This is
all part of a healthy correction.

All of these players reaped benefits during the
housing boom that preceded the current crisis. Certain homeowners were
able to temporarily live above their means. Homebuilder and bank
profits have been exorbitant, and shareholders and executives of these
companies have profited mightily in the boom. To not permit losses now
would be a direct violation of the free-market ideals at the foundation
of our economy."

Well said . . . 

>

Source:
Fannie, Freddie and the Housing Bust [1]
By ETHAN PENNER
August 16, 2007; Page A11
http://online.wsj.com/article/SB118723188037699335.html

Note:   Mr. Penner is a principal with the firm Lubert-Adler and is the managing partner of PGP, a real-estate investment firm. In the 1990s, as CEO of Nomura Capital, he helped pioneer the application of securitization technology to real-estate finance.


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URL to article: http://www.ritholtz.com/blog/2007/08/quote-of-the-day-moral-hazard/

URLs in this post:

[1] Fannie, Freddie and the Housing Bust: http://online.wsj.com/article/SB118723188037699335.html

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