[bwd]

No, the point is that unhedged systemic risk is only one component of the crisis, despite what the rest of the media is blaring. The other, and perhaps more important, component was zero down mortgages and cash-out refinancings that left borrowers with no equity in their houses. Borrowers were just as irresponsible as bankers and haven't gotten the bad press they deserve. "It's the leverage, stupid" should be the mantra of this crisis.

[grandalf]

Well, I don't disagree...

It's an example of moral hazard. How much is your pristine credit rating worth? If your house is under water by $100K maybe it's worth taking a hit -- it may be easier to rebuild your credit rating over five years than to repay $100K.

[jhancock]

"Borrowers were just as irresponsible as bankers"

The borrower never has been and never should be the party to determine if they can repay a loan or if the assets being leveraged will retain their value through the life of the loan. This is the job of the lender. Yes, it was "irresponsible" for people to borrow so much, but the burden goes to the lender...and the regulators that allowed the lenders to behave that way...and the people that voted for elected officials that enabled regulators to do what they did.

In short, if you make money so freely available, you can expect people to take it.

[grandalf]

Ironically, the borrowers just acted according to incentives, as did bankers. Everyone knew fannie/freddie would get bailed out if mortgages went south, and this fact drastically reduced anyone's incentive to care about how risky MBSs were.

There is moral hazard created by the way bankruptcy law works (for people who are significantly underwater) and also in banking regulations (and GSEs).

[apinstein]

Ironically?!

People always behave the way they're incentivized (unless it's egregiously immoral).

I've always found it pretty easy to predict the eventualities of markets based on how the system works. You can't predict the twists and turns along the way, but you usually know what the end looks like. Sadly though, not when.

On average people behave pretty predictably...

[grandalf]

I was being sarcastic :) I totally agree with you.

[anamax]

The problem at this point is not responsibility but liability.

Lenders and folks who bought securitized loans have taken a huge hit. (I'd agree that they haven't taken enough of a hit, they were going to keep the profits so they should take the losses, and if they didn't know what they were doing....)

Meanwhile, we're spending money to keep folks in houses that they never could afford instead of letting those houses go to folks who stayed within their means. And, by "we", I mean said "stay within their means" folks.

[jhancock]

I agree with you. but...a home is not a share of stock. Everyone needs a roof over their head. Giving the houses to people that stayed within their means doesn't solve the problem of keeping everyone in a home. In short, you shouldn't treat houses the same as we treat stocks.

[anamax]

> Everyone needs a roof over their head.

They can go back to where they were before. They can live where the folks who will buy those houses are living now.

There's no shortage of housing and if we're going to subsidize these folks, these houses are the wrong place to do it.