Monday, October 05, 2009

One of Mark Thoma's Best Posts

On how to think about research on modifications to the Efficient Markets Hypothesis:

Principal agent problems (particularly involving asymmetric information) have been an enormous part of the problem, but as Mark notes, are likely not enough to by themselves explain the crisis. I think we also need to look carefully at prospect theory and norms, and the mechanisms households use to make decisions (for instance, the marketing literature shows us that many households make credit decisions based on initial monthly payment).


Anonymous said...

From the borrower point of view, its not hard to understand the indifference to price. Non recourse mortgages are risk free, so the borrower pays no attention to price. If the price goes up later, they can flip the property for a profit. If the price goes down later, they can just mail back the keys. The free market cannot work to produce efficiency if customers don't actually pay for the product. Price signals become meaningless.

No other advanced country on earth uses no money down, negative amortization, non recourse loans. They are a recipe for a credit crises.

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