Wednesday, February 01, 2012

Two strong positives for the new Obama refinance plan

(1) It finally allows underwater borrowers to exercise an option that investors knew existed when they purchased mortgage backed securities--the prepayment option. Right now, the fact that borrowers are underwater allows investors to earn a windfall by collecting a premium on what is effectively a callable bond.

(2) It imposes a Pigou tax on large banks. When a small bank fails, the negative externality is small to non-existent. When a TBTF bank fails, the negative externality can be catastrophic.  Taxes on large banks help internalize the externality.



4 comments:

rjs said...

what's the chance the tax on banks gets past congress?

Aaron said...

Again the whole US nation will lay in deep recession for many years. Don`t rely on the news.
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