18
Dec
11

Bubblicious

A while ago I riffed on the idea that “affordable housing” programmes — if we’re being honest, we call them “easy-to-get mortgage” programmes — make for a fantastic transfer of wealth from poor people to rich people.

A few days ago, as part of a larger rant about the value of postsecondary education, Aretae wrote something similar about student loans:

Aren’t student loans hideous? At 90% certainty, they’re a great way to transfer money from the working-poor into the pockets of the rich colleges and the future rich, while screwing those who don’t benefit from college, either by not going or by failing out or getting useless degrees (with non-dischargeable loans).

So in both cases we have big loans driving a bubble, with a thundering herd of sanctimonious do-gooders chanting pious apologia in favour of clearly regressive transfers.  But where did these expansions in what ought to be clearly seen as dubious credit come from in the first place?  Arnold Kling has his suspicions:

[I]f the U.S. financial crisis was a black eye for the economics profession because few economists predicted it, then the euro crisis should be…well, whatever is the opposite of a black eye…because many economists predicted it.

In fact, the black eye and the non-black eye may be related. You can tell a story that the creation of the euro resulted in a bloated European financial sector, which then funded the U.S. housing bubble. Remember this post?

Well, all that credit had to come from somewhere.  I’m coming to the opinion that the housing bubble was really just a symptom of a credit bubble — excess demand for investments, and the riskier the better.  Part of that was driven by innovation in the securities sector — credit default swaps, tranched CDOs, and so on — reducing the price of investments, but the demand had to come from somewhere.

This makes me less than sanguine about current efforts to prop up the status quo ante in the Eurozone.

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