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"top executives and regulators do not understand the technical characteristics of today's financial instruments"

[W]hen trouble hits, everyone looks out for themselves, and your goal is to be the first person to jump ship. If Merton is right, a lot of people are going to be hurting, relative to their plans, over the coming years, and a lot of them may turn to government for help. The financial sector will have gotten the jump on everyone else, and there won't be much money left in the Treasury when individuals start to realize they are suffering. The banks mark their mortgage assets to market right away. Individuals don't revalue their houses and revise their retirement planning. (Granted, this means that when house prices were rising they didn't become as optimistic as they would had they mentally marked to market.) In a few years, as people retire, they won't have nearly as much home equity to borrow against as people had a few years ago, and we don't know how that might play out.

The other point that Merton [Robert C. Merton of Harvard] made was that top executives and regulators do not understand the technical characteristics of today's financial instruments. Once again, this is vindication for a view that I have been pushing. I worry that there is a disconnect between the geeks and the suits in valuing these mortgage securities. The geeks think that their low values are realistic. The suits think that the securities are undervalued. [Treasury Secretary Henry] Paulson is a suit. I'm a geek.

"Mankiw, Rogoff, and Merton," by Arnold Kling, EconLog, September 27, 2008 (emphasis added)

Also see
"Is a Potential Bailout Making Things Worse?" by Alex Tabarrok, Marginal Revolution, September 27, 2008

"Smaller Banks Thrive Out of the Fray of Crisis: People Shift Money From Wall St. to Main St." By Binyamin Appelbaum, The Washington Post, September 26, 2008

Posted September 27, 2008 06:57 PM  ·  Permalink   ·  Caught Our Eye



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