13 Apr 2009

Chicago Economists Catching Up to the Austrians

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On April 8 Casey Mulligan blogged about the perverse effects of the looming government bailout of those holding toxic–excuse me, legacy–assets:

Last fall the public learned that banks were not selling many of their legacy mortgages and mortgage-backed securities, despite the impression that ownership of the assets were hindering the banks’ lending. A variety of theories have been put forward to explain this failure, and to suggest what the government might do to fix it.

But the lack of trade in mortgage-backed securities may have something in common with the lack of trade in hybrid Chicago taxicabs. The secondary market for legacy mortgages may have stagnated largely because of the (ultimately correct) anticipation of a huge government subsidy. As I wrote last week, banks were not “unable” to sell their legacy mortgages; they were prudently unwilling to sell because they expected the government to eventually step in and help push the prices of the assets higher.

I’m going to go out on a limb and say that I offered this exact critique–namely that the government bailouts of insolvent investors was the primary cause of the “frozen” credit markets–more than a year before Mulligan. However, I am too lazy to go look it up.

***So, we will have our first Free Advice reader contest! Woo hoo! The person who finds the earliest online occurrence of me giving the above theory (for the frozen credit markets) will get an autographed copy of the PIG to the Great Depression and New Deal.***

I guess to be safe, we should do this: If you think you’ve found a contender, then first email it to me and then post it in the comments. I’m just trying to avoid a possible problem where some guy posts the winning entry, and then different people try to tell me that they are “Brian Smith” (or whatever) and give me different mailing addresses. (I know I know, the prize has to actually be valuable to make cheating worthwhile.)

I am the final decider on the winning entry.

Last thing: I have considered the possible embarrassment of announcing this contest and then nobody responds. I reserve the right to post answers under assumed names to avoid humiliation in that event.

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