Should You Worry About Sub-Prime Mortgages?
The housing market really isn’t my thing, but James Hamilton does have a pretty good post that looks at a potential problem with sub-prime loans. Still, you are interested in such things, head on over and check out that post. Here is the main conclusion,
The ultimate discipline, then, must come from these final holders of the mortgages. I have two concerns about whether the incentives have indeed been structured to work in society’s best interests here. The first is whether these final holders of the loans perceive them to be insured through implicit government guarantees, for example through Fannie Mae and Freddie Mac or the too big to fail doctrine. If so, then there may be a serious moral hazard problem here that has promoted excessive risk-taking behavior from these final investors
My second concern is whether certain institutions such as public pension funds (, ) may in fact desire assets with low probabilities of catastrophic outcomes, with the technological advances to which Bernanke refers giving them new opportunities to assume risks that may not be desirable from the perspective of broader social goals.
For this reason, the number one question in my mind that we should be asking here is, Who is the residual holder of this risk?
And that is not a question that was addressed in Bernanke’s remarks.