Opinion

Felix Salmon

Counterparties

By Felix Salmon
May 27, 2010

“There is no economic reason for banks to insist on regular capital repayment” — Josh.sg

“Immigration has increased the average wage of Americans modestly in the short-run, and by more over the long-term” — NDN

I do like a good old-fashioned movie review slam. AO Scott vs SATC2 — NYT

“If we like something then we judge it as less risky, and if we don’t like it we judge it as more risky.” — PsyFi

Euro Crisis Dashboard — Inflexionary

Comments
6 comments so far | RSS Comments RSS

Yeah, increased supply of labor raises returns to capital and incomes of those who participate in higher returns to capital. We could flatter ourselves by making the “returns to skill” argument (education captures returns to capital), although the educational system may impose significant deadweight costs in the form of expensive credentials for rent seekers. This argument for immigration seems a noble attempt to protect some of the most vulnerable in our midst (Mexican illegals).

Posted by xyz70 | Report as abusive
 

From Shapiro at NDN:

“… undocumented immigrants are more likely [than the native-born] to support traditional families with children….”

Also known as displacement.

Posted by Mega | Report as abusive
 

“It has worked fantastically in Europe as a way for people to get home ownership and build wealth throughout their lives. It just requires a change in mindset about how you live with debt,” Mr Koch said.”

I slept on this quote last night. I’m sure there’s a way to apply Mr. Koch’s wisdom to the debt of countries, but I just haven’t managed to puzzle it out yet. But I’m not giving up!

Posted by DonthelibertDem | Report as abusive
 

I think a zero-amortization loan could make a lot of sense for certain borrowers if you require a 25% down payment (perhaps with a reappraisal every few years to ensure no more than 75% LTV, in which case it would start amortizing). The real problem isn’t the product, it’s where it’s used. (I am not predicting, by the way, that it will be used responsibly here.)

Posted by dWj | Report as abusive
 

Zero amortisation changes the whole risk profile of a loan. Yes, a 25% down payment changes the initial starting point but let’s think about this for a sec. Ignore the path of house prices, since this is path dependent, and hold house prices steady. There are two key metrics here, initial LTV, and IO vs Repayment. The initial LTV dictates the initial likelihood of default and also the likely loss given default. The IO vs repayment has a different effect, it makes the difference between the likelihood of default and LGD holding constant over time, or the likelihood of default and the loss given default both diminishing over time. Because both those factors co-conspire to increase the risk to the lender, a zero-amortisation mortgage is a completely different beast that needs pricing at an interest rate which is almost certainly uneconomic (I’ll model something up and see).

Posted by drewiepe | Report as abusive
 

“There is no economic reason for banks to insist on regular capital repayment”

Why is this neccesarily a bad thing. Wouldn’t this be the same as the bank (which is the home owner) renting to the inhabitants who have a non expiratory option to buy the house and presumably pay a bit of a premium over a corresponding renting price.

I know that banks do not have a good track record at renting out homes but I see no reason this couldn’t work.

Posted by KevyD | Report as abusive
 

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