Credit Market Overview

December 3, 2008

I was lucky enough yesterday to finagle a seat at a breakfast where Robert Schiller, the Arthur M. Okun Professor of Economics at Yale University and also known as the Schiller of the S&P Case/Schiller housing index, was speaking with regard to the sub-prime crisis its attendant effects and possible solutions to ensure that we don’t repeat the same thing all over again.

As an academic Mr. Schiller’s examination of what when wrong and why was clear and concise dating the true source of today’s problems with LBJ’s changing of FNM’s and FRE’s status as semi-private entities. While elucidating some of those things he proposes to get us out of the mess we’re in, however, there tended to be a theme of high levels of Government involvement, free advisory services for home buyers and a restructuring of the way a mortgage works so that the borrower is never really stressed and Uncle Sam is always there to help take the pain away.

Another member of the panel, Jonathan Macey, the Sam Harris Professor of Corporate Law, Corporate Finance and Securities Regulation at Yale University (Yes it was a Yale Law School sponsored event and no I didn’t attend Yale Law School, hence the “finagle” I mentioned in my opening sentence.) comes from a more “free market” school of thought, no pun intended, and spent a good portion of his time debunking most of what Prof. Schiller proposed describing his approach as less “socialized” than Schiller’s.

Needless to say there was spirited debate at times including Prof. Macey’s analysis of what it would cost the tax payer to set up a separate a agency in the Government to monitor the home buying process with the goal of protecting the home buyer and mortgage borrower.

Jonathan’s rebuttal to spending a lot of tax-payer money to offer free stuff to the country’s home buying population was a bit more pragmatic as he described the regulatory controls already in place in the securities business and wondered out loud why there was so much regulation on for what many constitutes a fairly small amount of total household net worth and almost no regulation on what constitutes for many the largest investment they will ever make, their home.

Towards this end Prof. Macey proposed expanding the purview of FINRA to include those in the real-estate business e.g. the broker that sells you the house and the broker that arranges your mortgage.

Jon Macey did not intimate that he thought this would have prevented the bubble completely but that it could have definitely helped curtail some of the predatory lending we are reading so much about.

The cost of expanding FINRA, he went on to say would be much less to the tax-payers than creating an entirely new bureaucracy in Washington.

Always interesting to have breakfast with smart people.

Enjoy your week.

Jim Delaney