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The Dangers of Bad Financial Products

This is a terrific paragraph from Mike Rorty:

I’m assuming that if I was a degenerate crackhead who snuck into your neighborhood and mugged you for $50, the Wall Street Journal Opinion Page would want me thrown in jail. Now imagine that I’m a degenerate crackhead who took out a subprime loan to move next door to you, in an arrangement that I’m likely not going to pay off. I might not even make one payment. If I default you’ll lose 10% of the value of your home from the externality effect. Assuming your home is worth $300,000, there’s a 20% chance I default in 2 years (realistic numbers), and you lose 10%; 300,000*.2*.1 = I’ve just robbed you for $6,000 while the Wall Street Journal Opinion Page cheered me on. And that’s one house – I’ll have a dozen neighbors. Now mind you, the product was great for me – I got to smoke crack indoors, in a house I could never realistically afford, which was a big plus. The subprime lender sold my loan to a pension fund in Denmark for a nice fee. It goes in the win column for us.

Rorty's point here is an important one: Bad financial products cause harm to others. That's true, as we've seen, when they all go bad at once and bring down the economy. But it's also true on a much smaller level. All of this is another way of saying that the Consumer Financial Protection Agency is a good and important idea that people should support. For more on that, read Tim Fernholz.

By Ezra Klein  |  July 9, 2009; 10:54 AM ET
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That seems like a more effective criticism of Barney Frank's affordable housing policies than the WSJ opinion page.

Posted by: fallsmeadjc | July 9, 2009 11:04 AM | Report abuse

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