In any financial crisis on Wall Street, there are always winners and losers. The winners include: (1) Those who got paid for building and selling (the excess portion of) houses (over and above the normal demand) and those who sold houses during the peak of the bubble. (2) Sub-prime borrowers who got to enjoy, at least for a while, the pleasure of owning a house. (3) The managers and employees of banks and Wall Street firms, some of whom collected huge bonuses. (4) Financial stock owners, smart investors including hedge funds who sold their holdings before the recent meltdown. Common sense suggests that the winners should not be receiving any taxpayer bailout money.
The populist talk of helping the Main Street by helping the sub-prime borrowers is perhaps misguided. These borrowers must have known all along that they did not really afford the pleasure of home ownership. If we succumb to our populist instincts, it will hurt the American economy in the long term. We must be aware of wrong incentive structures and do not grant further taxpayer funds to those who are already the winners by exploiting information asymmetry.
Vinod, H. D. (2004) “Conflict of Interest Economics and Investment Analyst Biases,” Brooklyn Law Review, Vol. 70, No. 1, Fall 2004, pp 53-88.
Vinod, H. D. (2008) “Fraud and Corruption” Ch. 9 in Manager’s Guide to Compliance: Sarbanes-Oxley, COSO, ERM, COBIT, IFRS, BASEL II, OMB A-123, ASX 10, OECD Principles, Turnbull Guidance, Best Practices, and Case Studies. Anthony Tarantino (Ed.).New York: J. Wiley and Sons, 2008.