Wednesday, September 05, 2007

Sub-prime Remedies

Arnold Kling has an idea on how to "fix" the subprime mess. He calls it the "debt-equity swap". Essentially, for those that are unable to make payments now, he proposes having banks assume more of the mortgage debt themselves at the expense of the owners equity. This would essentially be as if the bank had put down the 20% down payment themselves. It's an interesting proposal. This seems to be the best proposal I have seen in terms of avoiding moral hazard.

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