Famous Last Words

John Cochrane

John Cochrane

I have to say, if I’d been saying stuff like this in the fall of 2007, I’m not sure I’d be making myself the poster boy for the “freshwater” defense against Paul Krugman:

In the recent turmoil in financial markets over the failure of subprime mortgages, investors should remember “caveat emptor,” or let the buyer beware, said John Cochrane, Myron S. Scholes Professor of Finance. “These are matters for buyers and sellers, not regulators,” Cochrane said during a Myron Scholes Global Markets Forum, organized by the Initiative on Global Markets and sponsored by the CME Trust and Chicago Council on Global Affairs, at the CME Auditorium September 25.

Nobody else gets hurt if you buy a lousy mortgage pool,” Cochrane said. “The government doesn’t need to write a new rule every time someone buys a rotten tomato. Investors will demand the right amount of transparency, complexity, and risk-sharing – or monitoring of mortgage pools – unless they all get bailed out and learn to count on a bailout instead.”

That’s via this comment. Obviously, only a very small proportion of the people who’ve lost their jobs during the recent recession actually bought lousy mortgage pools. Apparently in the real world bad decision-making on the part of a relatively small number of key players at financial institutions. One might have thought this was obvious from such historical incidents as “every financial panic in human history” but perhaps not.