Finance Goes Rational

August 18, 2008 in capitalizing, explaining, objecting, pricing, testing
Tags: banking, credit, crisis, finance, foreclosures, irrationality, money, mortgage, norris, nyt, rationality

Many like to think that the trouble with finance is that it often goes irrational. But here is a clever quote from Floyd Norris about the credit crunch and the foreclosures crisis:

“Every bank is now acting rationally. They need to conserve capital, so they raise prices, tighten standards and sell foreclosed properties quickly. But when all do those reasonable things, which should have been done years ago, they deepen the crisis for homeowners, and for themselves.” (from “Banks leap from foolish risks in mortgages to none at all”, International Herald Tribune, August 14 2008)

Which means that things turn bad (or worse) when finance goes straight and steady — a message to be passed to mainstream economists.

(Announcement: this is the last post at the Test Society blog, which sadly failed from achieving opinion-making domination after one year of fair and conscientious services.)