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A Double Dip March 18, 2008

Posted by davidzweig in economics, financial crisis.
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A rumination on market failure:

The human race has so far managed to define only two flavors of market failure. They are:

ADVERSE SELECTION: You’re selling insurance. Over time, you have exhausted all the low-risk customers, so you start selling to shady characters. They start filing more claims. You must charge higher premiums to cover them. So your low risk customers leave you and get insurance elsewhere. Now you have a pool of shady characters and falling revenue to pay your rising premiums.

MORAL HAZARDS: If I know I have insurance and you’ll cover me, I am inclined to do more wild and crazy things than ever before. This will cause you to pay out more and more.

Now, sustitute home mortgages and collateralized debt obligations for “insurance.” Here we are.

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