by Jeff Sovern
Three interesting recent pieces in the Times: Today's Times has an editorial, "Moving Ahead on Mortgages," that endorses the FDIC proposal to deal with the foreclosure crisis by freezing interest rates at the introductory teaser rate (I previously linked to the FDIC proposal here). Friday's issue had a column by Paul Krugman, "A Catastrophe Foretold" about how the mortgage meltdown could have been avoided, in which he refers to the prophetic words of the late Edward A. Gramlich. An excerpt:
In his final paper, Mr. Gramlich stressed the extent to which unregulated lending is prone to the “abusive lending practices” he mentioned in his 2004 warning. The fact is that many borrowers are ill-equipped to make judgments about “exotic” loans, like subprime loans that offer a low initial “teaser” rate that suddenly jumps after two years, and that include prepayment penalties preventing the borrowers from undoing their mistakes.
Yet such loans were primarily offered to those least able to evaluate them. “Why are the most risky loan products sold to the least sophisticated borrowers?” Mr. Gramlich asked. “The question answers itself — the least sophisticated borrowers are probably duped into taking these products.” And “the predictable result was carnage.”
Mr. Frank is now trying to push through legislation that extends moderate regulation to the subprime market. Despite the scale of the disaster, he’s facing an uphill fight: money still talks in Washington, and the mortgage industry is a huge source of campaign finance. * * *
Finally, on Wednesday, David Leonhardt's Economic Scene column, titled "Lessons Thomas Still Could Learn," reports on lead in toys. The company which manufactures Thomas toys comes off pretty badly, having first asked customers to pay the cost of returning its dangerous toys to the company, and then having sent the customers who returned the toys a free gift--which was also contaminated with lead. But there's also good news: the Times bought fifty toys at a Wal-Mart and other stores and had them tested for lead. No toy exceeded the legal limit for lead and only five--none bought at Wal-Mart--had any lead at all.