Wednesday, February 4, 2009

Bailout Lingo

When listening to some congressional hearings on C-SPAN radio, I heard some lingo for which I wanted good definitions. Here are the two biggies:

Moral Hazard: If we bail out people who took bad risks, then they won't learn from the losses. They will continue to take stupid risks. This is basically my original problem with the bailout.

Cram-Down: A court-ordered reduction of the secured balance due on a home mortgage loan. Basically, a judge "crams" a reduced loan balance "down" the throats of the mortgage company. Before I heard the term, I wondered about this idea. Why should the home buyers take the whole hit for bad mortgages? It seems to me that the companies that wrote (and benefited from) the bad mortgages should bear some of the cost of writing down the values. Jim Gogek has an interesting take on cram-downs that is pretty consistent with my thinking.

C-SPAN rocks.

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