Wednesday, September 24, 2008

Keep It Simple

Karl Okamoto offers not only investing tips in these troublesome times but tips for the solution to the ongoing financial mess: 

So let me offer one more anti-intellectual suggestion. As we ponder the regulatory solutions to the current mess, my suggestion is we keep it simple. The reason why financial institutions blow up is the same reason houses go into foreclosure. People take risks they cannot fully insure. Normally people are pretty good about avoiding such extreme positions because they understand the downside and wisely avoid it. So if I am going to lose my 20% down payment on this condo if I can’t support next year’s mortgage payments, I’ll buy a cheaper one where I am certain I can “keep my seat” in a down-turn. By appealing to human’s natural optimism and avarice while at the same time masking or often eliminating the downside cost, the home lending market created a “heads I win, tails who cares” environment for home buyers that eliminated the “old fashioned” calculus that defined prudent home buying and finance.


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