Several people have been writing about John Cochrane’s post on Federal Reserve independence, but few have mentioned what is actually making Cochrane mad. Why does Cochrane feel something has gone terribly wrong? Here’s a quick scan:
Led by the White House, the state Attorneys General announced their “settlement” with banks….There are also costs. This money comes from somewhere…To say nothing of the blatant unfairness, and moral hazard…or the larger moral hazard of using the threat of prosecution for procedural errors to force anyone to cough up money towards unrelated policy goals…
Heavens, what a scandal…Documents not properly notarized! Notice it does not even “allege” that anyone was actually kicked out of a house who was paying their mortgage.
I once got into a disagreement with someone over whether or not libertarians care about fraud. I alleged they didn’t, and their real concerns would always run downhill, usually towards debtors. They have no language for fraud other than a reactionary posture that going after fraud unfairly benefits those on the other end, who have gotten what they deserved.
Look at Cochrane’s post – the robosigning and subsequent scandals are viewed as nothing of significance. Not only are these acts against the law, but not breaking these laws are essential to the whole securitization chain. Following the proper legal steps in creating and executing these financial instruments is necessary for the whole thing to work. From REMIC to trust to property law to bankruptcy remoteness to everything else, unless you are actually following these steps you are causing huge problems for the securitization later on. The same goes for foreclosures. Like all property, they are legal creations. And for a particularly complex piece of property like a security composed of many home mortgages, following the law is essential.
Allowing financial firms to get away with not following the laws we created to handle securitization, property and foreclosure would, in any sensible sense of the phrase, cause “moral hazard.” But the only moral hazard Cochrane is concerned about is ones that might benefit mortgage debtors, who need to be constantly disciplined. Two sets of rules – one for the 1%, one for everyone else.