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Wednesday, September 19, 2007
Hedgeconomy
The credit crunch has beancounters are buzzing about moral hazard - ie, we should force banks etc to bear the costs of their actions.
But that's ignoring the real problem - which is adverse selection. No one can price/value ummm...an entire asset class. There is a near total information asymmetry.
Forcing banks to bear the costs of silly loans might get a lot of people fired. But it won't fix the deeper problems of marking to (almost incomprehensible) models.
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