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    October 01, 2007

     Subprime loans in Judaea

    Paul "Jeremiah" Krugman, today:

    As Ms. Morgenson reported in yesterday’s Times, Countrywide seems peculiarly unwilling to work out deals that might let borrowers hold on to their homes — even when such a deal, by avoiding the costs of foreclosure, would actually work to the benefit of both sides.
    Jesus of Nazareth, ca. 30 CE, Luke 16 (RSV):
    He also said to the disciples, "There was a rich man who had a steward, and charges were brought to him that this man was wasting his goods. And he called him and said to him, 'What is this that I hear about you? Turn in the account of your stewardship, for you can no longer be steward.' And the steward said to himself, 'What shall I do, since my master is taking the stewardship away from me? I am not strong enough to dig, and I am ashamed to beg. I have decided what to do, so that people may receive me into their houses when I am put out of the stewardship.'

    So, summoning his master's debtors one by one, he said to the first, 'How much do you owe my master?' He said, 'A hundred measures of oil.' And he said to him, 'Take your bill, and sit down quickly and write fifty.' Then he said to another, 'And how much do you owe?' He said, 'A hundred measures of wheat.' He said to him, 'Take your bill, and write eighty.'

    The master commended the dishonest steward for his shrewdness; for the sons of this world are more shrewd in dealing with their own generation than the sons of light. "

    The situation is remarkably parallel. The bad steward (CEO) hasn't stolen his master's (stockholders', depositors') money, he's lent it to unreliable borrowers. Called unexpectedly to account, he writes down the debts drastically. In this way he secures two objectives: he gets the owner back fifteen denarii on the aureus immediately, and acquires goodwill with the borrowers which he will need when he's fired.

    The parable is not of course given as financial advice, though it shows a sharp understanding of the business mind. It's advice to the godly, who are always inclined - like academics. large families and gangsters - to keep minor worldly grievances simmering long past their sell-by date. There's a fine Trollopean example, only ten years old, set in the chapter of Lincoln cathedral. Good businessmen, and especially traders, must be able to write off the past; the sands of yesterday's market are wiped clean every night by the tide, every sunrise begins a new trading day. In this sense, they serve as models to the godly in making money their instrument and not their master.

    So as Keynes also warned, and Larry Summers agrees, financial policy should not be dominated by the moral hazard principle, that recklessness must be punished. The past is over, the present and the future come first.

    PS: The Jeremiah tag is intended as a earnest compliment. Telling truth to power makes the real prophet execrated and feared by King Hezekiah and his flunkeys. Plus ça change.

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