Mortgage Protection

Here is an excellent post from a London School of Economics professor. It poses some big questions about the government's pledge to bail out those who face repossession of their houses.

It throws up some interesting questions. Should those who took out mortgages which we too big and too risky be protected? Will the measure stimulate spending?

But most interestingly this article explores the topic of incentives? If a homeowner knows that they will be bailed out, it reduces the risk and creates teriible incentives. If you move to a house on a flood plain, you should take insurance out against flooding, not expect the government to bail you out.

Favourite quote : "Good economics serves efficiency and fairness. Good politics serves the survival of the incumbent government. Sometimes all these considerations point in the same direction. Sometimes they don’t. "