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Wednesday, January 11, 2012

The Economy

Fun quote from Moody's chief economist, Mark Zandi: "I don't see anything different happening in the economy whether Romney or Obama are the next president. they're pretty much the same. If some of the other more bizarre republican candidates were elected, well then we'd have to reconsider things."So there you go: that's why you don't want to pick the "electable" guy just to get Obama out of office: he's substantively the same. Just rides to town on a different animal. On the other hand, Zandi dismissed my worries about the implosion of the student loan market, saying that "sure, a big portion of that trillion dollars worth of federally subsidized, need-based debt is going to default, but its on the books of the federal government. So it will be a big problem for tax payers, but its not going to impact the financial system like the mortgage crisis did."

I'm sorry to say, my worries were not allayed. Aside from default on government-held assets being a fairly big problem in this era of our government constantly running out of money, I'm not convinced that they're really on the government's books anyway. Sallie Mae, who I believe is the initiator of this trillion dollars of risky debt (correct me if I'm wrong), regularly issues asset backed securities. As often as twice a quarter, and they're not small issues.

I'd like to know who's holding them, because presumably the risk is on their books, not the federal government's. Their site is currently crashing as I try to investigate; awesome sign. But even then, the buyers of the ABS's likely aren't the ultimate bearers of the risk; it would be dumb of them to not buy insurance on these risky assets (ie, credit default swaps).

Zandi didn't answer my more specific question: "Has a market emerged for credit default swaps on student loan asset backed securities?" Which is unsurprising if he was unaware of the market for ABS's. I suspect the market is there, it just hasn't made the news yet.

Then again, I may be ignorantly misunderstanding the whole situation. I would invite enlightenment from anyone who's more well-versed.

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