Amazing that the voice of reason comes from 1938

"Decades before anybody had ever heard of a mortgage derivative, an economist named Melchior Palyi predicted key causes of the 2008-2009 financial crisis with precision that makes a modern reader's hair stand on end."

"His warnings help explain why investors insist on trusting market gatekeepers they know to be fallible—such as policy makers, regulators and credit-ratings firms."
Bank portfolios and the control of the capital market (The journal of business of the University of Chicago. January, 1938)


link to paper BANK CONTROL OF THE CAPITAL MARKETS

The lead in the Wall Street Journal today Crisis Called 70 years ago in the by a Professor at U of Chicago.
Mr. Palyi, then teaching at the University of Chicago, was a vocal skeptic from the outset. Looking back into the 1920s, he found that investment-grade bonds went bust with alarming frequency, often in the same year they were rated. On average, he showed, a bank that followed the new rules would end up with a third of its bond portfolio going into default"
The record was so unreliable that it would be "still more responsible," Mr. Palyi growled, to "stop the publication of ratings altogether." He was especially troubled that the new banking rules switched the responsibility for credit safety from bankers—and even bank regulators—to ratings firms.




"From there," he warned, it "will have to be shifted again—to someone else," presumably taxpayers. Liquidity, Mr. Palyi argued, was being replaced by what he scornfully called "shiftability," a new kind of risk that could someday "be magnified into catastrophic dimensions."
Mr. Palyi warned in 1938 that a push toward universal home ownership would "make the population fixed to the ground" by "overburdening them with housing costs." That, he foresaw, would limit the mobility of American workers—helping explain why unemployment is so stubbornly high today"

The Twilight of Gold, 1914-1936: Myths and Realities
Amazing that the voice of reason comes from 1938.  The golden goose of home ownership was going to save America according to the current congress.  The problem is that the elite law makers have no idea how much it costs to keep a home up and running after you make the mortgage payment.  Those flush with excess cash have hard time understanding that the majority of people make enough money to pay their bills, and buy food with little left over for home repairs or up keep. 

An Inflation Primer,
Compulsory Medical Care and The Welfare State












A Lesson In French Inflation (1959)

The Chicago credit market (Wall Street and the security markets)
How long can "successful" deficit financing continue at falling interest rates?