I was curious what people’s thoughts on the implications of Paulson’s push today for covered bonds. My intuition is that this doesn’t seem like much of a solution. It sounds like it requires banks to be more on the hook for the quality of the loans. Not a bad thing, but will it make them any more eager to lend? They were only happy to lend money at silly interest rates when they could dump the risk on someone else. Now, I would think they, like anyone else, would demand a higher interest rate to compensate them for assuming a higher risk. Won’t this add to upward pressure on mortgage rates? Will, as usual, Paulson’s plan have unintended consequences? Or is there some wrinkle here I’m missing?
