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“The Subprime Crisis: Why One Bad Turn Leads to Another” at Pepperdine University School of Law | Author: Richard A. Epstein

“The Subprime Crisis: Why One Bad Turn Leads to Another” at Pepperdine University School of Law | Author: Richard A. Epstein

The subprime crisis has migrated from the inside pages of the business section to the front page. Indeed, it is precisely because the topic has received such nonstop publicity that it is necessary to return to fundamentals to understand the origins of the crisis and some possible ways to mitigate its harsh effects, many of which are regrettably beyond recall. In this connection, I often think back to Casablanca. It is fun to talk about kisses and sighs, but if you recall Sam’s famous song, the fundamental things still apply as time goes by. And so it is. Modern finance law has affixed many bells and whistles to the simple home mortgage. But the only way to unpack the current situation is to begin with the critical relationship of debt to equity. The more adventurous financing devices all share one characteristic: they are more vulnerable in bad times than the more modest arrangements in more modest times. So let us begin with a primer on the iron laws of debt.

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