How the Promise of Future Subsidies Can Freeze Markets

I think Casey Mulligan nails it:

The [Chicago city] council has debated mandating hybrid purchases. But the rumor among taxi drivers is that in addition, or perhaps instead, the city or other government agency will eventually subsidize the purchase of a hybrid.

Drivers have decided that they should not purchase a Prius or other hybrid until the subsidy arrived. Buying one now would mean over-paying.

Regardless of whether it is realistic to expect Chicago to someday subsidize purchases of hybrid taxis, the fact is that some cab drivers are considering the possibility. If taxi drivers consider future subsidies in their industry, then so must bank executives.

Last fall the public learned that banks were not selling many of their legacy mortgages and mortgage-backed securities, despite the impression that ownership of the assets were hindering the banks’ lending. A variety of theories have been put forward to explain this failure, and to suggest what the government might do to fix it.

But the lack of trade in mortgage-backed securities may have something in common with the lack of trade in hybrid Chicago taxicabs. The secondary market for legacy mortgages may have stagnated largely because of the (ultimately correct) anticipation of a huge government subsidy.

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8 thoughts on “How the Promise of Future Subsidies Can Freeze Markets

  1. Pingback: How the Promise of Future Subsidies Can Freeze Markets | Real Rumors

  2. This is true of pretty much anything these days. Why go to work even? Just wait for your subsidy from Obama. Let him do all the work.

  3. Is this really a promise of future subsidies, or just the possibility? Because, if they said “yes there will be a subsidy on say, June 1,” the purchases that would have occurred in April and May would then just be delayed until June or July, which would then see a boom in purchases, one that may induce a mild, prolonged increase in sales.

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