I LOVE comments. Please leave some even if they are brief half-formed ideas
that you aren't even sure you really believe. I just love comments.

Friday, September 26, 2008

Let's make it explicitly about blame

In the previous post, Josh asked what was wrong with equilibrium, and Matt pointed out that people don't have to buy homes, they need a place to live. If you look at the post below, you will notice a couple of things about the normalized cost of rent. First, it did not spike like the home costs from 1980 to 2006. Furthermore, it seemed to track very closely with the shape of the wage curve. Suggesting that the necessity, the thing really tied to demand, moved with wages.

So, people encouraged by government policies and initiatives from lenders bought homes they could not afford. First the people, then the lenders, got into big trouble.

Who should we take care of? Who is more culpable? While working for the Arizona Supreme Court we considered cases applying lemon laws to leased cars. The decisions assume that the one who signed the lease knew what he or she was doing, and should bear the consequences of his or her actions.

I analyze this crisis from the perspective of power. Who has the power in these cases? The borrower nominally is empowered to say 'no'. But I suggest, it is the lenders and their allies in government who hold the real power to push on the system.

Okay, let me have it.

7 comments:

Josh Gentry said...

Why not take the argument to its logical conclusion. The people who should really be pissed are the ones who stuck to that renting curve. Who didn't buy into the craze and stuck with what they could afford. Their taxes are going to bail out the corporations and the defaulters. If you want to talk about who deserves what, I think we should give them the houses that get forclosed on. Maybe they should run the financial institutions, too, since they have sense.

Josh Gentry said...

I think the financial institutions have plenty of blame. For them, equilibrium was a problem, because they can't grow their profits every year. So they manufactured a way to give more loans, and it was bullshit.

But the borrowers had more than a "nominal" ability to say "No." I sympathize with them, because the financial experts said it would all be OK, and they are supposed to know. But you can't remove the responsibility of the borrower.

So the borrowers default, and the financial institutions go bankrupt and the consequences match the actions. Except wait, the Feds are saying don't let the financial institutions suffer their part of the consequences. Obviously its not "fair", but the argument is that as much as it sucks, saving those losers is in the best interest of Joe Sixpack, because his boss won't be able to pay him if we don't. That's the argument I don't know how to evaluate.

JimII said...

Obviously its not "fair", but the argument is that as much as it sucks, saving those losers is in the best interest of Joe Sixpack, because his boss won't be able to pay him if we don't. That's the argument I don't know how to evaluate.

Doesn't the other argument work too? If you prevent foreclosures and bailout the homeowners, then they can pay their mortgages and the banks can stay solvent. I mean, why does it make more sense to inject the money into the banks than the into the homeowners?

I think the pragmatic argument works both ways.

Josh Gentry said...

I've wondered about that, and I think the answer you'll get is that it would take too long. The banks are failing now.

Not sure I buy it.

Matt Dick said...

Why not take the argument to its logical conclusion.

I think this is almost always, when discussing complicated issues, the wrong thing to do. No important convention humans do works in the extreme application.

But the borrowers had more than a "nominal" ability to say "No."

This is exactly right.

But further, the trouble started when someone, and I have no idea which economist is to blame, decided that "home ownership" as a percentage of the population, was an index of economic health as an independent variable.

Home ownership indicates something about an economy and its health, but it doesn't drive economic health. Just ceding homes to people won't create wealth.

I hate it when I'm watching a football analyst and he says, "The Bears are 22-2 when the running back gets more than 26 carries, so they need to get him the ball more." This supposes that running 27 times produces a win, and not the more likely case that when you find yourself with a late lead, a good strategy is to run the ball.

When people are prosperous, they tend to buy homes and pay off mortgages. When times are bad, you can't just give them homes.

"Fair" is such a horrible concept when you need to do important, hard, grown-up things like run an economy. Any complex adaptive system that is made to be fair is doomed to failure. And this is known. The closest thing to fair we can do is create equal opportunity. Trying to tweak the variables in the system to make them fair will have unintended consequences--that's what a complex adaptive system does.

Is it fair that we only let young, strong, healthy people be firefighters? No, but can you imagine running the system of firefighting fairly? No, you create an environment of equal opportunity and let the appropriately fit individuals become firefighters ("fitness" being a measure of capability, not of health).

In an economy, you create an environment of equal opportunity. Some backstop to economic ruin is appropriate, like catching the destitute with welfare, but tweaking the variables in the system is not just a bad idea, it's a necessarily impossible task.

JimII said...

"Fair" is such a horrible concept when you need to do important, hard, grown-up things like run an economy. Any complex adaptive system that is made to be fair is doomed to failure. . . . Is it fair that we only let young, strong, healthy people be firefighters?

? Of course it is fair to only allow capable people to do a job.

Why should anyone buy into a system that does not treat them fairly? I submit that fairness is a very important measure of the success of an economy.

The total amount of work produced by the economic system is another. And, if there was a system that ensure absolutely that one was compensated in direct proportion to the value of one's contribution, but the effort expended to ensure that were such that the society produced very little of value, it would be a failed system.

However, if America was a little less productive but a little more fair, I think it would be a gain. Perhaps I'll raise this to a new post.

Matt Dick said...

Jim, I tried to distinguished "fairness" (i.e. everyone gets a house no matter how unable to provide fair market value in exchange) from "equal opportunity" (i.e. if you can produce fair market value, you are allowed to buy that level of house no matter who you are).

The first is a doomed strategy that makes you look like a nice governor. The second is what makes this a nice place to live, but makes you look cold-hearted.