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Was that . . .
Daniel Inviglio had to go and stir up the “are homes investments?” hornets nest again. In order to avoid a 10,000 word debate with Felix Salmon, I’ll try to keep this brief and relatively uncontroversial.
Inviglio makes the false claim that other than a bad credit score a homeowner has no economic reason to not walk away from their home once they are underwater on it. Homeowners have several economic reasons to not walk away from their homes even when they have negative equity:
1. Interest < Rent: If interest payments are less than rent, then it costs you money to move out and start renting.
2. Moving = $: It costs money to move, or to put it in econospeak: there are often significant transaction costs. Renting a moving truck isn’t cheap, neither is the opportunity cost of your and your friends’ and family’s time and energy. You may not pay them, but helping you comes at a real economic cost to them, and people are not indifferent to those costs.
3. Recourse: If the mortgage is a recourse loan, the borrower faces the possibility of losing other assets if the bank comes after him.
As Zingales et al point out in a recent paper, in addition to these economic disincentives to foreclosure, people often perceive high moral costs to foreclosing. According to their survey, 80% of people think it is morally wrong to default. Even when the home is 50% underwater, only 17% said they would default if they could still afford the mortgage. Of course when they actually are in the position to default, people might not behave as they say they would in this survey, but they at least perceive it as a cost. There’s a big debate out there about whether or not it is immoral to default on your mortgage when you can afford to pay it, but that’s neither here nor there. Since many homeowners clearly perceive strategic default as immoral, it’s a cost to many homebuyers regardless of the actual morality of default.
Clearly, foreclosing on a home is not economically costless to a homeowner. For many it is not morally costless either. I kind of thought this was conventional wisdom by now.
I had my fourth or fifth conversation with a “man of the street” regarding the bailout today. They’ve all gone roughly like this
THEM: What do you do?
ME: I’m an economist.
THEM: URGH, OBAMA! Why did we give the banks billions instead of giving it to people.
ME: Well we didn’t give the banks money, we loaned them money. And to make sure they paid it back we took a temporary ownership stake in the banks. You can’t actually take an ownership stake in people. It violates the 13th amendment <smile, pause for laugh>
THEM: But why did they use the money for bonuses!
ME: Well their argument is that if they don’t pay their workers the workers will leave for foreign banks. In fact, many of the banks paid back the government early so that they could be free to increase pay. It doesn’t really help the owners of the bank to pay the bank workers more money, so I would really guess that they have to.
THEM: Huh, you told me something I didn’t know.
The last phrase was almost literally word for word from all five people. So, I don’t know where the White Houses communication break down is, but every person I have talked to has gone from pissed to understanding in less than 5 minutes. Now maybe they won’t stay unpissed, but its a few data points worth passing on.
Mike Konczal posts this chart from Frank Luntz
noting that the percentages refer to the fraction of people who would be concerned about the Consumer Financial Protection Agency IF the allegation were true.
Mike suggests that this means the CFPA is more popular than Luntz’s chart would indicate.
I can’t get over how unconcerned people are. I don’t know if this is an unusual bout of honesty regarding their apathy but it seems only 14% of Americans list “kills jobs” as one of the top 3 things they would be concerned about IF TRUE.
Moreover, 15% say they are not really concerned about the creation of an additional government agency which authorizes bailouts for Wall Street, increases the size and power of the government, creates more red tape, kills jobs, limits choice, strangles small business, is run by a czar, crafted by lobbyist and costs hundreds of millions of dollars per year. Those are some truly Zen folks.
In an interview with Matt Lauer the First Lady says that the obesity crisis is “imminently solvable” and “doesn’t require any new technology.” So, it looks as if we can shelve Qnexa and Vagus Stimulation Research, Michelle has got this one covered.
I’m giving the First Lady a hard time of course, but its important that the contours of the obesity problem be public knowledge. I used to think that experts were wholly incapable of seeing how the future would evolve. We would get these dazzling predictions of flying cars, cures for cancers and the end of poverty. Yet, they never panned out.
Deeper investigation into these issues often shows, however, that many experts were skeptical about achieving these goals in anything like a short time frame. Yet, the imagination of the intelligentsia was entranced and it became popular to speculate about great achievements that were just around the corner.
Obesity is the same way. There is no indication whatsoever that obesity is “imminently solvable” and I would bet that the solution, when it comes, will involve radical new technologies. I am sure that the First Lady has in mind Behavior and Lifestyle Modification (BLM), the idea that we can teach people to live and eat differently.
However, BLM has been an overwhelming failure in long term weight management and there is no reason I know of to think that will change. We can haggle over why BLM is failed. Maybe the interventions weren’t big enough. Maybe the people weren’t dedicated enough. Maybe big agribusiness has hooked everyone on salt and fat. Maybe . . .
Still, if we can’t get it to work in a clinical setting, with brilliant doctors, fancy equipment and patients who have volunteered, then we should be extremely skeptical that this can be successfully rolled out to the general public.
“What I also have in this bill is the health care services commission. It is a system whereby all these stakeholders in health care – providers, doctors, insurers, consumer groups, hospitals, unions – all come up with standard metrics that are standardized that we hold for price and quality and best practices. It’s a lot different than a comparative effectiveness approach.”
I haven’t read the bill, so maybe I’m misunderstanding him here, but it sounds to me like Ryan’s alternative to comparative effectiveness research conducted by some sort of independent agency is to explicitly have the decision made by haggling between impartial interest groups. Feel better now?
It’s not hard to persuade the persuaded. Nevertheless, I found Caitlan Flannigan’s takedown of the disturbing nexus of local food and progressive school reform to be spot on. Like the broader green school movement I wrote about recently, these moves to indoctrinate students into the social fad of the moment seem destined to contaminate not just the obvious subjects, like health and science classes, but the entire curriculum. At Martin Luthor King Jr. Middle School, for instance, Flannigan found:
In English class students composed recipes, in math they measured the garden beds, and in history they ground corn as a way of studying pre-Columbian civilizations. Students’ grades quickly improved at King, which makes sense given that a recipe is much easier to write than a coherent paragraph on The Crucible.
Flannigan aptly describes the movement as driven by an:
agglomeration of foodies and educational reformers who are propelled by a vacuous if well-meaning ideology that is responsible for robbing an increasing number of American schoolchildren of hours they might other wise have spent reading important books or learning higher math (attaining the cultural achievements, in other words, that have lifted uncounted generations of human beings out of the desperate daily scrabble to wrest sustenance from dirt).
The common belief that 90% of HIV transmission in Africa is driven by heterosexual exposure is no longer tenable. Evidence supporting a much larger role for parenteral HIV transmission in medical settings in Africa has recently been painstakingly detailed 9,21. The HSRC report, if confirmed, adds to this evidence. The lessons for all doctors, including obstetricians and gynaecologists are clear: They must educate their patients in the dangers of non-sterile injections and ensure that their own practice is beyond reproach. Patients could be shown the package of a new needle (or bring their own) and single-dose vials used for injections. Similar improvements in the sterility of injections in the informal sector also need to be made. We must protect patients from their own medical care system in all countries with similar epidemiological characteristics
If true, the really shocking part is not that medical care is in large part responsible for this medical nightmare, but that we missed it until now. With all of the attention put on African HIV/AIDS is it really possible that we didn’t see that medical care itself was the problem? Sadly, I believe that it is.
Why did Lehman fail– along with Fannie Mae, Freddie Mac, AIG, Wamu, and very nearly Citigroup and Bank of America? Here is where I part company on the usual worries about bubbles, imbalances, silly mortgages, and so on.
The underlying decline in wealth from the housing bust was not that large…. Most estimates put subprime losses around $400 billion. The stock market absorbs losses like that in days. But it turned out that housing risks are spread very differently from stock market risks.
The difference is that mortgages were held in very fragile financial structures.
Perhaps, unusual for an academic economist, I watched the crisis unfold in real time. From the first rumblings in August 2007 until well after the collapse of Lehman I spent the better part of most days combing through the financial news.
Part of my role is to serve as an advisor to the North Carolina government and the key question on my mind from the start was whether or not this was going to affect employment in the Charlotte region. Even before it was clear that this would become an international, or even national crisis, it was clear that it would affect bank profits.
Certainly, at the time it seemed that fragility was the issue. However, I would go further and say it wasn’t just that the government didn’t bail Lehman out, it was that Lehman experienced what looked like a run. Moreover, it seemed at the time that the run was spreading. The money markets were reportedly in turmoil.
There was a rumor that Wachovia was offering 30% APR to roll over 7 day paper and could not find a buyer. From my perspective it seemed as if a liquidity crisis might be enveloping all of the major financial institutions in the United States. So much so, that warned my colleagues and contacts that we were “walking a fine line.” And, it was not inconceivable that the entire global transactions infrastructure was going to come undone.
Now, its true that if there was a credible government guarantee that none of this would be a problem. However, from the Fed statements surrounding the Bear Stearns issue it was clear that the government was hesitant to engage in direct intervention.
Instead, I at least, felt a general sense that actually bankruptcy and short term creditor losses just “weren’t going to be allowed to happen.” I am not sure exactly what I would have been expecting. Whether that meant a last minute buyer pressured by the Fed, or action by the Treasury or even something as fanciful as a private consortium of banks swooping in, in an effort to stave off systemic collapse, I can’t say.
The fact that nothing happened, however, was a shock.