Examples in another context of the confusion between ignoring risk and excusing wrongdoing: there's a new book out, drawing attention once again to the government policies that contributed to the 2008 housing crisis. The book is drawing the predictable criticism that it's a mistake to attribute the housing crisis to government regulatory initiatives, when it's so obvious that many bankers were greedy and incompetent. That's a confusing criticism, considering that we're not likely to start inhabiting a world in which bankers are drawn exclusively from the ranks of the saintly and skilled. We have systems for restraining the more unpleasant results of bankers who go wild. They start with making it highly likely that the bankers will lose money if they keep it up, and go on to criminal penalties if, in addition to responding to a natural impulse to make money, they drift into outright fraud. But none of that explains very well what went so dramatically wrong with our housing market in 2008.
What does explain it quite handily is a look at the impact of a government-sponsored entity that sends out a strong signal, "We'll buy the craziest mortgages you can sign up. Lend money to people with bad credit. Not only will you get credit of various sorts from people (on both sides of the political aisle) who want to see homeownership expand in our society, but you won't even pay a financial price for writing loans you ought to know perfectly well are going to default in above-average numbers. We'll subsidize your losses." What exactly did we expect to happen, especially considering that banks make money on processing fees and therefore are highly motivated, all other factors being equal, to maximize loan volume? The force that normally puts a brake on this motivation is fear of failure. We took fear of failure almost completely away.
Does that mean no banks behaved badly? Obviously not. But, as voters, we're not in control of bankers' consciences. We are in control of the laws we pass. We don't have to pass laws that fuel the very behavior we claim to be outraged by. I don't know why we can't learn the lesson that you get more of whatever you subsidize.
As usual, I think the basic underlying mistake here is to imagine we can escape the price tag of a charitable impulse. Both Democrats and Republicans had a natural, even laudable, goal to improve the lives of Americans by extending the benefits of home ownership to greater numbers of people. We went wrong by fantasizing about a world in which such a thing would not have a cost, a real cost that real people would have to pay. We're like people who want to feed the homeless, and place an order for restaurants to deliver hot meals to 10,000 people, then settle back in our armchairs feeling compassionate. But when the bill comes in the mail, we throw up our hands and refuse to pay it. "I thought it wouldn't cost anything! I thought someone else was going to pay it! If you don't keep delivering the hot meals without waiting for my check, you're just mean! You must be in favor of hunger! Restaurant owners are greedy!"
I think it's a little different from the other case, in which moral guilt is not divided -- we all agree that the rapist is 100% morally responsible and therefore the only guilty party. In those cases, there's just an equivocation going on. We say, "You could do X to reduce your risk," and people hear, "You're partly to blame for not doing X." Not morally, no, you're not to blame at all: but that doesn't change the practical calculation.
ReplyDeleteIn the restaurant case, too, presumably the restaurant is not morally responsible for anything. It maybe was foolish to take the government at its word that it would be paid for meals to the homeless, but it wasn't harming the homeless by feeding them. It was just taking a risk by trusting the government.
In the case with the banks, the government only assumes 100% of the moral responsibility in cases in which it mandated the loans (e.g., by threatening to sue for discrimination if loans weren't made to poor families in black neighborhoods). In cases in which it merely offered to subsidize the costs, there's still moral blame on the bank side too if they made loans they knew couldn't be repaid and that would actively harm the poor families (in the way that, in the analogy, being fed didn't harm the homeless). The fact that they chose to do the harm in order to collect some money on processing fees, and pass on their losses to the taxpayer, is morally blameworthy.
There are still some cases where the government ends up with all the responsibility, but in cases where they do not, guilt can be divided without being lessened.
That was not the first housing bubble fueled by high-risk loans.
ReplyDeleteI lived in Houston in the 80s when the housing bubble burst. That bubble was based on many thousands of risky ARM loans. I recall reading some very patronizing articles in the newspaper about those bad ol' banks lending to what they said were unsophisticated people who were taking too much risk.
Thing is, I worked in a chemical plant with union workers. They talked endlessly about everything, including investments and their home loans. They could talk quite plainly about the risks of an ARM. They knew the potential. But, one of them put it this way: "Maybe rates will go up. If they go up high enough, I may lose my house. But between now and then I get to live in the house that I want, instead of something else."
We have pinheads in the government that believe it is a good thing to force banks to ignore the laws of economics.
Valerie
...it wasn't harming the homeless by feeding them.
ReplyDeleteIf all that was going on was feeding them, as implied in OP, they certainly were being harmed: they were being transformed into dependents. Stéphane Charbonnier addressed that sentiment in starker terms just before he was butchered.
And by ripping off the restaurant, society was being harmed in its ability to do something actually useful for the homeless, or even just to pay for that dependency.
Eric Hines
Nobody harmed renting citizens by giving them ownership in their next home, either. One way or the other, it was a roof over their heads for a considerable period. They decided for themselves what to pay for their new homes; no one forced them to overpay. When they borrowed money to make up the purchase, they either paid it back (no harm to their pockets) or someone else (taxpayers) paid it back for them (no harm to their pockets). The harm was to the taxpayers.
ReplyDeleteThe problem wasn't that society unfairly expected people to pay back money they borrowed. It was that society decided to pretend that people who obviously couldn't pay it back might manage to do so someday, instead of acknowledging right up front that taxpayers would have to do it for them. When it came time for taxpayers to pay up, the public was horrified: We never agreed to shell out this kind of money! Well, yes, we did, unless we were lying to ourselves. The money has to come from somewhere, and people with awful credit have awful credit for a reason. You don't have to blame them for it if you think that's unjust or unreasonable, but there's no use pretending they're suddenly going to undergo a financial transformation in large numbers. Credit scores aren't just arbitrary numbers: they're extremely predictive of people's ability to avoid default.
The equivalent attitude is pretending that the homeless people are somehow going to reimburse us for the free meals. The no-cost charity mindset gets us every time.
I don't know why we can't learn the lesson that you get more of whatever you subsidize.
ReplyDeleteThey have no idea what they are subsidizing. They are just slaves, they did as Chris Dodds told them to, and Dodds was the one that benefited from the crash, and perhaps Soros/Hussein too.
When has slaves ever benefited from their work being used to subsidize the elites?
There are still some cases where the government ends up with all the responsibility
ReplyDeleteThat's a way of saying no one is held responsible.
The Islamic Jihad holds people responsible for insults against their holy symbols.
So who has held Chris Dodds, Soros, or other government bureaucrats responsible? Nobody right.