Surprisingly, two wrongs don't make a right
Yesterday brought us another train-wreck of an economics column in the NY Times. Yep, it was Bob Shiller's turn again.
Did you know that the mortgage mess is just like people kneeling at an outdoor concert?
Maybe that's because it isn't.
Bob, there is no collective action problem in the Olsonian sense in the mortgage mess.
First off, a single bank and an single lender can take effective action on their own! A bank doesn't need every other bank to write down their mortgages in order to be able to write down its mortgages. A single kneeler can sit down, but won't be able to see. A single farmer can't make a price rise stick on her own; she needs all the other farmers to cut production to get prices raised. The kneeler and the farmer face a collective action problem in a way that a bank and a homeowner clearly do not. They need all (or most) of their compatriots to act the same way to get a result. An individual bank does not need this.
Second, bankers and homeowners have opposing goals. They are not all in it together in the same way, like the kneelers at the concert, or the farmers lusting for higher prices. I'd say the banks and homeowners are closer to playing a zero sum game than being stuck in a collective action problem. Every $ of mortgage write-down is a gain to the homeowner and a loss to the bank. Sure, it may be the case that a lack of a write-down might lead to a foreclosure as Shiller argues, but it won't always do so and apparently a lot of banks think that blanket write-downs are worse than the status quo with all its associated default risk.
Having mis-diagnosed the problem, Shiller proceeds to a stupendously (and I mean that sincerely) bizarre remedy: the government should use its powers of eminent domain to seize mortgages!!
I am not making this up. Please do read the whole piece.