Monday, June 25, 2012

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?

Me neither.

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.


Tom said...

"Taxpayers are not involved"! Not even via DAFT, because... Well, this whole things works because bankers are too stupid to recognize the low (fair!) market value of their holdings. But after a little eminent domain intervention from a wise government other investors will see... will see... that the seized assets are even more valuable than the (fair) government compensation of the stupid bankers!

I have a question: Are the Roberts, Shiller & Hockett, just stupid, or has a stupendous arrogance frozen their minds?

dano said...

How are the original mortgage holders better off when the government pays fair market value to seize underwater mortgages? Since government is paying less than the value of the mortgage, won't the lender have to write down the loss?

Taxpayers are not involved, and no government deficit is incurred... is working with a private company So this is Kelo all over again with the mortgages being taken from one person and given to another.