me:
> >> My impression is that both the GMU and Chicago schools start with
> >> their conclusions and work backwards, ...
David Shemano:
> I don't think I disagree. When I introspect about my political beliefs, I
> think I start with certain core beliefs, which seem self-evident to me, and
> then look for theoretical arguments why my beliefs are correct. ... That is
> why I jumped on your statement -- you seemed to be saying that precisely
> because a theorist advocates a core belief policy with which you disagree,
> there is, ipso facto, no reason for you to treat the theory seriously. That
> I reject.<
No, that's not what I meant. For example just because Milton Friedman
believed in allying with General Pinochet to impose the kind of
"freedom" he advocated on Chile does not mean that MF was always
wrong. As I've said so many times it's become ultra-boring, even a
stopped clock is right twice a day.
I'm glad we agree on this point.
me:
> >> This is part of the general " financial deregulation" trend I referred
> >> to, which essentially means "give the financial entrepreneurs what
> >> they want." ...
> >>
> >> The mortgage lenders wanted to be able to lend with a minimum amount
> >> of risk. ... [Hence] the
> >> idea of bundling and securitizing mortgages and allowing the bankers
> >> to sell them. ...
David:
> It is the policy of the United States, ... to subsidize home ownership. ...
> It is self-evident to me that when you subsidize something, strange things
> eventually happen. We can spend lots of time analyzing why the housing
> bubble burst in 2007-08, but our collective-decision to subsidize home
> ownership was a critical part of the existence of the bubble in the first
> place.<
It is NOT self-evident that when "you subsidize something, strange
things eventually happen." (I doubt that _anything_ is self-evident.)
For example, a _laissez-faire_ market economy normally pollutes the
water and air. All else equal, subsidy for anti-pollution equipment
would counteract that, leading to more sane results. Or maybe this
world we live in is so f*cked up that sanity is "strange"?
Similarly, if there is something wrong with the preexisting financial
system (or the housing market) which involves some sort of systematic
bias against home-owning (except for the rich), then subsidies might
counteract that bias, so that more sane results could occur. The main
bias against home-owning seems to be the rule of "dollar votes" and
common behaviors such as redlining.
Getting back to bubbles, note that there were housing bubbles in the
1920s, when the US government did not subsidize home ownership at all.
In addition, the current housing bubble happened only in the 2000s,
not during the period of the 1950s and 1960s when the subsidies for
housing were the largest.
The first point suggests that the subsidy is not required to cause a
bubble. Instead, it was likely the prevalence of _laissez-faire_
finance. The second point suggests that the financial regulation that
was set up in the 1930s and after (aimed at avoiding a repetition of
the 1929 crash, bank failures, etc.) prevented a pro-ownership push
from causing a bubble. These and other data suggest that financial
deregulation (from the 1980s to the present) was crucial to causing
the late housing bubble.
There are big problems with a _laissez-faire_ finance regime, for
example those implied by Miskin's Money & Banking textbook. Though
most regulations don't solve the problems completely, they do tend to
moderate them. Even though the banks still have tremendous amount of
impact on the nature and implementation of bank regs, in a
non_laissez-faire_ regime, the regs are more likely to serve the
bankers' long-term and collective interests as opposed to their
short-term individual greed (as under a _laissez-faire_ regime).
(In practice unlike in theory, _laissez faire_ does not mean "getting
the government out of markets." Rather, it means "give the businesses
and rich people what they want.")
Starting in the late 1990s, the US has seen a big increase in the
various money supplies. It's true that the impact of money supplies
during the last 25 years or so on the aggregate demand for goods and
services has been weak (as is the Fed's control over the amounts of
money in the system), but eventually increasing the supplies of money
faster than potential growth is associated with some kind of
inflation.
(Contrary to the views of the now-defunct Monetarist school, financial
bubbles can _cause_ growth in the money supplies, since demand often
creates its own supply. This is especially true under financial
"deregulation." But the Alan Greenspan _du jour_ can pop bubbles via
interest-rate hikes or other methods, which reduces the demands for
and thus the supplies of money. So we might see the growth of money
supplies as kinda sorta the Fed's fault.)
The high dollar exchange rate during this period (1996-2007)
suppressed most inflation of the prices of newly-produced goods and
services. So that the increase in the money supply did not cause
inflation as usually measured -- breaking the Monetarist prediction.
Instead, we saw asset inflation, i.e., bubbles.
In the late 1990s, it was the stock market, Silicon Valley stocks,
etc. (I wonder what subsidy caused that bubble?) In the 2000s, it was
housing, which was allowed to go bubblicious by deregulated finance.
Of course, asset inflation also helped aggregate demand for goods and
services (through the wealth effect). So to some extent, we didn't see
just a financial bubble but a bubble in the real economy (reminiscent
of Japan in the 1980s). This is especially true in the current decade.
Interestingly, something like this may have happened in the 1920s. The
gold standard prevent any inflation as normally measured. But the
"credit inflation" (growth of the money supply, not prevented by the
Fed) may have helped fuel the housing bubbles back then -- and then
the Big Bull Bubble that set the stage for the Crash. I'll have to
look into this hypothesis.
me:
> >> It also, as you say, meant that the "originators had little interest
> >> in whether or not the loan was ultimately repaid." And of this meant
> >> that the originators _didn't care_ to discriminate. But that's different
> >> from what I was talking about, i.e., stuff like being legally
> >> prohibited from redlining (racist discrimination, etc.) [emphasis added]
> >> This reform also has nothing to do with banning credit rationing.
> >> Rather, it undermined the incentive to ration credit _in general_.
> >> What happened was not motivated by "those who were critical of the
> >> 'discriminating' nature of the mortgage banker" as much as by the
> >> mortgage bankers themselves. [punctuation corrected.]
David: > I am not really sure what you are arguing. You previously
appeared critical of the personal nature of decisions to make mortgage
loans.<
I was talking about mortgage lenders, I believe. They make business
decisions. If the corporate bureaucracy is working, these do not
reflect personal opinions unless they serve the profit motive.
> I am thinking of the typical scene in an old movie where the potential
> borrower goes to the local bank and is personally interviewed by the banker,
> and, based upon a subjective judgment of the potential borrower, the banker
> has to decide whether to take a chance and makes the loan. <
I'd say that was a subjective judgment of what's best for the goals of
the bank (i.e., profits), rather than of the person making subjective
decisions. But that's quibbling over terms.
> That process disappeared from the mortgage loan industry and we had loans
> based upon nothing more than stated income and a favorable appraisal in an
> inflated market. I don't see how anybody critical of the old process could
> be critical of the new process ...<
Oh, I get it. You see any kind of picking and choosing by loan
officers as necessary part of their job. Granted. But not all such
"discrimination" is a good thing. For example, there's redlining.
Getting rid of redlining does not get rid of _all_ "discrimination"
(picking and
choosing). To my mind, it was _securitization_ that did that.
In economics, redlining does not have to have racist animus (or
whatever) behind it, though personal racism can reinforce the role of
statistical discrimination. The "economics Nobel" prize-winner Kenneth
Arrow called it "statistical discrimination." (This discrimination
does not require subjective racism to be objectively racist, to be a
part of institutional racism.)
How does that work? Due to incomplete information about the
prospective borrowers, the lenders judge the validity of the loan
application based on average information concerning larger groups.
This latter information may or may not include personal racist biases;
it could be totally dispassionate.
Anyway, getting rid of redlining and other forms of statistical
discrimination (if it can be done) pushes the loan officers to follow
what should be a basic principle of libertarianism, i.e., treating
each individual as an individual rather than as merely a member of
some larger group. I agree with this principle, despite its
association here with libertarianism. After all, officially liberals
and socialists embrace it too.
There's a difference between (a) ridding the "old process" of
redlining and the like and (b) creating a system in which the banks
can avoid _any and all_ picking and choosing since they can sell off
their mortgages (by turning them into securities), in a way that
allows them to spread the risk all across the financial system.
Now that I think of it, there may actually be a connection between the
redlining ban and the more general decline in picking and choosing by
bankers. It's different from David's story. I don't have any evidence
for this, but it's possible there was was one of those nasty deals
that are too common: the bankers say "okay, I'll give up my
prerogative to red-line, but you have to loosen up some other
restrictions on my freedom" or (facing resistance from the bankers),
the congresscritters or the regulators say "the only way we can get
this anti-redlining law through -- and actually obeyed -- is by
throwing the bankers a bone."
I can also imagine some congresscreep saying "hey I can make myself
look better with my constituents, who dislike redlining and other
immoral behavior, at the same time I can get more campaign
contributions from the banking sector by offering them deregulation."
Of course, these stories would mesh well with the general trend of
"give the money guys what they want." This is another good research
topic...
> Regarding the alleged distinction between the old process and redlining, it
> is entirely polemical.<
"Entirely polemical"? are you saying that the old lending process was
totally racist, i.e., consisted of nothing but redlining (that goes,
remember, against official libertarian principles)?
>The evidence is irrefuable -- prior to anti-redlining laws, there was
absolutely no difference in the default rates between white and black
borrowers, so even assuming bankers discriminated based upon race ...,
the discrimination was evident the bankers were doing what they were
supposed to be doing -- making creditworthy loans.<
Because of the complexity of the real world, _any_ empirical argument
is refutable. Maybe that's why the "Austrian" school so often eschews
empirical evidence and wants to stick in the business of building
sandcastles in the air.
That _post hoc_ (anti-redlining laws came before subsequent events )
implies _propter hoc_ (the laws caused later events) is one of the
classic fallacies that logicians point to.
Back to specifics: "prior to anti-redlining laws, there was absolutely
no difference in the default rates between white and black borrowers."
Assuming that David has his facts straight, that's because Blacks were
subject to more stringent inspection and rules than were Whites.That
restricted the lending pool to those who were more credit-worthy. That
should have actually made Black borrowers have a lower default rate,
just as more-selective schools get better students than those that
have to accept everyone (all else equal). But it was counteracted by a
second effect: redlining undermines the creditworthiness of its
victims.
Why? The problem with redlining against Blacks is more than that it
may involve personal racism. By denying loans to a specific group of
people who live in a specific area of the city, that can (and often
does) create a _vicious circle_, as Arrow has pointed out.
If the people are denied funds, that doesn't just affect them as
individuals. I can't get a loan to fix up my house, so it looks slummy
which makes my near-by neighborhood look slummy. (We in the econ-biz
call this a negative externality.) It in turn reduces property values,
as every middle-class homeowner knows. By reducing their home equity,
that makes the residents of the neighborhood less credit-worthy. This
in turn justifies statistical discrimination, so that the story comes
full circle.
Note that this phenomenon does not just hit one person: redlining hits
a lot of people, so that it can be truly devastating to neighborhoods.
Throw in the other vicious circles that constantly threaten the poor,
and you've got a recipe for creating a ghetto. Since redlining and
other policies that are (in effect) racist have been around for
decades, they have been very important in US institutional racism.
So we see a crucial reason why _post hoc ergo propter hoc_ is
fallacious: redlining can cause people to be bad credit risks rather
than vice-versa. Similarly, if we ban redlining it can help
neighborhoods, make people better credit risks, and undermine
institutional racism (though I recommend a multi-front approach).
In this vicious circle, the "wise" loan officers can make decisions
without a tinge of personal racism on their part that end up creating
a racist vicious circle. They can even participate in marches
protesting racism at the same time.
By the way, I've been subject to redlining, even though my skin is
pinker than pink. When I first moved to L.A., the insurance company
thought that I lives in a redlined half zip-code. (I lived near a
Hispanic neighborhood.) The cost of insurance was truly outrageous!
In fact I actually had to beg a loan from a colleague in order to pay
the rent. Luckily, it turned out that the insurance company made a
mistake and reversed its decision. But that didn't keep them from
making exactly the same mistake again (after I moved out of town and
moved back in again).
>If we make the collective decision, through our government, to
require bankers to make loans to people who are going to default at
higher rates, that is fine, but let's be clear in understanding the
consequences.<
see above. Redlining has really bad consequences. _laissez-faire_
finance does, too.
David writes:
> I still think you are evading the PC critique -- if we are going to have a
> democracy, what rules should be instituted to minimize the problems inherent
> in democracy, problems which you are apparently willing to accept as real?
> Saying democracy, as a whole, is better than plutocracy, as a whole, does not
> mean you can avoid discussing details of that democracy.<
"evading"? I dunno. I've talked about those issues in other threads,
in other missives.
me:
> >> One way of summarizing this point is to say that John Locke, James
> >> Buchanan, and the like see (god given?) property rights as trumping
> >> citizen's rights. I would agree with Jean-Jacques Rousseau that it
> >> should go the other way, with citizenship rights trumping property
> >> rights (or allowing them, depending on the democratic will). Of
> >> course, I disagree with Rousseau on a lot of other things.
David:
> Personally, I do not make natural law arguments.<
Both Rousseau and his main inspiration (Hobbes) rejected natural law.
Instead of seeing property rights as "natural rights" (like Locke),
they saw all rights and laws as human creations. R and H were much
smarter -- or at least less muddle-headed -- than L.
>I view property rights as instrumental to more fundamental core
beliefs (freedom, happiness, prosperity).<
this brings up questions like "what is freedom?" My extremely
practical definition is that the more choices one has, the more
freedom. (it ignores the way our genetics & biographies within the
societal environment we're faced with determine our actual choices.)
I see a clear distinction between the "freedom" advocated by so-called
libertarians (i.e., the freedom to earn or spend my money any way I
want) and a more complete freedom. Among other things, the libertarian
conception of "freedom" ignores the way in which living with other
people and having a government can give us more choices, i.e., more
freedom.
what is prosperity? I hope it's more than increased money income
(corrected for inflation, natch). It would also involve such things as
a clean environment, stable and friendly communities, etc.
what is happiness? I don't know, but polling of people's subjective
happiness indicate that market income (and GDP per capita) raises
happiness while escaping poverty but that rise levels off and then
stops. In the US, we've suffered from diminishing returns to increased
income for decades. Happiness seems promoted by broadly-defined
freedom and broadly-defined prosperity, not by market definitions of
those concepts.
This morning on the radio ("Market Place"), I heard some nut talking
about -- and misinterpreting or even misrepresenting -- the empirical
happiness literature. (I think he was from the Cato institute.) He
said (truthfully) that richer people are on average happier than
poorer people. But then he (incorrectly and perhaps disingenuously)
said that that indicated that rising real GDP per capita would raise
over-all happiness.
It ain't so. A lot of the superior happiness of the richer folks comes
from their superior social status, at the top of the heap. In simple
terms, they can hire more servants to do their dirty work and/or to
give them all sorts of fawning attention. The rags-to-riches story of
someone climbing up society's hierarchy is not the same as the entire
economy rising to higher _per capita_ real GDP with the hierarchy
persisting. It's also not the story of rising real GDP with the rich
getting richer & richer & richer, as during the last 28 years or so.
enough for today. See you tomorrow.
--
Jim Devine / "Segui il tuo corso, e lascia dir le genti." (Go your own
way and let people talk.) -- Karl, paraphrasing Dante.
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