In his plain, direct way, Newt soared this morning. He gave a hungry and uncompromising speech aimed straight at the base’s heart – and we loved it. The message in paraphrase: “They must think we are stupid. But we are not. We know where they are trying to drag our country, and we will fight them tooth and nail.”
The line for Romney’s speech was out the door – and then another door after that. I didn’t get to see him in person and caught only the last half of his speech on television. Maybe the audience enjoyed him, but his words seemed aimed past the attendees toward a national audience. Barely more than a stump speech, it marched through a dozen policies, cheering and chiding, too polite and wonkish to be moving.
Newt reminded us of exciting past triumphs, Romney recapitulated the lusterless present. Who knows what the future will hold?
Lucretius De Rerum Natura I.44-49:
omnis enim per se divum natura necessest
immortali aevo summa cum pace fruatur
semota ab nostris rebus seiunctaque longe;
nam privata dolore omni, privata periclis,
ipsa suis pollens opibus, nihil indiga nostri,
nec bene promeritis capitur nec tangitur ira.
The nature of the gods must of itself
Enjoy its endless life in perfect peace,
Remote from human deeds in its own realm.
But, freed from misery and painful cares,
It thrives by its own force and not by ours,
Never seeking gains, nor ever enraged.
Eric Posner, a provocative new addition to the Volokh Conspiracy who has written on the War on Terror, foreign relations, and financial affairs, recently blogged this defense of mortgage rate readjustments (emphasis added):
The basic problem posed by the housing crisis is that millions of people find themselves with negative equity and rationally abandon their homes. Banks have trouble seizing, maintaining, and selling these houses, and bankers will tell you (anyway, they’ve told me) that the rule of thumb they use is that a foreclosed house will lose fifty percent of its value. I am unaware of any studies that prove that this figure is correct but the anecdotal evidence is powerful. In some communities, abandoned houses become havens for drug dealers and squatters who strip away wiring and whatever else might be valuable in the house. The derelict houses reduce the value of neighbors’ houses, who then can be plunged into negative equity themselves, causing them to abandon their houses as well, leading to further degradation of the neighborhood, in a vicious spiral.
From a theoretical perspective, there are really two problems. First, bankers and mortgage holders are unable to negotiate contracts that provide for an automatic mortgage modification in the event that the value of the house falls below the debt. An optimal, complete contract would provide for such a debt adjustment, but it seems likely that bankers fear that any such provision could be too easily gamed, and so they prefer to renegotiate ex post if necessary or simply swallow the costs by having a policy of automatic foreclosure. Second, bankers and mortgage holders have no incentive to take into account the possible negative effects of mortgage default on neighbors.
As I have argued in earlier posts, the solution to such a problem in principle is mortgage modification. A banker does better by voluntarily reducing principal and interest than by foreclosing; however, big banks have traditionally refrained from renegotiating, perhaps because the transaction costs are high (smaller banks have traditionally agreed to renegotiate, by contrast). In the current climate, big banks are rethinking their earlier policy, but in any event it is hard to renegotiate with someone who has abandoned his house and disappeared.
I don’t really have anything particularly insightful to say about the matter. Posner may be right about the efficiency of crisis-delimited government intervention in the mortgage market, though his fellow Conspirator Todd Zywicki disagrees. It’s the next part of Posner’s argument that really bothers me:
We have learned from this crisis that every mortgage imposes potentially serious negative externalities on third parties. When someone defaults and abandons his house, he causes harm to others. The law currently does not punish that person or try to deter him from what is essentially a kind of pollution (like abandoning a car in the street); any attempt to do that would be impractical. So in a second-best world in which wrongdoers cannot be punished for the harm they cause others, restrictions on the contracts that bring about this state of affairs may well be justified. That is what bankruptcy law has always done; mortgage modification is a further development in bankruptcy law that would be justified in crisis (and possibly even normal) conditions.
Economically minded people sometimes display a regrettable tendency to ignore the difference between indirect and direct effects and their moral implications. Is it merely “impractical” to punish those who abandon their houses? Are they really “wrongdoers” who would be punished in a perfect world? I don’t want to discount the possibility that Posner uses overly-strong language here merely to showcase the economics of the situation, but his language plainly assumes a moral and redressable wrong on the part of those who abandon their house.
The issue here seems to be the proper baseline. When my neighbor maintains his house and keeps his lawn in good order, my property value appreciates from the aesthetic gains. But in what sense do I have a right to that gain? It was not something I labored for, nor have I contracted with my neighbor for it. When my neighbor leaves he does not “steal” his manicured lawn from me – I never owned it in the first place. Nor is he responsible for the actions of the drug dealers who may light on the foreclosed property – they are individuals, fully responsible for their own actions. I have few legitimate claims on my neighbor’s property, the implications of demanding housing codes notwithstanding. Any benefits I accrue from his beautifying his own property are above baseline moral obligations.
The public property of the street imposes a higher baseline obligation. Since it is commonly “owned” for a specific purpose, all citizens have some obligation to respect the claims of their co-owners. If my neighbor leaves his car in the middle of the street, he impairs my use of the road. Posner’s attempt to place the argument for mortgage bailouts in an externality framework which could appeal even to libertarians does not work well. If we are intervene in mortgages, we will have to accept that we do so for pure efficiency reasons, not in redress of an “injustice” committed by homeowners.
I’ve been reading Amity Shlaes’s The Forgotten Man. She paints an intriguing picture of Calvin Coolidge, thirtieth president of the United States from 1923-1929. He presided over a government that composed a mere two percent of the nation’s GDP – and thought it was too large. He believed that the private sector should be responsible for itself and disliked intervening. “If you see ten troubles coming down the road,” he liked to say, “you can be sure that nine will run into the ditch before they reach you.” He loved government so little that, in 1927, he decided not to seek reelection, though he would certainly have won it. Says Shlaes, “It was another of Coolidge’s acts of refraining, his last and greatest.”
It is often said of Franklin Roosevelt that, even if his programs deepened the depression, at least their boldness restored citizens’ confidence that the government was “doing something” about the problem. It pains me to hear this point advanced in the President’s defense: I prefer to think it the crowning injury inflicted on the nation’s psyche by Roosevelt’s policies. The unconsidered celebration of Roosevelt’s overbearing programs has brought our nation’s politics to a sorry end.
In today’s recession, pundits loudly demand “bold action”. It is taken for granted that the government must take drastic measures in order to stabilize the economy. What sort of action? No one seems particularly concerned, provided only that it is drastic. Doing nothing, of course, would be a bold policy in the face of the current hysteria. Nor is there much boldness in succumbing to demands for action when history seems unable to stigmatize disastrous policies.
Calvin Coolidge’s restraint may have been crucial to the prosperity of the 1920s. But who today remembers Coolidge? Good conservative government leaves little record and fades in the public mind. Only the bold, progressive examples are appalling enough to demand emulation.
Happy Presidents Day.
Conservatives have been criticized for unfairly imputing socialist sympathies or policies to President Obama, but our new president has now demonstrated that he is more than ready to embrace at least symbolic socialist policies. President Obama recently signed into law executive pay-limits for financial companies receiving future TARP loans in reaction to “shameful” bonuses received on Wall Street. The government may soon set wages for those at the top – perhaps for those at the bottom tomorrow?
In case you were wondering what the new, hopeful, changed socialism would look like, well now you know. It is a political Frankenstein – just like the old socialism. The President, shackled to an unpopular and embarrassing stimulus plan, tries to divert attention with banal demagoguery against greedy executives. Claiming that $18.4 Billion in bonuses represents an “unacceptable” figure (How does he figure this? What amount of bonuses would be economically efficient?), the administration has decided that it will cap the salaries (Does this even relate to bonuses?) for executives of future companies accepting bridge loans at $500,000.
They have pulled from thin air a meaningless number. Government has no way of determining what efficient or “appropriate” wages for these critical positions are. Nor do Treasury officials seem to be making any claim to have done so. But the administration does know what is good for its own health: running heedlessly ahead of populist furor in order to secure a percentage point or two more in the next opinion poll. We should fear our government’s willingness to impose aimlessly punitive numbers on the private sector and, moreover, how quickly it has done so.
Fortunately, this socialism is still only symbolic. It is unclear if the price ceiling rules affect any companies at this point, or if they ever will. Perhaps we will be lucky, and the measure will defeat itself by simply driving companies out of the bailout queue. But the line between the public and private seems less of a barrier each day, and President Obama’s stimulus plan will soon give the economy a very real, trillion-dollar shove toward – and perhaps across – that line.