I kid you not, the headline above is a faithful representation of the thrust of an article today in the New York Times, “The Scars of Losing a Home,” by Yale economist Robert Shiller.
With friends like this, liberals have no need of enemies.
Shiller’s argument is ludicrous: implement the legislation before Congress, which guarantes up to $300 billion in mortgages for stressed borrowers, to prevent psychological damage to them. Wouldn’t it be cheaper just to hand out Prozac? Or copy New York’s Red Cross 9/11 mental health program?
This piece illustrates much of what is wrong-headed about the “rescue the homeowner” concept. First, attempting to prop up assets at levels not supported by the underlying economics (in this case, incomes) does not work (see here for an illustration). The prices will in the end revert to a sustainable level, if not trade below them for a while in some (perhaps even many) markets. Japan is an extreme example of the consequences: low growth due to good capital being thrown after bad and delays in clearing out bad loans and recapitalizing the financial system so it could get back to its job of funding productive enterprise.
Second, keeping housing expensive hurts first-time buyers, such as the young and the lower income. It not only makes it more difficult for them to engineer a purchase, but in communities which participated in the housing boom, assures that their housing investment will be lousy, if not a loser. It’s unlikely to appreciate from an inflated level; the best outcome would be for it to hold its nominal value for a long time while its real value gets eroded by inflation. Shiller, of all people, ought to know that. He did a long-term study of US housing prices and concluded that they had grown at a 0.4% real rate since 1890.
Let’s parse some of the key paragraphs of Shiller’s article:
The trend is unmistakable, and suggests that, without government intervention, many millions of American families will be losing their homes before long.
What would this mean in human terms? Picture a line of moving trucks extending for hundreds of miles: they are taking the furniture of countless families to storage lockers. Picture schoolchildren saying goodbye to their classmates. They aren’t going on vacation: they are being abruptly moved to the other side of town.
It’s easy to take a stern view of this spectacle. The arguments go something like this: Foreclosure is not the end of the world. There are valuable lessons to be learned from such a life experience. After all, we live in a capitalist economy that thrives on the sanctity of contracts. The founders of our nation put the contract clause into the Constitution to make it clear that people need to live up to the documents they sign…..
Now, let’s take the other perspective — and examine some arguments against the stern view. They have to do with the psychological effects of strict enforcement of a mortgage contract, and economists and people in business may need to be reminded of them.
I happen to be an expert in this topic (and to my knowledge, Shiller does not have a degree in psychology). I moved frequently in my childhood and went to 10 different schools before I finished high school. But no, we weren’t chased by creditors; my father was often transferred and promoted.
Yes, moving if you are a kid sucks. But Shiller wouldn’t argue that government intervention is called for to prevent family relocations due to getting a new job, divorce, deciding to be closer to aging parents. Note that other forms of financial trauma that might lead to a residential downsizing also fail to merit government subsidies, such as a renter having to move into even smaller digs (or moving in with parents or children) due to a job loss, high medical bills, or overspending. No, thanks to the sanctity of homeownership, giving up a house you can’t afford is a tragedy deserving of Federal aid, while other forms of psychological or financial loss don’t cut it.
Shiller argues that we are making homeowners the fall guy for a problem created by many:
….we have to consider that we cannot squarely place the blame for the current mortgage mess on the homeowner. It seems to be shared among mortgage brokers, mortgage originators, appraisers, regulatory agencies, securities ratings agencies, the chairman of the Federal Reserve and the president of the United States (who did not issue any warnings, but instead has consistently extolled the virtues of homeownership).
I’m as happy as the next guy to blame a lot of what is wrong with the country on Bush, but do you really think Bush or even Greenspan talking up homeownership actually influenced a single buyer, or even a single broker?
Shiller goes on to tell us that those who don’t agree with him are hardhearted:
But instead of having sympathy for these homeowners, many people blame them for their predicaments. That isn’t surprising. It’s an example of a general tendency that was documented by social psychologists decades ago.
In his 1980 book, “The Belief in a Just World: A Fundamental Delusion,” Melvin Lerner, a social psychologist, argued that people want to believe in the inherent justice of the economic system in which they live, and want to believe that people who appear to be suffering are in fact responsible for their own situations. He provided empirical evidence, derived from experiments, that after an initial pang of sympathy, people tend to develop negative views toward others who are suffering. That negative tendency seems to be at work today.
That’s a crock. The papers are full of sad stories about beleagured homeowners. There is plenty of sympathy. I feel sorry for the homeless too. But if I gave every homeless person I saw in New York a fifty, I’d be on the way to being homeless myself.
The mortgage bill has a tab that could be as much as $300 billion. That’s a $1000 liability of per every man, woman, and child. That’s on top of the $1500 in contingent liabilities taken on by the Fed to bail out the banking industry, which is also in part to shore up the mortgage markets. When you are talking numbers this large, this isn’t merely a Puritanical exercise in enforcing contracts; it’s also about basic equity. Shiller asserts that not bailing out the chumps will lead them to take a cynical view of contracts. You could just as easily argue that the responsible will conclude that there is no point in being honorable, they might as well try to game the system (including lie about their income and enter into agreements they probably can’t fulfill) like everyone else.
Back to Shiller:
…it is important to consider the psychological trauma of foreclosure. No one is likely to starve or sleep on the streets as an immediate result of a foreclosure, and the authorities no longer dump a family’s furniture on the sidewalk when it happens. Nonetheless, there is deep trauma.
Homeownership is fundamental part of a sense of belonging to a country. The psychologist William James wrote in 1890 that “a man’s Self is the sum total of all that he CAN call his, not only his body and his psychic powers, but his clothes and his house, his wife and children, his ancestors and friends, his reputation and works, his lands and horses, and yacht and bank account.”
Homeownership is thus an extension of self; if one owns a part of a country, one tends to feel at one with that country. Policy makers around the world have long known that, and hence have supported the growth of homeownership.
I find it noteworthy that the most contemporary psychologist Shiller could find to buttress his position is from the nineteenth century. And if we accept James’ view of possessions that are central to identity, Shiller should be arguing for rescues for yacht and horse owners too.
Now admittedly, this is not a validated instrument, but a widely used stress scoring test puts loss of spouse as 100 and divorce at 73. Foreclosure is 30, below sex difficulties (39), pregnancy (40), or personal injury (53). Change in residence is 20.
Note that if we as a society were worried about psychological damage, being fired (47) is far worse than foreclosure (30), and if it leads to a change in financial status (38) and/or change to a different line of work (36) those are separate, additive stress factors. Yet policy-makers have no qualms about advocating more open trade even though it produces industry restructurings that produce unemployment that does more psychological damage than foreclosures. As a society, we’ll pursue efficiency that first cost blue collar jobs, and now that we’ve gotten inured to that, white collar ones as well (although Alan Blinder draws the line there).
But efficiency arguments don’t apply to housing since we are sentimental about it. And it’s that sentimentality that bears examination, since it engendered policies that helped produce this mess.