Rational irresponsibility

March 9, 2009

Matthew Yglesias is catching flak for suggesting that “irresponsible borrowers” should not be made to suffer for defaulting on their mortgages. Yglesias writes:

I just don’t see how more than a tiny fraction of [the blame for mortgage defaults] could possibl[y] adhere to our electrician or teacher or secretary who’s decided, basically, that the financial services professionals and government regulators know what they’re doing. Now, could she have known better? Sure. She could have been reading Dean Baker and Paul Krugman and others. The idea that this lending was all being undertaken on a false premise that a nationwide housing bust was impossible wasn’t a highly guarded secret. I was, for example, familiar with the chart above and with the analysis suggesting that a bust was, in fact, likely. And I believed that analysis. But at the same time, I write about U.S. public policy debates for a living. If there’s a dissident line of thinking that, despite its general unpopularity, is popular among left-of-center economists—well, that’s the kind of thing I know a lot about. But our nurse? Why would she know?

The conservative response has been to chide Yglesias for “discounting the common sense of borrowers” and putting it above borrowers’ ability to “understand their own situation”. By this line of reasoning, some of the default mortgages were taken out by people who knew they could not pay them down. The irresponsibility of such behavior is beyond question, and thus should not be rewarded in any homeowners’ bailout.

Or so it seems. Beneath its surface of common-sense, this argument amounts to stating that when it comes to homeownership, no (sizeable) risk is acceptable. One should take only a mortgage one could afford, or, better yet, afford twice over. Never mind that homeownership can mean attaining economic, social, and cultural capital – you know, capital that gives future generations a chance to climb up the SES ladder.

In business, finance, investing, and allied pursuits, risk-taking is typically rewarded and hailed as the engine of progress, even when it involves seemingly irresponsible decisions. Recall that Warren Buffett, the living embodiment of calculated and successful risk-taking, advised Americans this past October to invest in tanking stocks. His advice is worth recounting at length:

You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.

Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”

Buffett wasn’t talking about investing in a home, of course, but signing up for a presently-unaffordable mortgage does not seem so distant from buying up stocks in the midst of an economic downturn. In fact, less than two years ago, Peter Coy at BusinessWeek reported that the best mortgages for homeowners were the most “toxic” ones – assuming homeowners could act rationally. In at least one form, shouldering “irresponsible” risk in one’s mortgage was considered by the financial establishment a reasonable investment. Viewed through the broader prism of inequality, taking on risks to become a homeowner can be construed as perfectly rational given the immense advantages which have historically accrued to homeowners and their descendants.

There are two reasons not to punish the “irresponsible” contingent of beleaguered homeowners struggling to pay their mortgages. One is the mix of empathy and consumers’-rights principles Yglesias invokes. The other reason, obscured by the first, is that the pursuit of homeownership, however risky, might be as close as real-world economic actors get to rationality in an environment where owning a home is the best and quickest path to the good life. “Rewarding irresponsibility,” in this case, becomes the much more sensible “rewarding rationality.”

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3 Responses to “Rational irresponsibility”

  1. Mike Says:

    In the past homes were considered good investments because they always went up in value. But that ‘investment’ took 40 years and it was usually your children that benefitted when they sold it after you passed on. Those that choose to take on higher risk in the short term to use a house more like a mutual fund need to accept what they got in to and not looking to Washington for help.

  2. grandmute Says:

    I’m not sure I follow what you mean by using a house “like a mutual fund.” Are you implying delinquent borrowers were looking to flip their homes for profit in the near future?

    I recommend skimming the linked papers on the relationship between homeownership and upward mobility, if you haven’t already done so. Homes can be considered good investments not just for their economic value, present or future, but also for the opportunities they open up for their owners and their owners’ children. I have not seen a convincing price put upon such opportunities, but I would think it should justify a very high level of mortgage risk, much higher than can be justified by simple financial gains accruing to the original borrower.


  3. […] almost sent an innocent man to his death — twice. Rational Irresponsibility. grandmute makes the argument that since  homeownership affords people capital needed for social mobility, borrowers who took […]


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