Debt Issue

A few more thoughts from the New York Times Debt Issue, though I’m sure you are already sick of it.

1) Megan McArdle wrote a really good followup post to the article about the economics reporter falling into debt, and connects it to the kind of status disequilibrium that one can get in high human-capital cities, and the comments section erupts into pandemonium. Whores! Liars! Thieves! (So did a lot of other comment sections, including mine I think.) Megan’s point is important, but what I find interesting is that in the story, as far as I read it from what is presented, the guy simply has about $100,000 to $150,000 too much in mortgage. If he could have gotten rid of that he would have given him something like an extra ~$1,100/month, more than enough to rent vacation homes or buy nice clothes, as well as pay down his other debt.

So why didn’t he sell when he was up a bit? I’ll probably hit up the book to try and see if he explains it. From my own personal interests, I wonder how much service workers, and urban workers who end up on the lower end of the new inequality more generally, are getting priced out of the new urban cores. This guy probably doesn’t qualify for this narrative, but I do think about this often. Growing up in Chicago, police officers had to live in the city, and county workers had to live in Cook County, so there would be these clumps of neighborhoods of just firefighters, cops, and county clerks that would only sell to each other. I’m not sure if this story is true, but I’ve heard that in San Francisco there aren’t enough EMTs and nurses to staff city hospitals that can afford to live in the city, so they all end up living in the East Bay. That’s fine, unless there is a massive earthquake, in which case the bridge and subway to the city would be unusable, and the hospitals in San Francisco couldn’t be staffed.

2) Wonky. I won’t expand too much on it, but I wonder how much mortgage borrowers use their banks to get a sense of how much the borrower can afford. The lender in that mortgage story lets Andrew write a blank check for himself, and then goes to town trying to get it. A bank that held that loan would have reined him in, or simply not given it to him. This is good – the bank has information too, and, game theory wise, we’d expect the bank to optimize their offer based on their information. To put it a different way, I don’t have to guess how much a dishwasher should cost, since the price reflects a lot of information on the back production end. I just have to decide at the margins. Instead of a banker saying “you qualify for $X, now we can do .8 * X to 1.3 * X depending on your lifestyle”, he says “How much do you want?” That’s fine if consumers can perfectly figure out their income and risks, but that is a really silly assumption to base our economy on.

3) Myron Scholes sounds terrible. Between him and Eugene Fama, the grandfathers of finance are looking pretty shabby when this tide is going out.

4) There’s a lot of trouble brewing in initial credit card writedowns. This recession may wipe out a lot of banks that have extensive credit card debt. I like how the magazine doesn’t piece together two things. Their debt collection article sounds all cheer-y and psych 101 about itself, with “math whizzes” and psychologists all data-mining out perfect credit risk targeting, and well-intentioned social workers managing the debt collection. And since so much science and technology and care has gone into it, the insane interest rate you are being charged must make sense, right?

I’m still getting my head around the data, but I think the part where Andrews pays off his credit card straight from his housing appreciation tells us all we need to know about what the credit card companies were gambling on – less that their whizzes had smoothed out all the risk, and more that strapped consumers would borrow against their house to pay off Visa.

This entry was posted in Uncategorized. Bookmark the permalink.

7 Responses to Debt Issue

  1. Pingback: Will Dearman Lifestream » Daily Digest for May 18th, 2009

  2. ydue says:

    That interview with Scholes is… weird. What sort of an answer is “What you’re saying is negative. Life is positive too. Every side of a coin has another side”? What is he saying? Is it “yes, I agree that the idea that banks could manage risk is a total illusion, but there are positives to look at too”? If not, then what *is* he saying? If yes, I have a list of questions for him:

    1) ?????????????????

  3. ginandtacos says:

    Megan McArdle is a horse’s ass. Did you catch her rant about American consumerism, greed, and materialism causing the debt crisis…three hours before she posted her list of the top ten consumer electronics gifts for the Christmas season?

    It was pretty awesome.

  4. Mike says:

    Yes! I did catch that. That was pretty fantastic. I think the rant was triggered by a Christmas story too if memory serves.

  5. Billare says:

    So it turns out with new evidence that many of the common-sensed and responsible bloggers who were saying that the wife was a spendthrift and the guy was an amorous loser were right all along, and that some of the useful idiots on the Left were wrong in the sense that the couple has now been exposed via some interesting anonymous comments and also through a cursory examination of the public record to have a very poor history of financial decision-making. Indeed, is at all surprising that the wife disgorged over $200,000 in back taxes in her first bankruptcy? Who could have predicted *that*?

  6. Mike says:

    Billare,

    Wait, am I a ‘useful idiot’ in that example? Because I’ve read all the new information, and I’m still of the opinion he had $100,000 to $150,000 too much in mortgage based on his fundamentals.

    If anything, it strengthens my previous point that prepayment penalties should be banned and home mortgages more regulated – this guy was a complete ‘loser’, and yet they floated him half a million dollars to sit in a house that they could soak the equity appreciation out of, precisely because he lit up on the “likely to need to refinance a lot” targets.

  7. Bart says:

    I think there’s still more to the story of Andrews==The World Well Lost for Love. The son was abandoned (hence the need for dental work, and why didn’t they just go to either the USC or UCLA dental school clinics), Social Services was called, etc.

    I wonder if Andrews thought that the book and its advance would be his means out of trouble. I’m guessing he did, and that it’s not going to work, esp. if his wife is an overspender.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s