Culture Norms and Walking Away

It’s Christmas Week! I’m going to go ahead and write some fun quasi-off-topic rough draft stuff this week since we’ve been wandering in financial reform for some time.

To start: Megan McArdle and Steve Waldman are having an interesting back and forth on the idea of cultural norms and strategic defaulting. (In order, Megan, Steve, Megan, Steve. I really enjoyed Steve last post there, but they are all worth a read.) It starts with McArdle referring to strategic defaulters, those who could continue to pay on an underwater mortgage but decide to mail in the keys and stop payments, as “The New Breed of Deadbeats.” Though they aren’t breaking any laws, and are probably acting in their own financial best interest, they are tearing up the implicit social norms that create the conditions for our excellent credit markets. Megan:

I am afraid that I am one of those people who have no patience for people who refuse to pay their debts… There is a sizable school of thought that says why shouldn’t they? They made a contract with the bank under known rules, and as long as they’re willing to pay the penalties, why shouldn’t they just walk away, the way a corporation would? Well, for one thing, companies don’t always behave like this, and those who get a reputation for stiffing their suppliers run into trouble. But for another, because society doesn’t really work on such clean logic. The reason we can have easy bankruptcy and a pretty robust credit market (usually) is that most people act like debts are obligations which should always be paid off if possible.

I do, on one level, find this kind of argument interesting. I’ve heard some arguments, tracing back to Karl Polanyi and other Continental thinkers, that say instead of taking ‘the market’ as granted we need to critically interrogate the social construction and performance of markets, examining the way they (re)produce cultural norms. The logic of the market, like the subject, does not precede a dense network of power relations but is instead produced through these relations, which forms the necessary conditions of its possibility. Heck I even made it through a good chunk of the feat of endurance that is The Social Structures of the Economy, where Bourdieu points out each and every sociological fact running underneath a Parisian couple trying to buy a house.

Again, I’m used to this argument coming from sociologists, anthropologists, certain types of radical political economists, etc. instead of a libertarian with a MBA from the University of Chicago, but it’s always a fun discussion. Let’s dig a little deeper into this argument. McArdle is using social norms to end the argument, but really invoking it starts a seperate argument that needs to draw on what has been changing in social norms over the past 30 years.

Nostalgianomics, Neoliberalism Without some argument about what is driving changes in social norms, the line of reasoning quickly devolves into Nostalgianomics – “Why can’t people just pay their mortgages off?” looks a lot like “Why do CEOs have to make so much money? The social norm used to be 30x a worker’s salary, but now its over 300x.” And here is where some neoliberalism theory can help. There’s been a move to fashion the individual as an entrepreneurial being in a system of “extending and disseminating market values to all institutions and social action … the production of all human and institutional action as rational entrepreneurial action.” I assume conflicts about this new mode of interactions is what is motivating Waldman in this discussion (as it does me).

To put it all another way, McArdle is saying that people need to make sure to act against their financial interests for the sake of society. Arch-Neoliberal and Hayekian Margaret Thatcher said “There is no such thing as society. There are individual men and women, and there are families.” I think Thatcher’s view is on the rise.

Shareholder’s Rights McArdle’s claim that “[Waldman] interprets Friedman’s argument that the responsibility of a firm was to maximize profits for its shareholders to mean that there are no standards of ethical conduct for corporations” I think misses what Waldman is getting at.

Prior to the early 1980s it was very common to think of a corporation as a particularly embedded institution, something with obligations and duties to its workers and to its communities in addition to its responsibilities to shareholders. This creates the conditions for people to think they have similar obligations to business institutions that go above and beyond the simply transactional. I think McArdle thinks you can remove one side of it while keeping the other in place – removing the social responsibility of the corporation while keeping the social responsibility of the individual in place. I’m not sure it is so easy.

(Before we go on, I think we can over-read social norms. I’d actual just put the change on the “Alternative Mortgage Transaction Parity Act of 1982″ which created the ability for subprime lending.)

Obligations are a Two Way Street But to put us on a more practical footing, what I see missing is McArdle not calling the mortgage lenders deadbeats for not modifying mortgages. I assume anyone who thinks a person should act in a way to fulfill social obligations should also think that the counterparty should meet him or her halfway. I can think of dozens of things banks could be doing: announcing that they won’t charge prepayment penalties, pushing out adverse rate resets, writing down principal, etc. Instead we have the government trying to bribe mortgage lenders with taxpayer money to consider doing these things, a policy that has been a failure. Where’s the mutual obligation?

2006 McArdle: “You can dance around it all you want, but someone who borrowed money to buy a house in 2006 was borrowing money under the tacit moral norms of the time.” But what was that moral norm? From here we can see that bankers believed a housing crash of the kind we say was less than 5% likely. I also believe, and make the argument in that link, that a subprime loan was a vehicle for banks to take bets on housing price appreciation alongside homeowners.

Nash equilibriums Not everything in life fits into a prisoner’s dilemma diagram, but it is often useful for clarifying ideas. I think what the anti-walking-away people are saying is that people need to cooperate with banks, so that the banks will co-operate back with them. This misses a key point of the prisoner’s dilemma: If you are convinced that the other party will cooperate with you no matter what (i.e. never walk away), that’s when you fuck them over the hardest (or more politely, that’s when you ‘don’t co-operate’). It’s only through the threat of non-cooperation that you can actually secure cooperation. If you are convinced that people will pay off their mortgage even though it was a high-hidden fee high-jump bet by a bank that housing would continue to appreciate then that’s exactly what you’ll offer. The argument should be that it’s only through some people actually just leaving that the banks would be motivated to take up their end of the social responsibility, if we can even conceive of such a thing anymore.

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9 Responses to Culture Norms and Walking Away

  1. dsquared says:

    Personally speaking I’m immune from McMegan’s social censure, as I have converted myself into a corporation, with a single shareholder (me). If I ever get into the situation of needing to walk away from an onerous mortgage, then while as an individual I might be stricken with morality, I will recall that as CEO of my corporation, I have a fiduciary duty to my shareholder to maximise his value, and so will hold my head up high as I jingle down to the mailbox.

  2. crack says:

    I’m immune from McMegan’s social censure because it’s coming from McMegan.

  3. zunguzungu says:

    Very nice piece. The friction between social conservativism and fiscal conservativism is one of those enduring decoder rings of contemporary right wing discourse; nonstop nostalgia for a time when society was unified coupled with full on ambition for a time when it won’t exist.

  4. Russ says:

    I think McArdle thinks you can remove one side of it while keeping the other in place – removing the social responsibility of the corporation while keeping the social responsibility of the individual in place. I’m not sure it is so easy.

    That’s putting it mildly.

    This is the Big Lie of all these so-called “libertarians”, who really just want a corporatist dictatorship.

    Any true libertarian would of course be the first to say you absolutely should walk away if it’s in your best interest. Isn’t that exactly what they preach in every other context?

    No, only if someone starts out calling for the complete breakup of the TBTFs, the banning of all casino banking, and vigorous prosecution of all the finance criminals, will I be willing to listen to a word from them about any individual’s alleged moral obligation to any big bank or to this system in general.

    (The same goes for the health insurance racket and alleged “free riding” by individuals. Get rid of the free riding parasite racket, and only then will I be willing to talk about individuals.)

    The system is criminal, and the government is criminal. Thatcher has indeed turned out to be right, and the people need to act based upon that, but not at all in the way she would’ve liked.

  5. chrismealy says:

    I’d add to the list the rising popularity of the economics major. People who major in economics generally don’t retain much knowledge about economics but they do internalize all the little parables of selfishness (see Robert H. Frank’s “The Opportunity Cost of Economics Education” and “Does Studying Economics Inhibit Cooperation?”). For example, the classic economist’s holiday chestnut, the “deadweight loss of Christmas.”

  6. Anne says:

    First, this is a different economy than the economy of 2006. Today, nearly 25 percent of all homeowners are in upside down mortgages. Concurrently, about 25 percent of the American workforce is under- or unemployed.

    And bankers played a huge hand in the crash that took us to today…

    The mortgage market of the 2000s was a very different mortgage market from the market of the 1990s. Today’s story of the mortgage crisis is one that in years past would have ended with the loan application.

    Banks are getting the collateral – the house – for loans they have on their books – loans they assumed by approving stupid and reckless loans.

    The idea that the homeowners are held to a different standard than the businesses who made billions off of them – and who got the lion’s share of the bailout – is wrong. Morality should never be only applied to one’s private life.

  7. Ted K says:

    I go over to the Atlantic a lot to read Andrew Sullivan. And I’m pretty much an economics/finance blog maniac. I don’t read McArdle at all. I think she is basically one of the people like that woman Prudence who gives gossip column advice. She fakes her way through blogging, and she’s a hack. Sorry if that hurts you at a Christmas party Mike but I have 0 respect for the woman.

  8. Glen says:

    It’s just a contract. Stay, walk away, hey, it’s just business.

    The banks should like that, because if they don’t, the next step involves lots n lots of pissed off people.

  9. Pingback: Mortgage Servicing Performance I: Underwater and That Social Trust Thing « Rortybomb

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