September 9, 2007
Arnold Kling
Tyler Cowen writes,
Wherever there are problems, people look for villains. The subprime mortgage crisis is a case in point.
...But financial markets rarely fit into simple moral narratives, and much as these stories may comfort many of us, they are not a good guide to understanding financial policy.
I think he is correct to question the narrative that says that the lenders are villains. He might go on to question the narrative that says that the borrowers are victims. I am sure there is a grain of truth in both narratives, but people are disposed to give victim-villain stories more credence than they deserve. I wrote about this in
The Moses Complex.
If you want to write popular fiction, you need to include a diabolical villain. Having an innocent victim helps, too.
The job of the economist is often to dissipate this sort of dramatic tension. Sometimes, there are positive-sum games, with neither villains nor victims. Often, adverse outcomes result from incentives embedded in complex systems, so that blaming a villain is nothing but an attribution error.
In attempting to do his job, Cowen is fighting against a sort of Gresham's Law. Bad (in the sense of innacurate) stories of villains and victims tend to drive out good (accurate) economic analysis.
RETURN TO: Econlog Main | Archives | Top of page
READ MORE:
Comments (7) |
TrackBacks (0)
CATEGORIES: Economic Philosophy (108)
"Often, adverse outcomes result from incentives embedded in complex systems."
Just because you follow your "incentives" doesn't mean you are not a villain. The whole idea of moral and ethical codes is that we want people to sometimes act against what would seem to be their incentives. If you steal my car, I will call you a villain, even if I might agree that you had an incentive to steal it.
Arnold -- the OC Register has made it clear that at least some of the subprime lenders in this hot bed of the housing boom-bust were misleading borrowers -- and some of the subprime lenders were set up by "snake oil" style salesmen out to make a quick buck in during the Fed generated boom, one subprime owner didn't have even an elementary school education. And you read that right. Others were in it for the fast buck, developing unsustainable new subprime instruments, and cashed out just before bankrupting their companies, keeping there multi-million dollar homes and dozen or so luxury cars. This too was reported in the OC Register.
I simply don't believe you are informed on this matter.
I thought Cowen's article made a very good point. Reporters and editors often have a weak background in quantitative subjects and a strong background in subjects with a narrative methodology like history and literature. As a result, their reportage and editorial decisions have a bias in favor of narrative and story telling, as opposed to statistical and perr-reviewed research and methodology. In a country of 300 milion people, there are a lot of stories one can tell, Moreover, the daily media is driven by what stories can be researched and told as quickly as possible. For example, it is easier to find and report on a homeowner who overpaid for a house and is facing foreclosure than it is to find a person moving to town who might benefit from lower prices.
The OC Register has been including the _whole_ "statistical sample" in its reportage,and has put up graphical analysis of that data by zip code. The have also taken a close up look house by house of whole blocks devastated by the Fed housing boom-bust and subprime mess. I'd wager that the average reader of the OC Register business section has a better understanding of all this than your average economic "scientist" misusing the logic of statistics and playing math games with formally inconsistent theoretical structures.
James wrote:
"For example, it is easier to find and report on a homeowner who overpaid for a house and is facing foreclosure than it is to find a person moving to town who might benefit from lower prices."
