Arnold Kling  

Business Reality vs. Wonk Theory

Miscellaneous... Where are the Servants?...

Felix Salmon writes,

And while the state attorneys general -- at least in states like New York and California -- might have a more aggressive stance towards the big banks than Treasury does, the fact is that they, too, are simply not set up to implement real enforcement. Which is the main reason why the banks have de facto impunity in this country. Even when the government tells them to do something, they face no real negative consequences from failing to do it.

He is dismayed that the government failed to "enforce" its mortgage modification program.

I put "enforce" in quotes, because anyone with any experience in the mortgage industry could have told you that it would take years to get the machinery in place to make something like this work. I pointed this out when I testified at a Congressional hearing, when HAMP was only a few months old.

I tried to explain that Freddie Mac and Fannie Mae had spent years training banks to follow guides contained in two enormous notebooks. One for originating mortgages (the seller's guide) and one for servicing mortgages (the servicer's guide).

HAMP combines issues in mortgage origination (determining borrower eligibility, creating proper loan documents, and much more) with mortgage servicing (instructions on how to process an existing loan, including procedures for dealing with delinquent loan payments, and much more). It is as if you ripped out hundreds of pages from the seller's and servicer's guides, rewrote them, shuffled them, flung them in the air, and told banks to pick them up and follow them.

In business, you take the principal-agent problem seriously. If you want your agent to comply with your expectations, you allow for the fact that you will need to clarify your expectations and train the agent to carry them out.

If you are a policy wonk, you can skip those steps if you want to. Just assume that you can snap your fingers and everything will take place the way you intend it.

The HAMP program was a creature of policy wonks. Not people with business experience.

Comments and Sharing

CATEGORIES: Business Economics

COMMENTS (3 to date)
ColoComment writes:

"The HAMP program was a creature of policy wonks. Not people with business experience."

Is that not the problem with most of this administration's policies? The President has chosen to be served by those whose careers have been restricted to academics and/or government.

it's Sowell's "Intellectuals and Society" writ large.

medwards writes:
It is as if you ripped out hundreds of pages from the seller's and servicer's guides, rewrote them, shuffled them, flung them in the air, and told banks to pick them up and follow them.

Maybe you should have done just that when you testified.

Justin writes:

I'm not sure that "business reality" takes the principal-agent problem more seriously than "wonk theory" does. But it does seem to take a radically different view of what incentives matter.

Businesses take the principal-agent problem by devising incentive systems that align the agent's selfish incentives with the principal's selfish desires. If you want your customer service rep to solve problems quickly, you set call time quotas, track individual performance, give bonuses to those that outperform, and reprimand those that fail to meet your metrics. Business accepts that this creates occasionally perverse incentives where your agent intentionally pushes customers to hang up without actually solving the problem because the second call starts a new timer and compensates by creating multiple metrics (call time, number of repeat calls, cost of fixes, etc.)

Policy wonks, on the other hand, seem to believe that they can solve the principal-agent problem through logic. They seem to believe that if they can only educate the agent about why the principal's desires are a Good Thing (TM) and the principal's motives are pure, the agent will do what's right because the agent is a good person. If the agent doesn't behave as the principal desires even after the principal patiently explains why the objective is good, the agent must either not be smart enough to understand the principal's arguments or must desire the bad outcome.

I'm not convinced that the problem in this case was that the government didn't explain the desired outcome to the banks or that the regulations were terribly difficult for the banks to implement. The problem appears to be much more one of incentives. Individual banks have very little incentive to aggressively implement HAMP regulations because there is little realistic prospect that an individual bank will gain more from implementing HAMP aggressively than they would spend building systems and training people to be able to do so. Individual banks make the economically practical decision that they are better off spending as little as possible and implementing the least aggressive HAMP program possible even if they accept the policy wonk argument that if everyone were to aggressively implement the program the country as a whole would be better off.

Comments for this entry have been closed
Return to top