Sunday, January 13, 2008

Tyler Cowen is Shocked, Shocked

I see that Tyler Cowen is back to touting his own form of “blame the victim” re the housing meltdown (link):

IT’S NOT JUST THE LENDERS There has been plenty of talk about “predatory lending,” but “predatory borrowing” may have been the bigger problem. As much as 70 percent of recent early payment defaults had fraudulent misrepresentations on their original loan applications, according to one recent study. The research was done by BasePoint Analytics, which helps banks and lenders identify fraudulent transactions; the study looked at more than three million loans from 1997 to 2006, with a majority from 2005 to 2006. Applications with misrepresentations were also five times as likely to go into default.

Oh, Tyler, Tyler. I tried to explain this to you before (link). Okay, I grant you could find any number of consumer advocates who do embrace the straw man that you seek to set afire. But that’s economics, that’s advocacy. Grownups know (and have known all along) that the loan market is like any other bazaar—lots of lying on both sides. And if the lenders try to move money with a steam shovel, can they be surprised that they find some borrowers who are happy to scoop it up with a spoon?

Technically speaking, the answer is: no, they cannot complain. To make a case for fraud, you have to prove not just “misrepresentation,” but “reliance.” Granted that a lot of the paper in the loan apps file would look bad in the Bulwer-Lytton bad fiction finals. But in spite—no precisely because—of that fact, the lenders cannot seriously claim that they were ever misled. If you hoik up some derelict off the street and tell him that you will fork over $1 million if only he will sign a piece of paper avowing that he knocks back $300 thou a year, why of course he’ll sign. There used to be a doctrine—maybe there still is—that a taker of negotiable warehouse receipt cannot claim to be “in good faith” if he takes from “a tramp or a professor.”

There also used to be as rule that “anyone who meets the definition of ‘good faith’…cannot be a ‘bank.’” But that takes us down a different path.

Footnote on “things we learned” in economics: I pluck my example out of Tyler’s menu of wonders that the economists have (allegedly) conferred upon us. If his other examples are as shaky as this one, I’d say he might want to go back and review his fieldnotes. But I have a particular problem with his final example—you live longer if you get out of a cold climate. As one who grew up in New Hampshire and watched the annual procession of snowbirds (and who eventually got out myself) I do not find this exactly news. But if it is news, it is economics? Tyler cites a study by two guys in an economics department. But does that make it economics? If anything, isn’t it demography, or population studies? Or is Tyler’s point that nothing is true until some economist believes it?

Update: Big Picture is a lot less kind than I am. DeLong has reservations. Paul Beard predicts: "Next up, how patients are to blame for malpractice. . ."

Mark Perry discovers that there are markets in everything.

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