Behavioral Economics and Underwater Mortgages

What if peo­ple behaved like banks? Or, more pre­cise­ly, what if indi­vid­u­als hold­ing “under­wa­ter” mort­gages stopped fol­low­ing the social norms of ‘per­son­al respon­si­bil­i­ty’ and ‘promise-keep­ing’ and instead act­ed like cap­i­tal­ist play­ers in a free mar­ket? Most would dump their sink­ing mort­gages and walk away. That’s the find­ing of Brent White, a law pro­fes­sor at the Uni­ver­si­ty of Ari­zona, who has pub­lished a new paper called “Under­wa­ter and Not Walk­ing Away: Shame, Fear and the Social Man­age­ment of the Hous­ing Cri­sis.” (PDF) The bot­tom line is that home­own­ers and banks play by two dif­fer­ent sets of rules. Main Street accepts the “emo­tion­al con­straints … active­ly cul­ti­vat­ed by the gov­ern­ment, the finan­cial indus­try,” and they hold the bag. Wall Street acts in its own self inter­est and gets a fresh start. The only thing they have in com­mon these days are (you guessed it) guns.

Just for the record: I’m not advo­cat­ing a posi­tion here, and I don’t hold an under­wa­ter mort­gage…

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  • David Jackemeyer says:

    This para­graph is clear­ly a col­lage of polit­i­cal sound-bites — dis­taste­ful, please remove.

  • David Jackemeyer says:

    The author quick­ly los­es my respect with wacky com­bi­na­tions of state­ments.

    Dear author,
    1) How do banks behave?

    2) Cap­i­tal­ist play­ers in a free mar­ket, which cur­rent­ly does not exist, would not be free from social pref­er­enc­ing — Google it — how­ev­er, todays wannabe cap­i­tal­ists are giv­en per­mis­sion to skirt respon­si­bil­i­ty by appeal­ing to an insti­tu­tion with a monop­oly on force; vio­la!, the costs of per­son­al respon­si­bil­i­ty are spread to the tax­pay­ers (who are held at gun point to take care of the mess­es).

    It’s like a sick game of Hot Pota­to, and the home­own­ers, banks, etc. are just play­ing by the rules!

    Enough — must recall my pri­or­i­ties…

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