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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