Wednesday, November 3, 2010

Time Horizons: Rambling Bankruptcy Edition

FLG was listening to NPR's Marketplace on the way home last night, and David Skeel, a law professor at UPenn, offered a "what if" bankruptcy law had been changed to allow restructuring of mortgages in bankruptcy.

He says at the opening:
The worst thing about the current foreclosure crisis is that we could have been out of it long ago if the big banks weren't so blinded by their own short-term financial interests. They ignored the long-term consequences for millions of home owners, the economy, and themselves.

And then he says at the conclusion:
Once upon a time, banks knew the difference between short-term and long-term interests better than anyone else. They borrowed money short-term, and used it to make long-term loans to home owners and businesses. But they seem to have forgotten how this works. And now they, and all of the rest of us, are paying the price.

Now, regular readers will know that the mere mention of the words short-term or long-term and FLG's ears perk up. His time horizons theory says that liberals discount the future (Paine's Eternal Now, King's Fierce urgency of now, and Keynes' in the long run we are all dead, and FLG's new favorite from him "those walk most truly in the paths of virtue and sane wisdom who take least thought for the morrow"), and here was a guy arguing that the long-term interests of the banks and the nation were aligned with what can largely be considered a liberal policy. A conundrum.

Well, first, let's point something out straight away. He's dead wrong on the banks' long-term interests. He's saying that 2-3 years ago, when this foreclosure problem began, that if the law had been tweaked to allow mortgage renegotiation in bankruptcy, then we'd be in a much better place economically. FLG is sympathetic to this view. However, Skeel goes wrong on the next step. He then basically says, Therefore, banks were too busy focusing on the short-term profits and balance sheets to realize that allowing mortgage renegotiation would be in their long-term interest. To this, FLG must say, what the fuck are you smoking?

Three years does not a long-term make. If FLG is sitting in a bank, and you told him 3 years ago, look, if your bank acquiesces to a bankruptcy law tweak that allows mortgage renegotiation, then we'll be out of this recession faster, then FLG'd would say, that's great. But what about the centuries after this tweak? We're fucking ourselves in the long run to ameliorate short-run economic conditions.

Let's be clear, FLG isn't arguing whether this bankruptcy law tweak would be in the nation's best interest. He doesn't really know enough about it, and he can see it both ways. But it's fucking clear as crystal that it wouldn't be in a bank's interest. Indeed, there's probably a reason it's in the law in the first place, and that's because banks asked for it. Probably under the argument that eliminating write downs in bankruptcy would both expand home ownership opportunities and lower mortgage borrowing costs. FLG could make the argument in his sleep, even if he doesn't really believe it.

So, FLG recognizes that Skeel is wrong about the time horizons thing. And wonder to himself is that because he is a liberal or a law professor? Because something didn't quite fit with the normal liberal argument and legal education, for all many people would like to believe is the last bastion of the Socratic Method and it teaches people to think, really perverts people's thinking by making it, unsurprisingly, too legalistic. But that explanation, he's just another lawyer dealing with economics, when lawyers shouldn't deal with economics for a variety of reasons, but primarily because they're usually bad at math. If FLG listed the commentators and pundits he thinks are the biggest idiots when it comes to economics a lot would have JDs.

Anyway, something still didn't fit. So, FLG did some googling. Turns out Skeel gave a speech at the Cato Institute. Doesn't make him a libertarian, but might say something. Well, as FLG kept digging, it turns out that Skeel seems to have a distrust of corporations. He wrote this piece in Legal Affairs in 2005 concerned about the power and greed of hedge funds. Amazon reveals he wrote a book called Icarus in the Boardroom: The Fundamental Flaws in Corporate America and Where They Came From. So, despite my feeling that Skeel wasn't quite your standard liberal, he's starting to sound like one. But then FLG sees, and they did mention this on NPR, that he just wrote a new book called The New Financial Deal: Understanding the Dodd-Frank Act and Its (Unintended) Consequences

"Unintended Consequences!," FLG thought to himself. Maybe the guy really isn't a standard liberal concerned about the short-term, but who doesn't realize it. From the review on Amazon though, FLG thinks the unintended consequences of the type aren't exactly what FLG had in mind:
Skeel's assessment is not entirely pessimistic, however. He argues that a few features of the Dodd-Frank Act are genuine improvements, such as its regulation of financial derivatives, and he outlines several simple bankruptcy reforms that would curb the worst excesses of the new partnership between the government and the largest financial institutions.

These aren't long-term unintended consequences caused by distorted incentives and regulatory issues, but rather the hideous nexus between big corporations and government. Kinda disappointing.

It's not that FLG is sanguine with the hideous nexus between big corporations and government. He finds the argument in Saving Capitalism from the Capitalists: Unleashing the Power of Financial Markets to Create Wealth and Spread Opportunity that incumbent firms undermine the capitalist system and the financial markets are the key battle ground very compelling. It's that a kind of be pro-market, not pro-business story that FLG always finds compelling and appealing. Furthermore, the concern about government and big business is a persistent concern. But it's not what FLG would call a long-term concern in the way that distorted incentive.

Anyway, after all that, FLG is pretty much back at square one. Skeel's arguments wreak of the short-term focus of a liberal, but there's something about them that isn't as easily dismissible. Perhaps he does have a libertarian bent, and it just so happens that he's very concerned about corporate power.

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