You Can Pop a Lot of Trouble with the Pop-o-Matic Bubble

In case you find yourself wondering why I find Munger's euvoluntary exchange project so compelling, I invite you to read this. It is an indictment of the growing higher education bubble, written almost entirely using the language of exploitation. Even small asides like "the notorious for-profit Everest College" [emphasis added] are underpinned by the very common justice-as-fairness heuristic. Wealthy residual claimants of university endowments reap unjust material gains while students are mired in decades-long debt obligations. It's not fair—it's not just.

If I were a conservative (I'm not), I'd make an argument appeal a little like this:

The student loan crisis is weakening the moral and economic character of America. Recent graduates with tens of thousands of dollars due in outstanding loans (whose interest rates are set by Washington bureaucrats) effectively put the nation's young people in indentured servitude to government organizations. The non-market price of education is so high that it threatens civil unrest, mass disobedience, and tax revolt. America's enemies are keeping a close eye on the sentiments of the young people, hoping for the Yankee version of Red October or the Storming of the Bastille. The last thing America needs with the many foreign threats it faces is domestic insurrection. The time to reform the university system based on the traditional model of separating state and education has come. &c &c.

If I were a libertarian (I'm not), I'd make an argument appeal a little like this:

Students and universities are not free to exchange with each other. Intermediaries like Sally Mae distort legitimate market signals. New students who typically learn very little in the way of practical economics in state-run primary schools are marginally more likely to enroll in marginally imprudent programs with little useful feedback to correct errors after graduation. Private lenders have a strong incentive to issue actuarially fair interest rates based on all available information (default rates associated with majors, & al), thereby better reflecting a truer measure of risk and providing honest prices to the student at matriculation. The time has come to reform the university system based on the free market principles of personal sovereignty and the freedom of contract &c &c.

"But Sam," you cry, "you arrive at the same conclusions no matter what your rhetoric! Your priors are showing."

Well, yes. But that's not the point. The point isn't that I think that collective decision-making has far-reaching unintended consequences for the student loan fiasco. The point is that whenever there's an instance of an exchange that isn't perfectly euvoluntary, the language we use, the rhetoric we deploy matters to our audience. You can take either of those two passages above, mess with them a little, and come to completely different conclusions. You want a stronger America? Well, let's only subsidize STEM fields. You want less exploitation? Remove the tax-exempt status from corporate or foundational grants. You want less coercion? Revoke the public charters of state schools (it's not like students are attending classes anyway).

The problems in higher ed are caused by a confusing mix of issues, ranging from Baumol's cost disease to the unfortunate lock-in of student athletics (incl. Title IX) to insufficient price discrimination of tuition to the outsized influence of teacher unions, and on and on and on. If you're interested in isolating one cause, you're faced with the choice of feeding red meat to your ideological friends or attempting to win converts from your enemies. Write accordingly.

h/t The Peej

Carpet Conflation: Slavery, Debt Bonds, and Child Labor

Harvard's FXB Center for Health and Human Rights releases a report on carpet manufacturing in India.

ATSRTWT.

TL;DR: making carpets is a rough affair. The work itself is dusty and dangerous. Workers spend hellaciously long shifts hunched over looms at dimly-lit stations, surrounded by sharp tools, litter, and rusty machinery. Pay is low, and even when workers agree ex ante to a particular wage, they often find ex post that actual wages are on the closed interval between zero and the agreed-upon wage, more than just a token epsilon from the right bound. Overtime pay is not a thing that exists there.

Please direct your attention to pages 22-23 of the report. There, we have a discussion of relevant legislation. The author takes the reader on a tour of the statutes defining forced labor, bonded labor, child labor, and human trafficking. Let me quote the latter verbatim so you can see for yourself how many of the EE conditions are engaged (statute in italics, EE-relevant passage also in bold):

Human trafficking is defined in numerous international conventions and domestic laws. The first international definition for human trafficking was provided by the 2000 United Nations “Palermo Protocol.” India ratified the Protocol in May 2011. Article 3 of the Protocol defines human trafficking as:

“Trafficking in persons” shall mean the recruitment, transportation, transfer, harbouring or receipt of persons, by means of the threat or use of force or other forms of coercion, of abduction, of fraud, of deception, of the abuse of power or of a position of vulnerability or of the giving or receiving of payments or benefits to achieve the consent of a person having control over another person, for the purpose of exploitation. Exploitation shall include, at a minimum, the exploitation of the prostitution of others or other forms of sexual exploitation, forced labour or services, slavery or practices similar to slavery, servitude or the removal of organs.

All there, black and white, clear as crystal. The investigation found just shy of 300 cases of human trafficking that fit this particular bill. And to their credit, they did heap much of the blame for these abhorrent working conditions on the institutions that support them, particularly the caste system, but mostly acknowledging that what's going on is coercion by circumstance (p. 29, Table 3). For the bonded-labor cases, parents valued cash advances more than they valued their kids not going off to make carpets. Rightly or wrongly, that shocks the sensibilities of well-to-do readers, particularly when 80% of the bond debenture was for "consumption." Why, just imagine sending your own child off to work with dangerous industrial equipment so you could pick up a PS4.

Smithian sympathy is hard. Framing matters. Context matters.

Everything in this report is good shoe-leather investigation up until the Recommendations section (p. 53). There, the author settles back into predictable feel-good Western, affluent-style nostrums that do precisely zero to address the underlying problems that generate heritable poverty. #9 is particularly risible: "Support and empower vulnerable communities." That's a fine idea, one quite consistent with good institutional analysis, but it's expressly not something that can be fixed with a wave of a magic wand. I daresay that my neoliberal dudebros AG and NS would agree that the Lindy Effect is not that bad a way to describe the durability of India's caste system: a British occupation ended suttee, but did little to eradicate untold generations of dominion-by-birthright. Reformers with no skin in the game are going to do better? Pollyanna please.

Look, the way to root out corrupt business practices like this must provide better alternatives for all parties. Bonded labor is a problem, so why not push for immigration reform so that poor villages can send folks to earn wages in highly productive enterprises and send home remittance payments? Prosecutions and investigations (#8) do quite literally nothing for the workers other than force them to accept a definitionally poor BATNA.

A soft heart is an asset. Please let's not couple it with a soft head.

Adjustable-Rate Mortgages

I am a home owner. Or if I've been playing too many video games, I am a home pwner (your domination is my vacation). Because of this, I tend to get reams of junk mail offering me fantastic refinancing deals. Hooray!

Now, since you've likely deduced that I've a bit of a training in economics, it naturally follows that I have no idea what the yield curve looks like on any particular day. I am however unusually blessed with an eagle-eyed spouse who takes every opportunity to keep from forking over cash moneys to lenders. She loathes interest, whereas I'm stupid enough to think its social benefit is all unicorn glitter and ballerinas pirouetting in a, I don't know, a glade or something. I flatter myself to think I'm on the side of a larger truth, whereas she actually keeps our household ledger in the black. It should be immediately obvious to anyone that she far and away provides a much larger marginal benefit to our household, so it should come as no surprise that she tracked down a few of these offers and looked a little closer.

Surprise, surprise, the ones that sound too good to be true are precisely that. They're either 15 year mortgages (we're not even remotely able to handle that) or they're adjustable rate.

For those of you who've never had to wrangle with the niceties of home financing, an ARM works a little like this: you start out for a couple of years with a relatively low fixed (say, 3%) interest rate on your loan, and when this sweetheart period is up, you start paying interest a bit over the floating market rate. Here, look at this:

That's what a yield curve looks like when it's at home. Source. How you'd calculate your floating rate is that you'd consult your crystal ball to see what this guy will look like each payment cycle down the life of your loan, find the time left on your mortgage on the abscissa, follow it up to the curve then head West young man to the rate on the ordinate. Since you're not the US Treasury, you pay some basis points above that (I'm not sufficiently familiar with the system to say exactly how much). If you're lucky enough, the yield curve will remain nice and low so that you don't get rear-ended by bigger and bigger interest components of your mortgage payment.

Which is what happened to folks in 2008.

Five years ago.

I'll not try to parse the substance of the response to the financial crisis. What I will do is ask why the Ban Barnstormers haven't so much as wiggled their wings at what seems to be an exploitative lending practice. Compared to, say, payday lending, the ARM seems a hell of a lot more deceptive.

Or does it? There's really no information asymmetry to speak of, right? Borrowers in effect become speculators, taking rather large uncovered positions over future market movements (think of the tremendous downside risk implicit here), but it's not like they're being tricked by lenders. In contrast, under a fixed rate mortgage, it is the lender (well, actually the taxpayer so long as we have Fannie and Freddy) who accepts the long-tail downside risk. But who should (normative claim alert!!!) accept the downside risk? It seems to me as if most folks hew to the opinion that it ought to be the big, faceless, indifferent corporations. People get all bent askew over Glass-Steagall (really!), but not so much as a lifted eyebrow when there's this huge industry-wide practice that heaps systemic risks on the shoulders of ordinary citizens.

Don't get me wrong, I think that as long as folks actually understand what it is they're agreeing to (and they have a pretty strong incentive to learn about what it is they're agreeing to for the next thirty years!), any ex post regret is their own ever-loving fault. But I also think that this moral and economic calculus applies in equal measure to other lending markets that people have at various times lit the pitchforks and grabbed the torches over.

So how about it? Are the regrets felt by ARM holders of the right type to make this type of loan non-euvoluntary? What does that imply for the regulatory scheme? Do we have different caveat emptor goalposts here? What to do about it?

Voluntary Sales and the City

(with apologies to Carrie and the girls...)

The city of Richmond, CA is making residents a voluntary offer they can't refuse.

Excerpt:

[A northern California city, Richmond] recently sent notice to the holders of more than 620 so-called underwater home mortgages in the city, asking them to sell the loans to the city. 

It would buy the mortgages for 80 percent of the fair value of the homes, write them down and help the homeowners refinance their loans. "Our sense is that those so-called voluntarily loan sales would not be very voluntary," said Freddie Mac's general counsel William McDavid in a conference call with reporters to discuss the company's second-quarter financial results. "They're loan sales under pressure - in fact, under a threat of seizure by eminent domain. We would consider taking legal action." 

Freddie Mac and its larger sister company, Fannie Mae, are some of the biggest buyers of private home-loan bonds. The two government-backed companies' finances would be affected if the eminent domain plan went forward and wiped out the worth of those bond investments. "Fannie Mae and Freddie Mac are investors in these securities. This is an issue that we are discussing," said Denise Dunckel, a spokeswoman for the companies' regulator, the Federal Housing Finance Agency. Both companies, operating under conservatorship since they were taken over by the government in 2008 during the financial crisis, would need the Federal Housing Finance Agency's permission to take legal action against the city of Richmond and possibly block the eminent domain seizures. 

The FHFA itself has previously raised concerns with an approach like Richmond's. Using eminent domain in this fashion to force banks and other investors to sell mortgages is novel. Historically cities have used the power to force the sale of properties if they obstruct the construction of a project deemed beneficial to the wider community, such as a road or bridge.

Thoughts?  It would appear that there are two big government entities fighting over who gets the boodle.  I'm always surprised when people thing governments are "not for profit."  They are clearly in fact all about profits.  They just don't have stockholders.

ATSRTWT