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Judge Posner: I definitely agree with your article, but wonder about a different angle on the discussion: what about the role of education? Have we really addressed the profound consequences of loading students up with general education for four years in high school (English for four years, geography, US history, world history, biology, chemistry, physics, etc.) and not teaching about interest rates, inflation, trade, taxes, contracts, statutes, and entitlements? Don't they deserve that? Haven't the opportunity costs now risen to trillions of dollars?


1. The issue of fraud, or con criminals, will never be resolved by better disclosure. Cognitive dissonance will kick in before reason.

2. Again, the role of the regulator is not to prevent the risk of fraud, especially when they don't have a good sociological model of it.

Erving Goffman provided the correct analysis of what regulators are really up to many years ago, http://www.tau.ac.il/~algazi/mat/Goffman--Cooling.htm

Goffman is correct, but it is a truth which cannot be stated by the regulator.

3. Finally, it is unlikely that our current economic crisis is due to a myopic borrowers. There simply are not enough of them, no matter how you count them.


So, we're calling "stupidity" optimism these days? I know that many home-buyers were terribly short-sighted in agreeing to some of the loans that they have now defaulted on, but the language posed makes it seem like they shouldn't bear any responsibility for their poor choices. The government cannot regulate intelligence anymore than it can regulate human ignorance.


Are there any proposals for reining in the myopia and over-optimism of the regulators? If the low-income people who made the "obviously" foolish assumption that home prices would continue to increase had asked, say, Barney Frank for advice prior to signing, wouldn't he have told them to "roll the dice?"


The regulators were responsible in large part for the bubble in the first place. They made it essentially risk free for the consumer and risk intense for the lenders. The consumers understood only too well that a no money down, sub-prime loan was easy to default and walk away, not to mention the second home market in California, Arizona and Florida. Ignorance indeed. Try greed and envy and try regulating that.


Regulation via exposition? That would be nice.

Some of these Mortgage Contracts are so complicated and confused that it requires at least a Masters in Finance and JD in Real Estate and Contract Law (and I'm not so sure about these guys and gals understanding them). And everyone wants the average Joe and Josephine too take full responsibility and understand all the nuances by themselves? Goodluck! Change and regulation is needed. Even the Fraudsters are having problems recognizing the fraudlent.


You know how it is for the hapless countryman caught between two lawyers; its like being a mouse between two cats. Its sort of like a citizen between two opposing legislators. All three pairs of cats are alike. They ar5e more than a little peckish.

Posted by Tweety.


How do you guys feel about that Peer to Peer lending network the SEC shut down a couple months ago? Wouldn't that remove entire layers of complexity from the banking system?


A legal system that succumbs to the urge to cater to the ignorant will inevitably promote ends other than the fair and even handed rule of law.


It's been reported by several news outlets that as many as 1.5 million home mortgage loans 90 days or more delinquent can't be foreclosed and the collateral liquidated because the secured promissory notes were sliced, diced, securitized, repackaged into bonds, and sold to investors in a manner so botched that the servicers and state court judges can't determine who "owns and holds" the evidence of indebtedness. The number is sure to grow as waves of now-upside down home loans funded at the '06-'07 peak fall into default. We saw a little of this "bad-chain-of-transfer" stuff during the S&L bailout era, but it was trifling compared to the fiasco Wall St's securitization schemes will have yielded. All real estate in America is "local" - i.e., land titles, the stuff of state law. If state court judges across the country start holding the loan servicers, indenture trustees, and lender agents to the strict letter of local law when foreclosure is applied for or opposed, the only "solution" left will be for Congress to pass legislation to buy up and, effectively, bail out all the garbled-ownership home mortgage debt securities by a process tantamount to a bulk in rem condemnation. (After all, we're going to have to do it with Fannie & Freddie anyway, right?) Eminent domain leaves no title defect uncured. Nobody can pass a stronger title upon resale than the sovereign.

A lot of land title and real estate financing law has been made in my state, Texas. It was driven by agriculture and petrochemicals. The Big Oil companies were once upon a time fierce marketplace competitors (remember the '50's-'60's gasoline price wars?), but they were of one mind when it came to real estate acquisition or financing: you never put your $$$ behind anything that you don't control. The term "land banking" wasn't coined by accident. But Wall St, aided & abetted by the bond rating quants and the credit sweetener (derivatives) market, blew right past it. They can't be trusted to securitize home loan finance. If Congress is going to "reform" anything, it ought to begin with home mortgage loan securitization. Just outlaw it, get it off the face of the earth.

Brian Davis
Austin, TX


Brian's comment seems spot-on.

It seems that not enough people are paying attention to the principal agent problem. If a lending agent knows that the loan is going to be chopped up and sold immediately after making the loan, the lender has less incentive to avoid lending to people where the terms increase likelihood of default. The securitization of mortgages seemed to have played a huge role in the formation of the housing bubble.


One solution would be the institution of standardized mortgage contracts in fixed increments, (say, in increments of $20,000), traded in open exchange markets—like we do with other securities. The underwriting process would be standardized, and the interest rates would float on the open markets. The only black box would be the underwriting, credit verification and appraisal components. However, the presence of an exchange mechanism would serve to advance standards and verification procedures in these areas as well.

The underwriting could be rationalized by separating its component processes into parts that can themselves be rationalized, adding to the quality of contextual epistemological granularity. The credit reporting agencies would provide the risk handicap (credit scores), and; Regional Sales Records would provide “market values,” with the dispersion measurements of same serving to handicap the risk for individual properties. Furthermore, demographic information provided by municipalities and verified by bond rating type agencies would provide a handicap on the likelihood that specific properties would continue to be kept up. The best part is that many of the valuation components that were formerly black box and subject to individual judgment would be brought to light and counted openly.

The reason this would work is that all the cards would be on the table, and so market players can be evaluated based on rational factors, which themselves can be seen in their context—which is the only way we can judge anything.

Posted by Foghorn Leghorn


I believe Thaler (and perhaps Sunstein) have written about this elsewhere, but it's absolutely true that if you refuse to concede that those people whom you label "pessimists" are, on average, objectively better off than those whom you label "optimists," then behavioral economics has nothing to say. That is because you are assuming away the problem behavioral economics has identified, and which Thaler, Sunstein and others attempt to address.

Behavioral economic-inspired reforms are about sorting. Of course it's true that some people are optimists and that society benefits with some measure of optimists. But it's also true that many people who are (for example) attracted to teaser mortgage rates are suffering from cognitive failings. Behavioral economists assume by definition that the latter group of people would make different choices if they were presented with the same information in a different way. They are being influenced by presentation, not substance. Thus, behavioralists hope to prompt people at least to consider alternatives by presenting the same information in a different manner.

One common way of doing this is by explaining alternatives. Behavioralists hold that people respond differently depending on whether a choice is framed negatively or positively. Thus, if a person is told that a certain course of treatment gives them a 2% chance of living, they may make quite different choices than if they are told that the same course of treatment gives them a 98% chance of dying. The example seems artificial, but analogs play out in the real world with great frequency.

Mortgages are an obvious case. It is surely wrong to suppose (as you seem to be doing) that all or even most people who choose teaser mortgages have actually considered whether they would be better off with a different mortgage, or without any mortgage at all. The behavioralist response is simply to reframe the presentation of the relevant information.


In answer to the behaviorist school dude that posted at 11:16am on 9-1-2009, I believe that it is not a matter of explaining the terms better, nor is it a matter of people “freely choosing ‘bad’ mortgages.” It’s sort of like Newton with “gravity:” He couldn’t define it, but he knew it acted a certain way, (in accord with the “inverse square law”). The same is true of economics and Cartesian style analysis in general. We don’t necessarily know the essence of the “what” of x’s and y’s are, but we can get a better handle on what’s going on from casting light on their relationships to each other.

The failure of the behaviorist approach is that it emphasizes the need for a normative “freedom of markets” in terms of a “freedom of information.” But information itself is a marketable thing. Information is not free until it is rendered so by being widely available. Market forces influence its evolution and dissemination. It would be wrong and foolish to suppose that others can be, (let alone should be), forced somehow to either enlighten us about the traps they themselves have set for us, or about the traps that third parties may set for us. That said, we need to continue to enforce social strictures against fraudulent acts when they are discovered. But responsibility for our education lies ultimately with us as individuals. The only education is self education.

Those who walk into these financial traps need to wise up about their assumptions as to the desirability or permanency of “social safety nets”—and those that set these financial snares need to wise up to the consequences to the social fabric that they create through their laying of traps for their fellow human beings. No one is immune from personal responsibility, and no one is immune from the need to walk wisely. God may not be watching, (I don’t know and neither do you), but both forms of stupidity (playing the Innocent Baby and playing the Rapacious Vulture) are most assuredly punished sooner or later by nature itself.

Posted by Foghorn Leghorn


Is there some problem with my earlier attempt to post?


if indeed the "regulators who made it risk free for osnumers..." who are repsonsible, then you must mean Mr Greenspan who flooded the markets with cheap credit with his low interest rates....as to the risk intense lenders, surely you jest. after originating the loans, they quickly sold them off as securities whcih were then repeatedly repackaged and sold over and again (to the last fool standing) on the false premise that credit risk ahd been removed in the process.


This is more complicated and far less black and white than many would like it to be. I can only recommend the clear thinking of the late great Yale law professor Arthur Allen Leff and his classic book Swindling and Selling (NY: Free Press, 1976), as an addition to the astute Goffman citation noted above.


As a activist/organizer in central Califoria (small scale, local stuff), I work with families in the midst of the foreclosure boom. To intimate that even 'some' of these cases might be comparable to that of a entrepreneurial industrial capitalist is absolutely hilarious. Thank you Judge Posner. That laugh made my day.



I'm having a problem posting my comments. I sent one in earlier today that referenced the B of E to Posner. Am I being excluded? By the way, my follow up question came up an Anon. I'm not.

Take care,

Don the libertarian Democrat


To say that something is more than “merely black and white,” begs the question of attempting to offer some solution. It is true that one can abuse Occam’s razor and so make problems worse. But, let’s face it: Arthur Leff was an oversimplifying Nihilist. I agree that we can’t get permanent normative principles from ethical modeling. But we can design systems that enhance the quality of life, as Locke and Montesquieu did with their notions of checks and balances on power and abuses. We don’t have to buy into the Leffian argument that “it’s all too complicated.” Yes, right and wrong are an over-simplification if imposed by a Hobbesian authority—but we to need to build models and refine a process to see what can be normatively applied. We do need to examine things. After all, knowledge consists in what remains after we prove that what is wrong is wrong.

John Galt.

John Galt.


"Epistlemological Granularity and the like"? Say what? And we wonder why we have problems with complexity, confusion and fraud in the Finance World and its near collapse? I think we may well have stumbled on a Root Cause.


Think of Granularity as pixels per square inch of understanding. When you zoom into something you claim to understand understand, the more pixels you have at that deeper level, the clearer the picture remains at the deeper level--thus, the finer the grain. Also, the more pixels you have, the more it tends to relate to the bigger picture. But this only works if the two views hold context, i.e., can be reconciled without contradiction. So, if your are looking at a conglomerate's books, (Zoomed out), or a divisions books, (Zoomed in), you should be able to presume certain relationships between the two views. To the degree this is true, you have increased granularity of viewpoint.

Epistemology refers to the grounds of knowledge and touches on everything that has to to with what can be known as such. So, when I refer to Epistemological Granularity, I am speaking of a quest for a broad understanding of matters in both a larger and smaller context in a manner that can be known.

John Galt


–±–ª–∞–≥–æ–¥–∞—Ä—é –∑–∞ –∏–Ω—Ñ–æ—Ä–º–∞—Ü–∏—é


John, I am familiar with "Epistemology" I do have some training in Philosophy. My problem comes when it is coupled with "Granularity". The problem comes when a computer style model and analog is used to explain the human mind and it's ability to explain understanding.

Let's turn to Logic and the principles of Cognition, Corroboration, and Verification. The issue becomes what set of "books" are we looking at? The ones set up for Public viewing or the ones kept in the depths of the Organization behind that legendary "Veil". Depending on which ones are being viewed, It will affect not only the size of the "pixels" but their "color" as well. Thus changing the whole picture and its understanding or lack of.

The solution? Simplicity and Clarity. Maybe then, Joe and Josephine may be able to understand what they're getting into.

A fundamental rule of Grammar and Syntax:
Single syllable signs tend to clarity and understanding. Poly-syllables, to complexity and confusion. Especially, when the signs and symbols are not explained or defined adequately. Then even the "experts" become confused and befuddled.


My gosh. I can read. I can write. I can think. I can ask questions. I can respond. I can decide. I don't need the federal government to do any of those things for me because it cannot do any of them better than I can. If I don't understand the mortgage, I won't get one and if I cannot tolerate some variance in the finances regarding the mortgage, I shouldn't have one. Is that clear?

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