Banging On The Bankers

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A lot of the resistance I've gotten for saying that people ought to pay their debts comes from people angrily declaring that after all, the banks are vicious predators.  In some cases this is true . . . certainly, in the case of Tom Vellucci, which I debated with Felix Salmon last week, the servicer seems to have offered him an unsustainable modification in the hopes of squeezing the last drop of savings from a dying man.

But I don't think this is an adequate argument.  Steve Waldmann, for example, seems to view walking away from your mortgage as a sort of game theory move, a just retribution in our society-wide game of tit-for-tat with banks that aren't behaving like good people.  I sense that he is not alone.

But this is awfully naive game theory.  A simple tit-for-tat strategy assumes a simple world in which there are only a few possible actions, all of which send clear signals.  What signal does walking away from your mortgage send?  Maybe it says, "People are mad at banks and they shouldn't charge such rapacious fees."  On the other hand, maybe it says, "People have stopped feeling any responsibility to pay their debts, so you should make it harder to get a mortgage, and more punitive to walk away from one."

The other problem with this notion is that tit-for-tat, and indeed every related strategy, requires that you can target the punishment at the bad actors.  But in many of the cases we're disputing, there's no evidence that the banks or investors who are getting shafted are the same banks or investors that are shafting others.  It's like ripping off Korean grocers because a waiter at a sushi place once overcharged you.

If we think bankers are, say, being abusive with their overdraft fees, we have better ways to fix it than turning into a nation of deadbeats.  We could, umm, regulate their overdraft fees.  Or we could publicize the banks that charge outrageous fees, and try to do business only with the ones that pay better.  If banks made stupid loans, they'll suffer by losing money.  But I find it hard to say that anyone is entitled to voluntarily default just to punish a bank for . . . being stupid enough to lend you money.  I mean, it's sort of elegantly self-referential, but one cannot do it without indicting oneself right along with the bank.

Of course, there's quite a bit of populist anger at the feeling that bankers haven't suffered--that they've just gone right along making money.  This is not actually true; many bankers have lost their jobs, and the job losses were heaviest in the sectors that performed worst.  RMBS is not exactly a hot line of business right now. 

But of course, many other bankers are still minting it hand over fist, which especially rankles because we, the taxpayers, are the only reason that they're not pricing refrigerator cartons and prime real estate under bridges.  It's one thing to pump money into the banks, if that's the only thing standing between us and the Great Depression, but no one wants to pump it into the bankers' pockets.

But still, the answer is not to gratuitously walk away from mortgages.  Much of that paper isn't held by banks, but by pension funds and similar institutions that did nothing to anyone. 

Unfortunately, I'm not sure what the answer is.  As long as banks are both extremely profitable, and competing for talent, they'll continue to pay huge salaries.  There is no direct way to intervene without gross violations of our legal system, or severely impairing the few banks we do have control over--banks who, let us remember, still owe us a great deal of money. A few months ago, I asked why banker salaries are so high, and ultimately I ended up with the fact that they're so high because so few people can make so much money.  When that's the case, no one wants to risk getting a "deal" on second best--which is why managers pay a lot to the firms that do their IPOs, and those firms pay so much to the bankers.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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