F1 Alarm On Kenmore Stove

"Regulators are human ..."

economist Edward Glaeser has the great virtue of constantly writing about subjects that interest me particularly. In this case it does on " regulatory failure", especially when it comes to correct problems of bounded rationality.

The question is whether Glaeser is the propensity of people to make mistakes and have "irrationality" in certain business decisions, more attractive the idea of \u200b\u200ba "strong government" to deal with these excesses monitor private. Citing the Bureau of Consumer Financial Protection "that the government intends to launch Obama.

We talk about the irrational behavior of agents in the U.S. housing bubble (the reasoning is equally valid for Spain). And he says, quite rightly, the behavior of those who want a loan to buy a home that arguably can afford, may in fact perfectly rational because they think that in the event of insolvency, is another who assume debt. Or, and this I would add, because they think it is an investment, or because they assume that the bank is paying and the risks will be measured sufficiently. Glaeser says precisely that the hardest thing to understand is actually the behavior of banks, "so crazy as to make such loans."

In my opinion, however, it is also arguable that the banks' behavior was "irrational." As I have argued and on occasion in this blog , the problem of bubbles is not as simple, or not occur: is a problem of perverse incentives that cause almost all the agents involved inflating the bubble with perfectly rational behavior, which makes it difficult to "dismount it "

• floors buyers because they see their neighbors win money buying and selling properties, and will not be less. The bank, main course interested in monitoring the risk, given the low interest loan and low demands. Who will be the "foolish" not to take advantage?
• sponsors, political scam to get the soil and raise prices without limit, because they see that buyers are willing to pay anything and the banks are happy to give cheerfully both the buyer and the developer himself. Who will be the "foolish" not to take advantage of the business?
• The banks? With explicit objectives of its operators on the number of mortgages granted, with very low default rates, eyeing the ever-increasing bank's business across ... and some, without worrying about higher-risk mortgages, while this risk may be to package and sell to other unsuspecting camouflaged. In the case of banks, at least for some, not so much a game as a game irrational cheats. In any case, who is going to be "foolish" to lose business by abandoning the behavior how well you will all your competitors?
• Do Governments and the Administration? For municipalities to play with the ground were allowed to resolve their funding problems. For many local politicians corruptly enriched with the rezoning and awards. The government, meanwhile, saw the unemployment rate fell to historic lows and could present it as a success of his administration. Who will be the "stupid" that ... ? I do not insist.

Of course, floating in the whole thing a couple of dubious points sound like:

• Unrealistic expectations on the evolution of housing prices (which will continue to rise indefinitely, you can not download ...). But this, lest we forget, was a possible scenario (however unlikely) for everyone bet because I was making money by betting on him .
• irresponsible behavior of the majority of agents, consisting of something like "other risks will be watching" . That is, each agent involved felt that "someone" would be taking care of the risks, and meanwhile they had a free hand.

This is like the parable of the precipice: many people moving inexorably, through the fog toward a precipice while earning money to move forward based on the slope. Many believe there is no cliff ... others know that he must have, but they can always leave the race on time. Of course nobody wants to abandon the race while still making money, nobody wants to fail to win while the other runners still winning. Is this behavior irrational? Is debatable.

Turning to address the issue of a regulatory agency to oversee the irrational behavior of the agents, Glaeser's view is that such agencies are also subject to error and irrational behavior, and have examples to prove it. The solution is advocated by those agencies have modest goals and well defined, primarily to inform the most vulnerable, and have low functioning bureaucracy. The agency wants to avoid generating barriers to entry and limited innovation.

It is at this point, the conclusions, where I do not agree with Glaeser. I understand that what he advocates is something so low (something like that requires the agency to label the calorie content of food) very doubtful that anything will help.

In my humble opinion, what is needed is an agency with sufficient capacity to establish and follow some sort of warning indicator of systemic risk, and capacity to act "irrationally" (forgive the boutade ) and prick bubbles. This means few people but highly educated and well paid, with political independence and discretion, something like the Bank of Spain at the time of Luis Angel Rojo , he was able to piss off our counter-provision imposing bankers at a time that this seemed "irrational." With which it has fallen and is falling, the last thing we should worry about is "to limit the innovation" ... On the contrary, innovation is likely to monitor and in the light of events, the target. About

difficulty setting up such agencies, and whether it should or should not be the Bank of Spain, one of them, Jesus Fdez Villaverde has discussed in the blog Nothing is free, in a series ( I , II , III and IV ) which I highly recommend reading despite being far more technical.


UPDATE 07/22/1910: An article by Robert J. Shiller in which advocates a strong regulatory and assigns responsibility to central banks.