Robert Shiller explains why the president should sign the mortgage relief bill:
The Scars of Losing a Home, by Robert Shiller, Economic View, NY Times: Across the United States, there were 243,353 foreclosure filings in April alone, nearly three times the total in the same month just two years ago... The trend is unmistakable, and suggests that, without government intervention, many millions of American families will be losing their homes before long. ...
Picture a line of moving trucks extending for hundreds of miles: they are taking the furniture of countless families to storage lockers. Picture schoolchildren saying goodbye to their classmates...: they are being abruptly moved to the other side of town.
It’s easy to take a stern view of this spectacle. The arguments go something like this: Foreclosure is not the end of the world. There are valuable lessons to be learned... After all, we live in a capitalist economy that thrives on the sanctity of contracts. The founders of our nation put the contract clause into the Constitution to make it clear that people need to live up to the documents they sign.
This stern view may, in fact, be winning the battle of public opinion. On May 9, the House approved legislation aimed at helping some of the people facing foreclosure, but the president has said he would veto it. ...
Now, let’s ... examine some arguments against the stern view. They have to do with the psychological effects of strict enforcement of a mortgage contract, and economists and people in business may need to be reminded of them. After all, too much attention to abstract economic statistics just might make us overlook what is really important.
First, we have to consider that we cannot squarely place the blame ... on the homeowner. It seems to be shared among mortgage brokers, mortgage originators, appraisers, regulatory agencies, securities ratings agencies, the chairman of the Federal Reserve and the president of the United States (who did not issue any warnings, but instead has consistently extolled the virtues of homeownership).
Because homeowners facing foreclosure must bear the brunt of the pain, they naturally feel indignation when all of these other parties continue to lead comfortable, even affluent lives. Trying to enforce mortgage contracts may thus have a perverse effect: instead of teaching homeowners that they should respect the contracts they sign, it may incline them to take a cynical view of the whole mess.
But instead of having sympathy for these homeowners, many people blame them for their predicaments. That isn’t surprising. It’s ... a general tendency ... documented by social psychologists decades ago.
In his 1980 book, ... Melvin Lerner, a social psychologist, argued that people want to believe in the inherent justice of the economic system in which they live, and want to believe that people who appear to be suffering are in fact responsible for their own situations. He provided empirical evidence ... that ... people tend to develop negative views toward others who are suffering. That negative tendency seems to be at work today.
Second, it is important to consider the psychological trauma of foreclosure. No one is likely to starve or sleep on the streets..., and the authorities no longer dump a family’s furniture on the sidewalk... Nonetheless, there is deep trauma.
Homeownership is fundamental part of a sense of belonging to a country. ... Policy makers around the world have long known that, and hence have supported the growth of homeownership.
Maybe that’s why President Bush’s “Ownership Society” theme had such resonance in his 2004 re-election campaign. People instinctively understand that homeownership conveys good feelings about belonging in our society, and that such feelings matter enormously, not only to our economic success but also to the pleasure we can take in it.
But we are now seeing the president’s Ownership Society plan operate in reverse. Already, the homeownership rate has fallen — from 69.1 percent in the first quarter of 2005 to 67.8 percent in the first quarter of 2008. That’s almost back to the 67.5 percent level where it stood when Mr. Bush took office in 2001. And it is likely to fall further.
The pain of this reverse movement could leave a psychological scar that will be with all of us for the rest of our lives.