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The Appearance of Action

June 25th, 2008 by Peter Suderman

From the New York Times piece today on the mortgage bailout:

Skeptics say the plan is a handout for irresponsible borrowers and lenders, who would be able to get rid of their worst-performing mortgages, putting taxpayers on the hook for billions of dollars in risky loans.

But in a contested election year, with Americans losing billions of dollars in home equity, officials in both parties seem reluctant to be seen as sitting on their hands.

And then there’s this:

“There’s a great desire to act,” said Representative Barney Frank, Democrat of Massachusetts, the bill’s main author in the House.

This, I think, cuts to the core of the political problem with the bill: So much of it is spurred by the desire to appear to be doing something rather than the desire to do something that’s actually sensible.  So the crafters of the legislation seem to have taken some, ah, helpful suggestions from Bank of America (see this document posting and report) and then decided, “Hey, this will make us look like we’re doing something!”

Megan McArdle likes to refer to Bryan Caplan’s blog-famous explanation of the logic behind this kind of thing like this:

1. Something must be done
2. This is something
3. Therefore, this must be done

It’s the “look busy” approach to work; when your boss shows up near your cubicle, you’d better pull up a spreadsheet and start filling in those fields. In this case, the public showed up and a bunch of legislators wanted to look busy.

Unfortunately, doing something doesn’t always mean doing something effective.

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3 Responses to “The Appearance of Action”

  1. Sickle Says:
    June 25th, 2008 at 11:58 am

    Well, your alternative is to “do nothing.” FYI from the same article:

    And a close look at the fine print of the bill shows that lenders who want to use the program to refinance troubled loans into new, federally insured mortgages will have to take substantial losses. They will also have to make carefully calculated decisions about whether it makes more sense to foreclose and resell or auction a property or to help a struggling borrower refinance and remain in the home.

    At the same time, homeowners seeking to use the program will have to prove that they have enough income and creditworthiness that they can afford to pay their new loans.

    “The mortgages aren’t just being given out on willy-nilly random basis,” said Senator John Kerry, Democrat of Massachusetts.

    Borrowers will have to pay a hefty fees to further insulate taxpayers from losses. As a result, the biggest risk may be that because the program is complicated — and voluntary — few lenders or borrowers will make use of it.

  2. CrewGuy Says:
    July 2nd, 2008 at 2:30 pm

    The “substantial losses” that the article refers to are only 15% of the actual loss that lenders would suffer if they weren’t allowed to dump their bad loans on the backs of the taxpayers.

    I’m not a lender, but it seems that exchanging favors with a couple influential Senators in exchange for avoiding 85% of a guaranteed loss is a pretty sweet deal.

  3. Sickle Says:
    July 2nd, 2008 at 6:14 pm

    The “substantial losses” that the article refers to are only 15% of the actual loss that lenders would suffer if they weren’t allowed to dump their bad loans on the backs of the taxpayers.

    Source, please.

    I’m not a lender, but it seems that exchanging favors with a couple influential Senators in exchange for avoiding 85% of a guaranteed loss is a pretty sweet deal.

    “A couple” Senators? You do realize that 51 have to vote for it, right? This isn’t an earmark, it’s a bill. One hell of conspiracy you’re alleging.

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