Sunday, February 24, 2013

A Canticle for Hadiya



Hadiya Pendleton
The story of Hadiya Pendleton is heart rending. The 15-year-old girl was known as a star student, a loving daughter and big sister, and a talented majorette. That latter aptitude resulted in her performing, along with her King College Prep High School team, at President Obama’s inauguration, an honor of which she was deservedly proud.

But several days later, on January 29th, she was senselessly killed by a purported gang member in a south-side Chicago park. Hadiya and her friends had taken shelter from the rain under a canopy in Harsh Park when Michael Ward, 18, allegedly opened fire on the group in a tragic case of mistaken identity – he thought they were rival gang members when in fact they were just a bunch of kids out celebrating after completing their mid-year exams.

The pathos of Hadiya’s death was overwhelming to her family and the community. President Obama recognized the event in his State of the Union address, remembering Hadiya while calling for stricter gun controls.

But what was it that made Ward, just a few years older than Hadiya, think it was acceptable to indiscriminately spray a group of young people with gunfire? Ward was in the company of one Kenneth Williams, 20, who had been shot in the arm by another gang last year. In his confession, Ward claimed that he was seeking revenge against that gang. What is it that allows young men to shoot each other with impunity in a city that registered over 2400 shootings and nearly 500 homicides in 2012? And this in a city with some of the toughest gun laws on the books?

There is a theory that addresses this and it has to do with “certainty of punishment.”  While it might seem odd, it turns out that criminals are very savvy about applying economic risk/benefit analysis to their decisions. Criminals calculate (intuitively, as their actual math skills are typically lacking) an “expected value” of punishment by applying the probability of being punished to the extent of the actual (not on paper) punishment.

For instance, while the law might call for 5 years in prison for carrying an illegal gun, they observe that the probability of being caught is very low. Hence, they calculate that the “expected value” of the punishment is far less than 5 years.  Further, even if caught, they see that the typical punishment is only a year of probation with no prison time at all. So in spite of the seemingly tough sanction against carrying an illegal gun, the criminal calculates that the “certainty of punishment” is actually very, very low. Hence, in their warped but canny minds, the benefits of carrying a gun far outweigh its costs.

All this is actually going on in Chicago. While having very tough laws on the books, the cops are dismayed to see offenders they manage to apprehend back on the streets within days. Williams, who provided the gun that killed Hadiya, should have been in prison for parole violations following an earlier gun offense. The cops blame prosecutors and judges, but the judges blame state and local budgets that limit available prison beds. So it comes down to a type of “guns vs. butter” argument – social welfare and pension spending vs. cops on the street and prison beds.

In our zeal to pass new gun laws, it might be worthwhile to ponder how effectively existing laws are being enforced, how certain the punishment for violations are, and how severely the actual punishments are adjudicated. Criminals must assess the “certainty of punishment” as being very, very high if we want to change their behavior.

In the case of Hadiya, her assailants’ long criminal records give sad testimony to ineffective execution of the law. Another toothless law on the books would not have helped, no matter how good it made us feel.

Wednesday, February 13, 2013

Slapped by the facts



Abandoned farm home - Great Depression
Home ownership is typically the largest financial asset of most American families. Equity (the excess value of your home above its mortgage balance) can be tapped to buy a needed new car, finance renovations, or send your kids to college. In retirement, with the mortgage discharged, the home may be sold to finance a nice retirement in Florida, Texas, or some other low tax (and high sun) haven.

Further, home ownership has proved to foster a sense of community far stronger than that of transient rental populations. Neighborhoods with high individual ownership rates tend to be neater and calmer and just nicer to live in. So it’s no wonder that government has fostered the notion that taxpayers’ pockets should be tapped to increase the general overall home ownership rate. What’s not to like about this?

Therefore in bipartisan fashion (meaning both Democrats and Republicans), we passed the Community Reinvestment Act (CRA) in 1977. The CRA was intended to coerce banks to make loans that they would not otherwise make. This is odd in that the language of the CRA also required that banks maintain sound and prudent lending practices. In typical government fashion, the banks were put into a bind that they could not escape. If they declined to make loans to uncreditworthy applicants, they would be punished. But if they made loans to uncreditworthy applicants, they would be punished. What’s a poor banker to do?

Since the punishment for not making loans was far greater, the loans rolled out. In association with other government “affordable housing” initiatives, down payments fell as low as 3.75% and losses were insured by the Federal Housing Authority (FHA). Lenders were incented to lend (protected from losses) and borrowers were incented to borrow, all lubricated by taxpayer largess.

The CRA was amped up in 1995 (Clinton) and again in 2005 (Bush). Politicians of both parties love to give our money away. And what did this largess gain us?

The financial crisis of 2008.

While there has been much argument that the CRA (and related government “affordable housing” programs) had no effect on the economy nor led to the financial crisis, a simple application of common sense might indicate otherwise.
  • Would a down payment of 20% result in a sounder applicant than 3.75%? In other words, on a $200,000 loan, would you be more likely to walk away (default) if you had paid $40,000 down versus $7,500?
  • As a mortgage originator, would you be more or less likely to grant a loan if you knew that the government would cover your losses?
Well, a recent study published by an independent, nonpartisan economic think tank has given us some answers. The National Bureau of Economic Research (NBER), based in Cambridge Massachusetts, has studied the impact of the Community Reinvestment Act. In their report, the NBER pulls no punches. “Did the Community Reinvestment Act(CRA) lead to Risky Lending? Yes, it did... We find that adherence to the act led to riskier lending by banks."


Read more here: http://voices.kansascity.com/entries/yes-community-reinvestment-act-encouraged-banks-make-risky-loans/#storylink=cpy

Barney Frank, who famously gambled with our money in 2003, had this to say then: “I want to roll the dice a little bit more in this situation towards subsidized housing." But by 2010, Rep. Frank had come to realize the error of his ways: "…it was a great mistake to push lower-income people into housing they couldn't afford and couldn't really handle once they had it." Even Barney was jarred into reality when slapped by the facts.

This sad tale reinforces the damage that the government can inflict when meddling with free markets. Although the intentions were admirable, the outcome was disastrous. Sometimes it’s best to let common sense, and a deep understanding of human nature, reign.