I’m usually skeptical of research that involves brain scans and areas lighting up when they are stimulated and that sort of thing—it seems reductive to equate brain activity with specific kinds of thoughts—but since this particular research into luxury effects that the Economist reported recently confirms suspicions I already had, I thought I would pass it along. The upshot of this study is this: “Dr Rangel and his colleagues found that if people are told a wine is expensive while they are drinking it, they really do think it tastes nicer than a cheap one, rather than merely saying that they do.” The question is whether this distinction is at all salient. It seems like evidence that people who buy into invidious display and conspicuous consumption are not merely other-directed and status conscious; their brains actually can translate the feelings of social superiority evoked by purchasing power into biochemical pleasure. They are not phonies simply pretending to like what’s more expensive to justify the conspicuous consumption. In saw ways, this suggests their consciousness is even falser than previously suspected; they are not in bad faith so much as betrayed by their own biology into transmuting money into fleeting pleasure.

Conspicuous consumption and waste are an important part of social display. Deployed properly, they bring the rewards of status and better mating opportunities. For this to work, though, it helps if the displaying individual really believes that what he is buying is not only more expensive than the alternative, but better, too.

Rangel, who conducted the study, believes this effect has something to do with an evolutionary (of course) need for learning.

Rangel suspects that what he has found is a mechanism for learning quickly what has helped others in the past, and thus for allowing choices about what is nice and what is nasty to be made speedily and efficiently. In modern society, price is probably a good proxy for such collective wisdom.

The idea that price is a proxy for collective wisdom seems a bit suspect, though. Despite what Hayek may argue about knowledge and prices, the magic of markets is not that efficient in translating truth into numerical values. Cooperation and survival don’t seem to be the sort of information conveyed by prices, which instead articulate scarcity and induce competition. It seems far more likely that we have a strong predisposition to want to believe our own bullshit. Just as the most gifted liars ended up persuading themselves of the truth of their own fictions, the conspicuous consumer ends up tasting the waste as nectar. 

—Rob Horning

Cato Unbound has an interesting series of essays about the future of marriage, by historian Stephanie Coontz, and the economic factors driving the evolution by Betsey Stevenson and Justin Wolfers. (Wolfers has a related post at the Freakonomics blog as well.) Its no surprise, considering the Cato Institute’s involvement, that a great deal of skepticism is directed at the State’s involvement in the institution, i.e. the bigoted American obsession with “protecting” marriage. But the history here is interesting in its own right, and absolutely essential if you want to have any understanding of what’s going in pretty much every novel written before World War I. Novels in their heyday dramatized the shift from more or less arranged marriages to love matches, offering all sorts of prescriptions for what love really is and proving a host of psychological and sociological defenses of the change. If I hadn’t sold all my lit-crit books when I moved to New York, I could probably even cite the appropriate scholar on this, but it has been argued that the commercial novel pretty much emerges from that shift; it’s a salient dramatic set piece that everyone in Western culture could relate to. (Maybe I need to go reread Denis de Rougemont.)

As Coontz explains, it made sense for state institutions to involve themselves in marriage when the practice was fundamentally a matter of broader family alliances than the preference of the betrothed individuals.

Because of marriage’s vital economic and political functions, few societies in history believed that individuals should freely choose their own marriage partners, especially on such fragile grounds as love. Indeed, for millennia, marriage was much more about regulating economic, political, and gender hierarchies than nourishing the well-being of adults and their children. Until the late 18th century, parents took for granted their right to arrange their children’s marriages and even, in many regions, to dissolve a marriage made without their permission. In Anglo-American law, a child born outside an approved marriage was a “fillius nullius” - a child of no one, entitled to nothing. In fact, through most of history, the precondition for maintaining a strong institution of marriage was the existence of an equally strong institution of illegitimacy, which denied such children any claim on their families.

In short, marriage was a system that supplied a legal framework for inheritances (and maintain gender roles, but that’s other story). That changed with the rising discourse of happiness, and marriage as permanent property arrangements was replaced with marriage as a public recognition of companionate love. A great deal contributed to orchestrating this shift; it correlates with the rising middle class and relaxing of the rigidity of the class system. But whatever the causes, it has left us with an institution patently rife with contradictions.

The same things that have made so many modern marriages more intimate, fair, and protective have simultaneously made marriage itself more optional and more contingent on successful negotiation. They have also made marriage seem less bearable when it doesn’t live up to its potential. The forces that have strengthened marriage as a personal relationship between freely-consenting adults have weakened marriage as a regulatory social institution.

Stevenson and Wolfers put this in a more explicitly economic framework: when we say couples are together because they love each other, what we mean is that share “consumption complementarities”—they share similar tastes about all the good stuff consumer society brings us.

Most things in life are simply better shared with another person: this ranges from the simple pleasures such as enjoying a movie or a hobby together, to shared social ties such as attending the same church, and finally, to the joint project of bringing up children.

No longer preoccupied with productive concerns—with capital formation and division of labor in producing a household—couples now can focus on consumption; this Stevenson and Wolfers call “hedonic marriage.” And this change seems indisuptable. But as our tastes are subject to change, complementary tastes seems a flimsy pretense to enter into contract with someone that lasts until death does you part. Though I am sure this happens all the time, it’s probably not necessary to marry the people you might like to, say, play bingo with. This shift likely puts implicit expectations to share all tastes on a couple, and probably subjects marriages to all sorts of undue pressure. Making the marriage commitment can in some ways become a kind of pledge to never change your tastes fundamentally, to become, to a degree, static. Obviously this doesn’t happen to all wed couples; perhaps some share a taste for curiosity.

—Rob Horning

Several people in the particular corner of the blogosphere that I frequent have linked to this transcript of a conversation n+1 had with a hedge fund manager. The very existence of this piece is encouraging, because it suggests that the sort of people who are likely to complain vociferously about capitalism are now actually taking a specific interest in the workings of capitalism. (I regard myself as one of those people, and for a long time I was content to complain about corporations without troubling to familiarize myself with a newspaper business page.) But what I found most interesting was this passage:

if you had a pool of half a billion dollars of mortgages, maybe there would be 300 million dollars of triple A paper you would sell to fund that, and then there would be smaller tranches of more junior paper. And the buyers of that paper, particularly the very senior paper, the triple-A paper, were not experts, they’re not mortgage experts, they say, “It’s triple-A? I’ll buy it.” This is money market funds, accounts that are not set up to do hardcore analysis, they tend to just rely on the rating agencies. And again the spread that they’re getting paid is very small, so they don’t really have a lot of spread to play with to hire a lot of analysts to go and dig in the mortgage pools and really understand them, they kind of rely on the rating agencies, and that’s their downfall. It’s kind of an interesting interaction in the sense that a lot of this mortgage project was almost created by the bid for the CDO paper rather than the reverse. I mean, the traditional way to think about financing is “OK, I find an investment opportunity, that on its face, I think, is a good opportunity. I want to deploy capital on that opportunity. Now I go look for funding. So I think that making mortgage loans is a good investment, so I will make mortgage loans. Then I will seek to fund those, to fund that activity, by perhaps issuing CDO paper, issuing the triple-A, double-A, A, and down the chain.” But what happened is, you had the creation of so many vehicles designed to buy that paper, the triple-A, the double-A, all the CDO paper… that the dynamic flipped around. It was almost as if the demand for that paper created the mortgages.

The argument you heard while subprime mortgages were booming was that it represented this great democratization of credit, tapping pent-up demand among the lower classes who had been unfairly denied credit for so long. Never mind all the advertising the mortgage industry took out; that demand was there and latent, it was argued. But as the hedge-fund manager explains here, there were huge incentives for highly leveraged financial players to create demand—they needed something upon which to extend their derivatives business. Knowing how profitable the derivatives would be, they managed to devise a way to let them come into being before the instruments they would be derived from. And this was accomplished mainly by separating competent understand of risk from the investors who were pouring in the money by way of ratings agencies inappropriately certifying the structured vehicles (and collecting their fees). Another thing to remember when you hear that the credit crisis was the fault of the borrowers getting in over their heads.

—Rob Horning

Always at the forefront with important news, Time magazine brings us the gory details of a very important development: people are paying other people to follow them around like paparazzi.

Even as real celebrities battle those pesky cameramen on the streets and in courts for intruding on their lives and trading on their images, some regular folks, from parents hosting teen birthday parties to Gen Xers out on the town, have decided that the attention could be fun--and worth paying up to $1,500 for. Cowher launched Celeb 4 A Day in Austin in November and is expanding to Los Angeles this month and San Francisco in February. There are similar companies, like Private Paparazzi in San Diego and Personal Paparazzi in Britain, and wannabe big shots in other places have taken matters into their own hands, hiring freelance photographers to trail them.

Josh Gamson, a sociology professor, was dragged into the spotlight to explain this curious phenomenon: “If you don’t have people asking who you are, you’re nobody,” he explains.

As absurd as this sounds at first, it’s really no different than hiring wedding photographers. Only instead of restricting yourself to such special events, you can treat every night out with your fiends as if it were your wedding. This seems extravagant and sort of pathetic, but not entirely beyond the pale. It also, however, serves as a reminder of the seductiveness of surveillance, and why it is so difficult for stir people into protecting their rights of privacy. Former modes of social recognition have been superseded by fame, by publicity as an end in itself, and we now all accept that it’s enough to be known, and it is doesn’t really matter what one is known for, if there even is anything. So there is no illegitimate avenue to being famous, or reaping what are percieved to be the rewards of that. As a result, we’ve glamorized being watched to the point where exhibitionism no longer registers as a fetish but is instead almost a baseline norm. 

—Rob Horning

I’ve been reading Nicholas Carr’s The Big Switch, which argues that computing power has become a centralized utility, like electricity, and the consequences of this will be nothing like what such utopians as Kevin Kelly, et al., have predicted. It won’t be a force for unleashing innovation and personal freedom; instead it will enact a more thorough state surveillance capability and be a powerful disincentive for creating intellectual property, leaving our culture awash in dilettante-produced mediocrity. Rather than pay an elite group of talented content-creators, companies can instead draw from the pool of free, user-generated content, a boon of unpaid labor, and monetize it in a way the individual workers can’t. (Management consultant types call this crowdsourcing. In a blog post, Carr called it digital sharecropping.)

Carr acknowledges that people have good reasons for donating their labor—namely, they are paid in recognition and the work is usually a creative outlet. But you still get the sense that it annoys him that amateurs are able to amuse and inform one another, that they are taking bread out of the mouths of anointed media professionals. Carr quotes a photojournalist who says that “the internet ‘economy’ has devastated my sector.” And presumably we are supposed to feel sorry for him, though what this means is that more people are sharing more images documenting more of the world’s activity for people to make use of as they see fit than ever before. Photojournalism is no longer strictly a matter of having the privileged connections to get work publicized and have one’s talent sanctified. If photojournalists feel threatened, its because they are being made aware how much of their distinction is a matter of access to travel and equipment and high-profile places to publish their work. If their work was so far superior to the work of amateurs, wouldn’t publishers and collectors be willing to pay for it, since everyone would see the difference and it would be something that could be marketed? The difference in talent may not equal the savings, and may never again. That seems to be what Carr is arguing, and lamenting: “Many cultural goods remain expensive to create or the painstaking work of talented professionals and it’s worth considering how the changing economics of media will affect them.” Hmm. I’ve considered it, and I’m inclined to say good riddance.

Being an obscure nobody, I’m strongly tempted (it probably already shows in my tone) to revel in schadenfreude and gloat about the misery of established artists or creative workers. How one feels about the fate of the poor photojournalist may be a litmus test for what one believes overall about talent. I’ve tended to think talent is far more subjective and ineffective that it’s generally held to be—that is, that it has no measurable value in mometary terms, but can only be assigned an approximate dollar value residually after other explanations for art market variances are accounted for—and that determination and connections are more important to success. And maybe, since these are somewhat destructive attributes to have, despoiling most personal relationships and making everyday life somewhat of a prod and a torment, they deserve to be amply compensated; those who are cursed with them are driven to produce the stuff we in our leisure can happily consume, while we enjoy things like family life and interpersonal relationships. We may need an airtight system of intellectual property rights to entice these miserably ambitious people to make commercial art, but that art, cherish it now though we may, is not the best or only art there is. It just happens to be what our economic system privileged and yielded and lauded, with a whole adjuct commercial system of reviewers and appraisers and collectors with a vested interest in it. If such work is “crowded out of the Web’s teeming bazaar” that may not be such a crushing loss. It may simply mean we need to recalibrate our aesthetic understanding of what we dub to be brilliant art to be something other than that which is created by an individual and possessed by a wealthy collector. We may have to accept art that is made collectively, distributed for free, and is never quite in a finished form. We may have to understand creative work as a process rather than a product. Horrible, I know.

—Rob Horning

A recent column by Tyler Cowen (of Marginal Revolution fame) in the New York TImes caused a little flap in the econoblogosphere recently about whether lenders or borrowers are more to blame for the recent credit crisis/subprime meltdown/imminent recession. Inhis piece, a sort of year end wrap up of things that surprised economists, Cowen offered this
item:

IT’S NOT JUST THE LENDERS
There has been plenty of talk about “predatory lending,” but “predatory borrowing” may have been the bigger problem. As much as 70 percent of recent early payment defaults had fraudulent misrepresentations on their original loan applications, according to one recent study. The research was done by BasePoint Analytics, which helps banks and lenders identify fraudulent transactions; the study looked at more than three million loans from 1997 to 2006, with a majority from 2005 to 2006. Applications with misrepresentations were also five times as likely to go into default.
Many of the frauds were simple rather than ingenious. In some cases, borrowers who were asked to state their incomes just lied, sometimes reporting five times actual income; other borrowers falsified income documents by using computers. Too often, mortgage originators and middlemen looked the other way rather than slowing down the process or insisting on adequate documentation of income and assets. As long as housing prices kept rising, it didn’t seem to matter.
In other words, many of the people now losing their homes committed fraud. And when a mortgage goes into default in its first year, the chance is high that there was fraud in the initial application, especially because unemployment in general has been low during the last two years.

Perhaps because this plays faintly echoes a particularly repugnant free-market talking point—caveat emptor ad omnium—or because Cowen was sounding like an apologist for a typically exploitative and greedy industry, Barry Ritholtz of the Big Picture went apoplectic.

Anyone who works in this area knows that the reality of the situation was far more blatant. To begin with, most people are naive when it comes to any financial product. They rely on the experience of the professional they are working with, even if this person is a SALESMAN or another party in an ADVERSARIAL NEGOTIATING ROLE.
I work with many builders and mortgage lenders; I take personal responsibility for a major builder selling much of his company’s stock in 2005 (more than $100 million worth). The rest of the family hated me—for about 6 months. I know how their company works, and I know what they and others in their field do in actuality.
During the hey day of the no-income verification, “No Doc” loans, the builders finance people, as well as other mortgage brokers walked people through the application process. Mr. Cowen writes that “Too often, mortgage originators and middlemen looked the other way.” That’s a rather generous read on it. The reality is that THEY TOLD PEOPLE WHAT INCOME TO WRITE. They used sentences such as “Put down $150k.” OTHER TIMES THEY APPLICANTS LEAVE THE INCOME SPACE BLANK; The reps later conveniently filled in the data on the own.
To claim mortgage originators and middlemen only looked the other way is putting too fine a point on it. THEY WERE ACTIVE COLLABORATORS IN ANY FRAUD. 
Oh, and, don’t take my word for it—find some people from the industry and ask them yourselves. This is a very well known fact amongst real estate agents, mortgage brokers, and builders.

I side with Ritholtz here, because I think in order to commit fraud, you have to understand the meaning of what you are doing, and most people, I’d guess, have no idea what is going on in the midst of the mountains of paperwork necessary to secure a mortgage and buy a house, something we are all led to believe is as fundamental to being an American as pledging allegiance to the flag and eating hamburgers. And unlike the brokers, the borrowers have the loans in their name and ultimately would be held accountable for the lies by having to pay the consequences, while brokers skate away relatively scot-free—at least until they started becoming unemployed—permanently if our society has any justice.

Housing blog Calculated Risk today excerpted comments by Chase CEO Jamie Dimon in which he seemed to imply that brokers were not doing such a good job assessing risk, to put it euphemistically.

James Dimon:
This is a lesson that’s been learned over and over about broker originations, they perform much worse than our own originations, and if you separate home equity into we call it kind of good bank, bad bank, and broker so I would say it’s less than 20%, but a lot of the losses are coming from that 20%, which is high LTV [loan-to-value], broker originated businesses. High LTV business is also bad in its own.
Analyst:
And the 20% you referred to a minute ago in round numbers is the sort of specifically high LTV and originated away [by brokers] is that right?
James Dimon:
It’s been very consistent In both our own originated and broker originated, high LTV, stated income is bad. It is three times worse in broker than it is in our own.
Analyst:
Wow.

Wow, indeed. This suggests that banks were constrained by the size and nature of their institutions, but brokers had no such scruples; they behaved like the fly-by-night operators they so often seem to be. The Caluclated Risk post prompted Felix Salmon to wonder why brokers have not yet been disintermediated (to use another fun euphemism), drawing the same conclusion that prompted me to start this entry:

Frankly, in an era where people can get mortgage quotes online almost as easily as they can buy car insurance, I fail to see why mortgage brokers should exist. It would be an industry crying out for disintermediation even if it weren’t obvious that mortgage brokers are top of the list of people to blame for the current mortgage crisis. In the debate about “predatory lenders” and “predatory borrowers”, the bigger truth is that the real problem was predatory brokers - people who abused the trust of both lenders and borrowers. If they do disappear, they shan’t be missed.

—Rob Horning