Silly Little Country

The NY Times' Public Editor Seems to Behave Foolishly

Outsourced to Brad DeLong.

Megan McArdle's point is that dysfunctions in mortgage lending have next to nothing to do with Edmund Andrews's personal financial crisis. The crisis comes from the radical disjunction between the style of life Andrews and his wife expect and Andrews's income--$10,000 a month, $3,500 in taxes, $4,000 (in the book; $5,000 in the bankruptcy filing) in alimony and child support, leaving $2,500 a month to live on for all expenses. If Andrews hadn't bought his house in Silver Spring he would, McArdle believes, be in a worse financial position right now--for one thing, his landlord would have evicted him. I think she is probably right, and that Patricia Berreiro's second bankruptcy is telling evidence for McArdle's position. Hoyt's claim that "I think it was clear that [Andrews] and his wife could not manage their finances, bankruptcies or no" appears to me to be a deliberate attempt to miss the entire point.

Now Megan McArdle is arguing that he is not a victim of the system in sense (3) either--that no matter what the financial system Andrews would now be facing bankruptcy. Moreover, on this reading the debt system has actually advantaged Andrews substantially. In a counterfactual world in which Andrews had rented and not bought, he would now have an extra $14K in New York Times stock (all that would be left of the $46K in stock he sold in 2004 to assemble the down payment, but in the meanwhile he paid about $2.5K a month in mortgage payments for a house it would have cost him about $2.5K a month to rent, the deductability of mortgage interest has given him about $21K in tax shields, he has lived rent-free for ten months since he stopped making mortgage payments and so gained an additional $25K, and he pumped $58K in home equity loans out of the house. As I see it, the willingness of the financial system to lend to him has allowed him to spend an extra $90K since 2004.

The question is: if the financial system had not encouraged him to borrow so much, would he have made wiser decisions and arrived at this point with more assets? Megan McArdle argues that Patricia Barreiro's two bankruptcies spaced eight years apart make that highly unlikely, and she has a very strong case.

That's why it is of interest--not Hoyt's "he should have revealed the second [bankruptcy], if only to head off the criticism," but because it shapes how we assess the damage done by the too-easy availability of credit.

It is also quite telling how Andrews left key elements of the story out.
And it is even more hilarious that the NY Times chooses not to name Megan McArdle. As DeLong points out in a separate blog post, who has the higher credibility?

posted by Alan Adamson @ 6:31 AM