Posts Tagged ‘banks’


One of the persistent narratives about the 2008 financial crash is that low-income people (with help from the government) took out mortgages to buy homes they couldn’t afford. And when they inevitably defaulted on their mortgage payments (and government-sponsored lending agencies were declared bankrupt), the entire financial system came tumbling down. In other words, poor people  caused the crash.

Uh, no!

New research by Manuel Adelino, Antoinette Schoar, and Felipe Severino serves to bury that myth. According to the authors,

The large majority of mortgage dollars originated between 2002 and 2006 are obtained by middle income and high income borrowers (not the poor). While there was a rapid expansion in overall mortgage origination during this time period, the fraction of new mortgage dollars going to each income group was stable. In other words, the poor did not represent a higher fraction of the mortgage loans originated over the period. In addition, borrowers in the middle and top of the distribution are the ones that contributed most significantly to the increase in mortgages in default after 2007.

In other words, the mortgage crisis that provoked the crash was not caused by poor people “living beyond their means.”

So, let’s stop blaming poor people for a crisis that originated elsewhere—among lenders and borrowers at the other end of the distribution of income whose “irrational exuberance” led them to get caught up in a spiral of increasing levels of mortgage debt premised on an unsustainable increase in housing prices that served as the basis of an intricate web of financial derivatives.

A bubble, which had nothing to do with poor people, that inevitably burst.


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Lying, cheating bankers

Posted: 22 November 2014 in Uncategorized
Tags: , , ,


Lying, cheating bankers are not born; they’re created.

That’s the conclusion of the new study by Alain CohnErnst Fehr, and Michel André Maréchal, “Business culture and dishonesty in the banking industry,” published in Science.

In other words, all of the various dishonest behaviors of bankers in recent years—from manipulating the foreign exchange market, LIBOR, and the gold market to mis-selling interest-rate swaps, mortgage backed securities, and credit-default swaps—for which some bankers have been fined but none of them jailed, can be attributed to the fact that “being a banker” made people more likely to cheat.

Their study is based on the idea that individuals have multiple social identities.

Which identity and associated norms are behaviourally relevant depends on the relative weight an individual attributes to an identity. In a given situation, behaviour is shifted towards those norms that are associated with the more salient identity. Thus, if the banking culture favours dishonest behaviours, it should be possible to trigger dishonesty in bank employees by rendering their professional identity salient.

And so they did: in a simple coin-toss game, they discovered respondents who were primed to think of themselves as “everyday people” did not lie about the results (despite the fact there was ample room to do so) while the group who were primed to think of themselves as “bankers” tended to lie significantly more.

The policy lesson the authors draw is that “banks should encourage honest behaviours by changing the norms associated with their workers’ professional identity.” An alternative lesson would be that the identity of lying, cheating bankers can be eliminated by getting rid of the banks themselves.