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42 Regulation 65 (2019-2020)
A Dangerously Seductive Theory

handle is hein.journals/rcatorbg42 and id is 291 raw text is: WINTER 2019-2020 / Regulation / 65 securitizations, which happened between the second quarter of 2004 and the end of 2006, came after the rise in homeownership, which peakedin the second quarter of2004. For the increase in private securitization of mortgages to be a major cause of the boom in homeownership, most of it would have had to happen just before or at the same time as the increase in ownership. In a chapter on migration between cities, Erdmann notes that for his story about migration from and to Closed Access cit- ies to make sense, people in those cities who have families would move out and be replaced by people with fewer children. Sure enough, federal tax data show that households moving into Closed Access cit- ies had 0.2 fewer members per household than households moving out. That sounds small, but it's one-third of the drop in the average size of an American family between the 1960s and 2018. Tight money, tighthousingmarketsl In one of the final chapters, A Moral Panic and a Financial Crisis, Erdmann shows that the Federal Reserve responded to the finan- cial crisis not by flooding the market with liquidity, as Alan Greenspan did after the 1987 stock market crash, but by bailing out particular financial institutions and then sopping up the added liquidity by selling bonds. The technical term for what the Fed did is sterilization. Erdmann could have strengthened his case by pointing to the well-developed eco- nomics literature on this point. San Jose State University economist Jeffrey Rogers Hummel has laid out the facts on this in detail (see Ben Bernanke versus Milton Friedman, Independent Review, Spring 2011) and notes that both Rutgers Univer- sity economics professor Michael Bordo and monetary blogger Scott Sumner have also made this point. Maybe it's all the more impressive that Erdmann, who is not an economist, appears to have come to this conclusion on his own. Moreover, he notes, the Federal Reserve started paying interest on bank reserves, which, of course, caused banks to hold on to reserves that they otherwise would have lent. This started in October 2008, which has to be one of the worst-timed Fed decisions since the Great Depression. The result of the relatively tight monetary policy was a large increase in mortgage delinquencies. Erdmann's best chapter is his epilogue. In it, he shows justhow dysfunctional hous- ing policy has been in the Closed Access cit- ies. He includes a two-and-a-half-page quote from an April 2016 article in the San Fran- cisco Chronicle about the barriers state and local governments have erected to prevent new housing. That passage is heart-break- ing and, in my case, anger-inducing. The epilogue also includes a nice dis- cussion of one of the few cases where the term trickle-down makes sense: housing. Erdmann argues that when new housing is supplied to the top end of the market and high-end tenants move into the new luxury units, the vacated housing is often occupied by people with lower income. I've often made that point with an analogy to cars: you don't generally see lower-income people driving relatively new Cadillacs, but you do see them driving 10-year old Cadillacs. Erd- mann supplies his own car analogy, writing, We don't insist that auto manufacturers only produce new cars that are worse than the existing used cars in order to be equita- ble. Moreover, he notes, whatever policy is chosen leads to some form of trickle-down: When new units don't 'trickle down' to households with lower incomes, house- holds with lower incomes have to 'trickle down' to Phoenix or Las Vegas. Erdmann, quite reasonably, sees the solu- tion in allowing more construction, espe- cially in Closed Access cities. His last line sums up his policy message: Let it rip. A Dangerously Seductive Theory _ REVIEW BY PIERRE LEMIEUX onsider fake news-the real sort, based on demonstrably false facts or false narratives. Actual fake news is ubiquitous and spreads like wildfire, thanks in part to the internet. In his new book Narrative Economics, Nobel economics prizewinner Robert Shiller cites research that found that false stories had six times the retweeting rate on Twitter as true sto- ries. Moreover, he notes, truth is not enough to stop false narratives, especially when the latter thrive on identity and us versus them thinking. Some people even enjoy stories that they know are false, much like pro wrestling. (We know people realize pro wrestling is fake because few people bet on matches.) Fake news, Shiller writes, seems to be part ofthe normal human condition. This book aims to show that contagious narra- tives-both false and true-are responsible for many of the changes we observe in eco- nomic activities. What are narratives?/ A narrative is a story or other representation that explains or justifies some event or institution and that affects people's behavior. Economic nar- ratives relate to economic events or insti- tutions. For example, the Laffer curve and the story of its originally being drawn on a restaurant napkin went viral around 1980 and may have influenced voters and pol- iticians. According to Shiller, neuroscience and neurolinguistics suggest that the human brain is organized around analogies, met- aphors, and stories-all the stuff of narra- tives. In short, people love stories. Paraphrasing psychologist Jerome Brunner, Shiller writes that we should not assume that human actions are driven

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