Unscrupulous economic predators prey on the innocent

Andrew Garfield portrays Dennis Nash, left, and Michael Shannon portrays Rick Carver in the movie 99 Homes. Hooman Bahrani / Broad Green Pictures via AP

In Ramin Bahrani's film 99 Homes, Florida's post-financial crisis real estate market becomes a hunting ground, in which amoral realtors profit from turfing families, the elderly, and the disabled onto the streets.

Dennis Nash, played by Andrew Garfield, is one of those evicted. When Rick Carver, the real estate agent who evicted him, offers Mr Nash a job, he accepts. But then Mr Nash must in turn play the evictor – he must victimise other down-on-their-luck homeowners and order them to leave the homes in which they have spent their lives.

In 99 Homes, as in post-crash America, the evicted were sold rotten mortgages at the height of the pre-crisis boom. These contracts contained deliberately inexplicable, unfair terms, inexcusable rates and usurious inbuilt margins. When the US economy went south, work dried up and hidden contractual terms caused borrowers’ bills to skyrocket, which in turn caused a wave of foreclosures spread across the United States.

The government, led by then-Treasury secretary Hank Paulson, bailed out the banks who stimulated demand for, issued and traded these mortgages, and nationalised Fannie Mae and Freddie Mac, the government agencies that were supposed to guarantee the loans. But it did nothing in the way of offering debt relief to consumers – the ones who had been missold mortgages.

"America bails out the winners," Mr Carver tells Mr Nash in 99 Homes.

In their new book, Phishing for Phools: The Economics of Manipulation and Deception, the Nobel economics laureates George Akerlof and Bob Shiller help us to understand how the situation depicted in 99 Homes happened – and why it's an integral part of market capitalism.

Akerloff and Shiller show that unregulated free markets systematically make people worse off by providing the unscrupulous with opportunities to take advantage of the unwary.

That is contrary to a popular story about the economy found in introductory economics textbooks, and in the rhetoric of right-wing politicians.

The 1980s bought neoliberalism – an updated form of laissez-faire economic thinking – into office. Neoliberalism advocates that individuals left to their own devices lead us to the best of all possible worlds. In this view, regulation harms industry and welfare, and “big government” is the problem.

In formal microeconomics, there is some elegant mathematics that explains why ideal-typical markets automatically produce good outcomes. These models are, when considered in isolation, fine – they map a bit of mathematical structure on to a streamlined set of assumptions, and give us some interesting implications. For instance: if the government sets a minimum price for milk, all things being equal, it will create a glut of milk. When a truly free market under perfect competition is in equilibrium, any kind of governmental interference must, the model says, make someone worse off.

Friedrich Hayek, a darling of neoliberals, got similarly carried away by the implications of entry-level microeconomics’ stylised mathematical models, which he mistook for universal truth.

Since government intervention always makes people worse off, he assumed, apropos of these models, government should barely ever intervene in markets. Hayek's ideas had "impact", as they say. "This is what we believe," said Margaret Thatcher, slamming Hayek's The Road to Serfdom, in which he sets down this thesis, on the table of the UK Cabinet.

But all other things are not always equal: Akerloff, Shiller, and Bahrani show us why this is picture of the world is dangerously wrong.

Akrasia, in philosophy, is the problem of why people do things that clearly aren’t in their own best interests. They eat more sugar than they need to; they drive faster than they should; they spend all their money at the start of the month, then struggle to make ends meet in the run-up to payday.

People are reliably akratic. They can become addicted to gambling, food, alcohol, drugs, computer games – pretty much anything that triggers a release of dopamine, which is to say, anything that feels good.

They are not omniscient. I may think that this house is a bargain – you may know about the high local crime rate, the crumbling foundations and the damp in the attic.

When there is a chance to get people to pay more money for something that they don’t really want – either because they are akratic or because they ​are deliberately kept underinformed about what they are signing up for – malicious individuals will smell profit.

Without the right kinds of regulation, companies spring up for whom ripping people off is a standard operating procedure. Such companies can exploit their informational advantages over underinformed consumers to make them pay more for a car than they need, to make them sign up to a mortgage that they have no hope of every paying off, to make them buy Oreos (top two ingredients: hydrogenated vegetable oil and sugar).

The Marxist’s customary complaint is that power determines economic outcomes. The study of economics discusses power sotto voce in the context of imperfectly competitive marketplaces – in the textbook model, oligopolists force consumers to pay higher prices by selling just enough for them to push up the price to a profit-maximising level.

In the Akerlof and Shiller model they have another weapon – they can find clever ways to manipulate and deceive the people they sell to. They can think of new ways to take their buying public for fools.

Powerful, rich companies use their size to manipulate the powerless in this way. Think of banks (the Libor scandal), car manufacturers (Volkswagen and the emissions scandal), petrochemicals companies (Standard Oil and the railways; Dow Chemical and the Bhopal disaster), cigarette companies (watch Michael Mann's The Insider).

In 99 Homes, Mr Nash and family move to a motel populated by other victims of Florida's real estate bust. They are poor people who were missold mortgages with exploitative terms by powerful banks who got bailed out. The banks took them for fools, and profited from it.

This isn’t a coincidence: it’s what happens when under-regulated markets are combined with inequalities in power, and opportunities to rip off fallible people. Without regulation, conmen thrive.

abouyamourn@​thenational.ae

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