Saturday, September 11, 2010

Ray Brescia on Income Inequality and the Financial Crisis

Ray Brescia (Albany) has posted a very interesting article on SSRN entitled The Cost of Inequality: Social Distance, Predatory Conduct and the Financial Crisis, which will be published in an upcoming issue of the N.Y.U. Annual Survey of American Law.  Those who attended the AALS Mid-Year Property meeting this summer will recall that Ray uses empirical data to try to understand the origins of the financial crisis in a fairly unique way, stressing the correlations between income inequality, trust, social capital, and delinquency rates.

I highly recommend this article.  Ray's abstract is below:

Many have offered theories that attempt to identify the causes of the present financial crisis. Some blame deregulation and a culture of greed on Wall Street. Others argue that lawmakers and Presidents promoted homeownership too aggressively, sending mortgage credit to low-income communities to serve borrowers with poor credit and little likelihood of paying back their mortgage. Too often, these charges enjoy little empirical support. Taking a hard look at some of the economic indicators present in the buildup to the crisis, one fact stands out; prior to the crisis, the U.S. experienced a stunning increase in income inequality. This increase was reminiscent of a time when the U.S. experienced a similar increase in income inequality: the years leading up to the Great Depression. Given this phenomenon, this article explores empirically whether income inequality itself may have an impact on financial markets: asking whether such inequality can exacerbate, or even lead to, financial crises.

There are several possible explanations for the potential connection between rising income inequality and the great strains on the economy it causes. Did rising income for certain sectors lead to an ability to use that income to influence policymaking in such a way that favored those sectors? Did such income inequality pressure politicians to promote policies that favored easy access to credit as a way to mollify lower income constituents who might otherwise grow frustrated with their own stagnating wages in the face of such inequality? These are the types of explanations that some have offered to try to explain the link between income inequality and the Great Recession. In this work, I both analyze these explanations, but also offer a third: that both income inequality and racial inequality created greater social distance and this social distance, in turn, led to greater predatory conduct. That predatory conduct turned a mortgage market into an economic killing field.

The review of the empirical information presented here uncovers critical information that may reveal new insights into the potential causes of the financial crisis. First, differences in economic inequality within states correspond to differences in mortgage delinquency rates: i.e., the greater the income inequality in a state, on average, the greater the delinquency rate in that state. Second, the greater the generalized trust in a state, the lower that state’s delinquency rate. Third, the higher the social capital in a state, and the higher the level of volunteerism in a state, the lower its delinquency rate. Fourth, the higher the median income in a state, the higher the delinquency rate in that state. Fifth, an index of a series of indicators — income inequality within a state, the size of the African-American population in a state and the median income of the African-American population in that state — reveals a strong correlation between these indicators and delinquency rates. This correlation suggests not that low-income African-Americans are to blame for the foreclosure crisis, but, rather, that middle-class African-Americans were targeted for, and steered towards, loans on unfair terms, precipitating the foreclosures that are now concentrated disproportionately in communities of color.

After a discussion of the empirical data that supports these conclusions, this article assesses the legislative and market forces presently at work that are attempting to rein in risky practices on Wall Street. First, I review the recently enacted Dodd-Frank financial reform legislation, analyzing to what extent it addresses social inequality. Second, I turn then to reform efforts with respect to modernization of the Community Reinvestment Act. Last, I look to market-driven and consumer-oriented efforts to reform financial institutions, including the Move Your Money campaign, a consumer-led boycott designed to convince consumers and investors to utilize community-based financial institutions.

Tanya Marsh

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September 11, 2010 in Mortgage Crisis | Permalink | Comments (0) | TrackBack (0)

Thursday, September 9, 2010

The Opposite of Bonsai

David Alvand believes in strong private property rights.  If nothing else, he is a man that would make Blackstone proud.  For example, he took a dispute over a wall in his backyard all the way to the European Court of Human Rights.  More recently, he's gotten into botany, planting giant leylandii trees across the front yard of his home in Plymouth, England.  His neighbors remain unimpressed and have "launched a formal complaint under antisocial behaviour legislation to force him to cut back the vast leyland cypress trees completely filling the front garden."  Here's the tree in question:


Surfing around the net a little, it seems that the leylandii has sparked many other rounds of suburban property warfare.  One website reports that the Leylandii has caused over 20,000 disputes between neighbors in Great Britain and Ireland. The arguments, it seems, usually center around access to sunlight.  In 2003, five tree blazes were reported in the Cumbrian village of Scotby, with police describing the attacks as "one person's war against the leylandii".

Steve Clowney 

(pic: from the Mirror under a creative commons license)

September 9, 2010 | Permalink | Comments (0) | TrackBack (0)

Wednesday, September 8, 2010

Further Thoughts on the Judicial Takings Standard

As I mentioned in a prior post, I am working on an article on Judicial Takings after Stop the Beach.  In that prior post, I discussed the private-private v. private-public distinction and its significance for judicial and regulatory takings.  In this post, I will make two further arguments about the judicial takings standard.  First, there was no need for the Court to address the judicial takings standard in Stop the Beach.  Second, there is no need for a unique judicial takings standard, and judicial takings cases can be analyzed under the Court's current takings standards.  As with the prior post, what follows is largely text from my draft article, with footnotes removed.  I will probably post the article on SSRN sometime in the next week or so.

The Supreme Court Did Not Need to Resolve the Judicial Takings Standard in Stop the Beach

The three opinions issued by the justices in Stop the Beach contain a significant amount of discussion of whether the Court needed to reach the issue of the substantive takings standard applicable to judicial takings cases.  Justice Scalia’s plurality opinion argued that the Court needed to reach this issue; Justices Kennedy and Breyer each argued in concurrence that the Court did not need to reach this issue.
On the surface, this debate might seem to be of largely academic interest, because none of the opinions issued in Stop the Beach commanded a majority of the Court.  If Justice Scalia’s opinion had commanded a majority, then whether the Court needed to reach the issue of the substantive standard might have mattered a great deal – if the Court did not need to reach this issue, then Justice Scalia’s discussion of the standard might be discounted as mere dicta.  Because Justice Scalia did not command a majority for his position, his discussion of the substantive judicial takings standard is not binding precedent, dicta or not.  On further consideration, however, resolving the issue of whether the Supreme Court needed to reach the substantive standard will be critical to lower federal courts deciding judicial takings challenges, because those courts themselves will have to decide whether and when they need to address the substantive judicial takings standard. 

Justice Scalia’s argument for the proposition that the Court needed to resolve the substantive standard is straightforward:  the Court cannot decide whether there has been a judicial taking until it decides what constitutes a judicial taking.  Thus, in critiquing Justice Breyer’s position that the Court need not reach the issue, Justice Scalia wrote:  “Justice Breyer cannot decide that petitioner’s claim fails without first deciding what a valid claim would consist of.”  Justice Breyer responded by asserting that “courts frequently find it possible to resolve cases – even those raising constitutional questions – without specifying the precise standard under which a party wins or loses.”  Justice Breyer also noted the consistent theme in the Court’s prior decisions of the importance of deciding only the narrow issue presented by a case.  For his part, Justice Kennedy also argued that it was a bad idea for the Court to reach out and decide issues that it need not reach before those issues had been considered in the lower courts and by commentators.

Justices Breyer and Kennedy have the better of this argument.  Justice Scalia, of course, was correct that a court needs to have at least some idea of the applicable substantive standard before it resolves a party’s claim.  But Justice Breyer was also correct that in some cases a court need not resolve the specific standard before it rejects a claim.  Consider a common law court deciding for the first time whether to recognize a doctrine of felony murder in a case where it turns out that the victim is still alive.  The court would be entirely correct to decide the case without resolving the specific felony murder standard, because on any conceivable analysis, a murder prosecution requires the victim to be dead.  Although the law on judicial takings is still wide open, everyone would agree that to state a judicial takings claim a property owner would have to demonstrate that a state court judicial action was a departure from, or inconsistent with, the prior property law in that jurisdiction – if a state court holding is consistent with the state’s prior property law, then nothing has been taken from the property owner. (See Lucas).  Alternatively, this same point can be made in terms of a comparison to takings by the legislature or the executive.  Under no theory of judicial takings could a judicial action be a taking if it would not be a taking for the legislature or the executive to do the same thing.  A legislative or executive action is not a taking if it is consistent with the state’s background principles of property law.  (again, see Lucas).  For a takings claim to be made, the property owner must establish that something was taken.  In Stop the Beach, the Court unanimously concluded that the Florida Supreme Court’s holding was consistent with the prior Florida law on beachfront property.  Under no conceivable standard, then, could the Florida Supreme Court’s holding be a judicial taking, and the United States Supreme Court therefore did not need to reach the specific substantive standard for judicial takings to reject the Petitioner’s claims. 

Justices Kennedy and Breyer were also correct to argue that it is unwise to reach an issue if it is unnecessary to do so.  An overarching theme of this Article is that the issues presented by judicial takings are far more complex than the Court’s opinions in Stop the Beach (including those by Justices Kennedy and Breyer) might suggest.  Had the Court finally resolved any of these issues in Stop the Beach without recognizing their complexity, it might have created more problems than it solved.

Lower federal courts considering judicial takings claims would therefore be wise to resolve only the narrow issues presented by any particular case.  Under any conceivable theory of judicial takings, a judicial taking can only occur if the challenged state court holding is inconsistent with the state’s prior property law.  If a court concludes that the challenged state court holding is consistent with the prior law in that state, then the court should reject the judicial takings claim without reaching the issue of the specific judicial takings standard.

There is no Need for a Unique Judicial Takings Standard

The logic of judicial takings rests on two basic points.  First, the judiciary is a state actor, and is subject to the constitution.  Second, the judiciary is capable of taking property.  The first point seems incontrovertible, and the examples of judicially mandated private-public transfers discussed in my prior post demonstrate that the second is true as well.  As Justice Scalia argued in his Stop the Beach plurality, “the Takings Clause bars the State from taking private property without paying for it, no matter which branch is the instrument of the taking.”

On this logic, there is no need for a unique test for judicial takings.  A judicial action should be considered a taking under the Just Compensation Clause if the equivalent action would be a taking if it was performed by the legislature or the executive. 

The prototypical judicial takings fact pattern involves a change in property law by a state judiciary.  Although this fact pattern may appear to be superficially different from the standard regulatory takings case, it in fact fits very well into the structure of the Court’s existing regulatory takings jurisprudence.  The Court has considered takings challenges to legislative changes to property law that are similar to changes that might be made by the judiciary.  In Hodel v. Irving, for example, the Court held that a legislative change to rules relating to the transfer of property at death was an unconstitutional taking.  It is important to note (as discussed further in my prior post) that Hodel involved a private-public transfer – the change in law resulted in the property interests in question escheating to the state at death, rather than transferring to another private person.  For present purposes, it is sufficient to recognize that it is easy to imagine a state court making the type of change in law that the legislature made in Hodel.  It is similarly easy to imagine state court decisions making other types of changes to the law that would resemble other branches of the Court’s regulatory takings caselaw.  The private-public transfer scenarios discussed in the prior post that involved judicial alterations of use rights in property that could easily be analyzed under cases such as Penn Central and Lucas, and of judicial requirements of public access to private property that are similar to those at issue in cases like Kaiser Aetna and Nollan.

There can be little question that a legislative or executive action that simply declared that previously-recognized property rights no longer existed would be a regulatory taking under the Court’s existing takings jurisprudence.  The dominant theme of the Court’s most recent regulatory takings cases is that a government action is a taking if it is the equivalent of an exercise of eminent domain, and this principle of equivalence prominently featured in Justice Scalia’s Stop the Beach plurality opinion.  The declaration that a property right no longer exists is certainly the equivalent of the taking of that property right through eminent domain.  Prior to each government action, owners held private property rights; after each, those rights were held by the public.  Thus, as Justice Scalia argued in Stop the Beach, “If a legislature or a court declares that what was once an established right of private property no longer exists, it has taken that property, no less than if the State had physically appropriated it or destroyed its value by regulation.”  In his opinion, Justice Scalia placed his emphasis on “or a court.”  Here, I would place the emphasis on “a legislature.”  The branches of government are equivalent in this context, and there is no need to create a unique standard for judicial takings.

Ben Barros

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September 8, 2010 in Takings | Permalink | Comments (0) | TrackBack (0)

Tuesday, September 7, 2010

Trompe l'oeil

The problem of abandoned homes is an increasingly serious policy issue in both urban and suburban settings.  Vacant buildings act as a beacon for drugs, prostitution, arson, and other human ills.  A judge in Cleveland as a low cost solution

Cleveland Housing Court Judge Raymond Pianka is testing a way to board up vacant houses so they don't look like glaring neon signs saying nobody's home. Pianka brought in a Chicago man who specializes in making plywood to look like doors and windows. He gets vacant homes to blend into the neighborhood and not stand out as eyesores that draw drive-by vandals as well as vagrants and kids. 

I'm on record preferring a rollback of single-use zoning in these troubled areas (let businesses move into these empty properties), but this looks like a far more politically feasible approach. 


Steve Clowney

(pic credit: Chuck Crow - used under creative commons license)

September 7, 2010 | Permalink | Comments (0) | TrackBack (0)

Sunday, September 5, 2010

What, If Anything, Do We Do Now?

Home values continue to drop.  The market for existing stock is at a standstill, and tens of thousands of new foreclosures have yet to enter it anyway.  More and more homeowners -- including boringly responsible ones, like yours truly -- find themselves underwater, owing more on their mortgage loans than the house is worth. Homebuilders?  With no homes to build, they're unemployed.  Between the unemployed and the underwater, there's no one to buy homes even at current prices.

The Obama administration didn't create this disaster, it inherited it from the economic anti-Midas that was the Bush admninistration.  But the Obama administration has been unable to repair it.  The home-buyer tax credit that expired months ago had no long-term positive impact.  It was supposed provide enough stimulus so that, combined with other parts of the stimulus package, the economy would grow, making further market stimulus unnecessary.   It didn't work, and there's no reason to think another tax credit is (a) possible, given the enormous budget deficit, or (b) advisable, since the last one didn't work anyway.

George with raven

So now what, if anything, do we do?  That's the question posed by this article in the New York Times.   The simplest, most painful, most politically deadly, and most advisable thing to do may be this: nothing.  Theoretically, eventually the market has to bottom out: eventually prices have to hit a point so low that people begin buying.

But, and this a HUGE but: as home values continue to fall, more and more homeowners will be underwater.  More and more are likely to default, unless they ignore their own economic self-interest. 

Let's say some hypothetical homeowner's -- let's call him, say, Mark Edwards -- home is worth $100K less than he paid for it 3 years ago  Now he could buy a very similar house next door for $100K less than he owes on this one.  His child is approaching college age, and he needs to find a way to pay for tuition.  So: does he (a) continue to make payments on a house that's worth much less than he's paying for it, and tell his child he can't afford to pay her tuition, or (b) default, buy the house next door, and send his child to college?  

If you think that many people would choose (b), then consider the consequence of doing nothing to try to stop the fall in home values: more defaults and foreclosures, and therefore more discounted housing stock entering the market, driving home values down further.  The spiral will get worse -- possibly much worse.  In fact, three years later, Edwards might be motivated to default on the house next door, too (maybe even to buy back the first house at less than he paid for the second). 

So, yes, eventually home values will hit bottom, but bottom is a long, long way down, and getting there will be more than just painful; it will require a fundamental readjustment in our economic expectations.  And God help any politician who proposes THAT. So if we can't face the pain of doing nothing, then we have to try to do something.  But what?  And at what cost? 

Mark A. Edwards

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September 5, 2010 in Home and Housing, Mortgage Crisis | Permalink | Comments (0) | TrackBack (0)