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The political economy of mortgage defaults

- December 18, 2008

As a sort of follow-up to Drutman, “this paper”:http://www.gsb.stanford.edu/FACSEMINARS/events/political_economy/documents/pe_12_08_trebbi.pdf by a clatter of Chicago economists is worth looking at.

We examine the determinants of congressional voting behavior on two of the most signi?cant pieces of federal legislation in U.S. economic history: the American Housing Rescue and Foreclosure Prevention Act of 2008 and the Emergency Economic Stabilization Act of 2008. We fi?nd evidence that constituent interests and special interests in?uence voting patterns during the crisis. Representatives from districts experiencing an increase in mortgage default rates are signifi?cantly more likely to vote in favor of the AHRFPA. They are precise in responding only to mortgage related constituent defaults, and are signi?ficantly more sensitive to defaults of their own-party constituents. Increased campaign contributions from the fi?nancial services industry is associated with a higher likelihood of voting in favor of the EESA, a bill which transfers wealth from tax payers to the fi?nancial services industry. We also examine the trade-off between politician ideology and constituent and special interests, and ?nd that conservative politicians are less responsive to constituent and special interest pressure. This latter fi?nding suggests that politicians, through ideology, can commit against intervention even during severe crises.

They suggest (unsurprisingly) that the levels of mortgage defaults in a particular district counts importantly in explaining how that district’s Member of Congress votes, and a little less intuitively that non-mortgage defaults seem to have no explanatory power. Furthermore, they use zipcode data to explore whether Congress members are more sensitive to mortgage defaults among ‘their’ supporters than to constituents in general (they suggest that the answer is ‘yes’) and also note that the size of campaign donations from the financial services industry have a clear effect on voting. While I’ll leave the detailed analysis and critique to more statistically inclined monkeycagers, I will note that I am a bit dubious about their suggestion that these votes constitute a natural experiment that allows one neatly to separate the effects of ideology and constituent interest in voting because, supposedly, “the shock to mortgage defaults that precedes the bill is completely orthogonal to ideology.” Additionally, as is typical for papers with this kind of provenance, they cite rather more extensively to quasi-connected literatures in economics and public choice than to the relevant literature on voting.

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