I don’t know nuthin’ ’bout economics, but…: NPR/Henri Poincaré/Mortgage follies edition
Innumeracy is a problem I have and will come back to a lot here. But as I listen to more and more popular presentations of technical subjects, I still get astonished by the intersection of two structural problems in the media.
That is: many reporters — not so high a proportion of self-described science writers, though still plenty there — have trouble with even the most elementary uses of quantitative approaches to their stories because they just don’t think in numbers at all. That’s the negative way of framing the problem; journalists have a lack that inhibits their capacity to do good work in an ever-more technically imbued world.
Then there’s the affirmative problem. Reporters establish stories by anecdote, by individual bits of data, single episodes. They’re called stories for a reason: the goal is to perform one of the most powerful acts of communication humans have figured out, to convey information that compels belief because its hearer can place themselves right into the narrative.
That’s why, to edge closer to the real subject of this post, so much of the reporting on the mortgage crisis (fiasco) centers on some family that’s about to lose a house, and spend little time, on the meaning of the big numbers, like the implications of a repricing of US housing on a large scale. The point is that not only do many journalists not know a set of ideas that could help them figure out such things; what they do know leads them away from the kind of approach to their work that more mathematical sophistication would provoke.
We can not know all facts, and it is necessary to chose those which are worthy of being known.
Choose? Worthy? Surely Poincaré is not going prematurely po-mo on us here?
Not really. The notion embedded in his deliberately provocative turn of phrase is that facts need form, some apparatus that can incorporate a given datum into a richer story — one with a meaning larger than that of a single incident. That apparatus is quantitative.
(BTW — I use the word “quantitative” rather than mathematical, because for a great deal of human experience, the math needed to make sense of what’s going on is not that complicated. It’s often a matter of counting, sorting, and extracting relationships within the formal limits of what you learn by the end of high school. I have posted on a couple of such examples from great scientists — Freeman Dyson, for one, and J.B.S. Haldane for another. There are lots more — perhaps readers could be persuaded to post examples of what they think are elegant, simple insights a bit of math can give us ?)
All of this into mind while I listened to NPR this morning.
This is the story that got me going — a short (1 minute, 10 seconds) reporter-voiced account of what seemed to the Morning Edition team to be something strange: Even though the Fed is cutting interest rates, mortgage rates went up sharply last week. That ain’t how its supposed to be, according to the reporter, Adam Davidson, because when the Fed lowers its rates, other rates are supposed to drop.
The reason Davidson gave for what he saw as weird is not all wrong: he said that lenders are newly afraid of inflation, and hence want to charge a higher price for money that is going to be paid back over time.
But look at the unexamined assumption: that the Fed can control rates in general. That’s not true.
What’s missing here? An understanding of the real importance of time.
The Fed mostly exerts its influence on interest rates through the shortest of short-term instruments, the overnight federal funds rate — which is just the price banks pay for extremely brief loans required to keep their minimum reserves up to snuff.
But real people borrow money for houses on long time scales, most famously through 30 year mortgages. The enormous difference between the types and uncertainties of risk between those two scales of time serve at least partially to decouple the two rates — see the data to be retrieved here for a survey view of this.
So it is true that fear of inflation could keep push term rates up, whether or not the Fed was playing around with short term rates. But so could lots of other things.
Perhaps that the value of US real estate is unclear in a falling market, and thus lenders demand a risk premium before they lend against such difficult-to-value assets. Perhaps the overall credit worthiness rating of American real estate borrowers has dropped in the aggregate. Perhaps lenders fear that the secondary market for mortgages is going to get a bit less liquid. Lots of factors play into long term interest rates that have nothing to do with the reasons the Fed makes its interest rate decisions.
In other words: and the NPR story was either meaningless or misleading. And it failed because the reporter glossed over or did not fully understand what the mortgage rate summarizes as a single number — all the complex calculations of risk and profit that underpin the decision of whether or not to make a loan.
What I would have loved to hear instead of a “this fact is strange” report would be that story: how do interest rates express quantitatively our ideas about the future. It’s still a good, fully human story: Those numbers tells us a tale about what we think we know about what’s coming down the pike — and how much in dollars and cents we fear changes in our perception of what we don’t know.
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