China now has about 65,000 kilometers of freeway criss-crossing the country. In 1989, the number of kilometers was zero. To get a sense of the magnitude of this achievement, the Interstate Highway system is about 75,000 kilometers long and took about 40 years to complete.
This does not mean the US should go on a freeway building spree (the marginal productivity of length almost surely decreases in length); it is just one measure of explaining how China has developed so rapidly.
There they go again
I enjoy David Brooks. From everything I can tell, he is smart and has a good heart. I would guess he is a terrific dinner companion. So I was disappointed when I read in his column this morning:
Sorry, David, but 1980 to 2006 was not a long boom. Consult the National Income and Product Accounts tables, and you will find that real GDP over that time grew about 3.1 percent per year. In the "awful" Nixon-Ford-Carter 1970s, growth was 3.2 percent per year; in the 60s 4.2 percent; in the 50s 3.5 percent, and in the 40s 5.6 percent.
It is not that 1980-2006 was bad, just hardly a boom relative to the previous 40 years.
What we have is not just a cycle but a condition. We could look back on the period between 1980 and 2006 as the long boom ...
Sorry, David, but 1980 to 2006 was not a long boom. Consult the National Income and Product Accounts tables, and you will find that real GDP over that time grew about 3.1 percent per year. In the "awful" Nixon-Ford-Carter 1970s, growth was 3.2 percent per year; in the 60s 4.2 percent; in the 50s 3.5 percent, and in the 40s 5.6 percent.
It is not that 1980-2006 was bad, just hardly a boom relative to the previous 40 years.
Steve Malpezzi is not happy
He blogs:
When I first heard of HAUP, I was excited, but my excitement quickly turned to disappointment. Among other problems, it requires that unemployed homeowners go through a fairly bureaucratic procedure to apply for what is (more or less) three months forbearance. And that' s merely the application; forbearance may or may not be granted for the 3 months. Remember, at the present time, the AVERAGE duration of unemployment is 9 months and rising.
(The fine print says you can extend beyond 3 months, but it's not clear that will happen, and will certainly not be clear to potential applicants).
The website's FAQs does not even tell people if the differences between the original payments and the reduced payments, are forgiven, or wrapped into the loan. (When I inquired of the experts in Washington, it turns out part of the loan is forborne, adding to the loan amount, but it’s amazing that they ask people to apply without clearly explaining such a key element of the program!)
What if your unemployment lasts more than three months (which is true for most unemployed today?) After two months you are given an application for HAMP, the dog that won't hunt. As far as I can tell, most unemployed will still not qualify for HAMP after they fill out this application.
There are other details that limit the program’s scope, and hence its effectiveness at halting the skid in housing prices. Homeowners can't get relief on the second liens. And if I read it right, HAUP does nothing for the unemployed not receiving unemployment insurance.
My bottom line: Treasury is still spitting on the fire and leaving the hoses coiled up.
David Leonhardt writes that Kindergarten matters
From the encouraging article:
Two really important points here: (1) early education does seem to matter; (2) the multiple choice tests we give older students may be deeply flawed. This is particularly problematic if these later tests are the foundation for evaluating our educational system.
On Tuesday, Mr. Chetty presented the findings — not yet peer-reviewed — at an academic conference in Cambridge, Mass. They’re fairly explosive.
Just as in other studies, the Tennessee experiment found that some teachers were able to help students learn vastly more than other teachers. And just as in other studies, the effect largely disappeared by junior high, based on test scores. Yet when Mr. Chetty and his colleagues took another look at the students in adulthood, they discovered that the legacy of kindergarten had re-emerged.
Students who had learned much more in kindergarten were more likely to go to college than students with otherwise similar backgrounds. Students who learned more were also less likely to become single parents. As adults, they were more likely to be saving for retirement. Perhaps most striking, they were earning more.
All else equal, they were making about an extra $100 a year at age 27 for every percentile they had moved up the test-score distribution over the course of kindergarten. A student who went from average to the 60th percentile — a typical jump for a 5-year-old with a good teacher — could expect to make about $1,000 more a year at age 27 than a student who remained at the average. Over time, the effect seems to grow, too.
The economists don’t pretend to know the exact causes. But it’s not hard to come up with plausible guesses. Good early education can impart skills that last a lifetime — patience, discipline, manners, perseverance. The tests that 5-year-olds take may pick up these skills, even if later multiple-choice tests do not.
Two really important points here: (1) early education does seem to matter; (2) the multiple choice tests we give older students may be deeply flawed. This is particularly problematic if these later tests are the foundation for evaluating our educational system.
The Hidden Leverage of Mortgage Securitization
Ed Glaeser has a nice piece about the debate over whether securitization should get the blame for the subprime mess. But it doesn't address one of the problems created by securitization: hidden leverage.
When banks (commercial and investment) sold off mortgage backed securities, they got them off their balance sheets, and so there was a pretense that they were no longer liabilities. But in order to sell the MBS, the lenders had to offer repurchase agreements, which said that if there was something materially wrong with the loan underwriting, the investor could return the mortgage backed security to the lender at par. Lenders also often kept residual positions of mortgage backed securities, meaning that to reassure investors, the lenders (i.e., the sellers of the securities) would take first loss positions.
Both repurchase agreements and residuals effectively increased the leverage taken on by lenders. Let me illustrate: suppose a lender has an whole asset and capital of ten percent, and the asset loses one percent of its value. The lender takes a ten percent hit against capital, because it is levered at 10 to one. But now suppose it takes a first loss position of ten percent on residuals, and the mortgage underlying the residuals lose one percent of value. The residual loses ten percent of its value, which means it wipes out the capital that is implicitly backing it. The combination of ten percent capital and a ten percent first loss position implies actual leverage of [updated: 100 to 1].
Ironically, the fact that financial institutions ate some of their own cooking--something that should have mitigated moral hazard--made them more vulnerable.
When banks (commercial and investment) sold off mortgage backed securities, they got them off their balance sheets, and so there was a pretense that they were no longer liabilities. But in order to sell the MBS, the lenders had to offer repurchase agreements, which said that if there was something materially wrong with the loan underwriting, the investor could return the mortgage backed security to the lender at par. Lenders also often kept residual positions of mortgage backed securities, meaning that to reassure investors, the lenders (i.e., the sellers of the securities) would take first loss positions.
Both repurchase agreements and residuals effectively increased the leverage taken on by lenders. Let me illustrate: suppose a lender has an whole asset and capital of ten percent, and the asset loses one percent of its value. The lender takes a ten percent hit against capital, because it is levered at 10 to one. But now suppose it takes a first loss position of ten percent on residuals, and the mortgage underlying the residuals lose one percent of value. The residual loses ten percent of its value, which means it wipes out the capital that is implicitly backing it. The combination of ten percent capital and a ten percent first loss position implies actual leverage of [updated: 100 to 1].
Ironically, the fact that financial institutions ate some of their own cooking--something that should have mitigated moral hazard--made them more vulnerable.
Raphael Bostic on housing tenure policy
From Newsweek:
Another senior HUD official was more direct in an interview with the Washington Post recently: "In previous eras, we haven't seen people question whether homeownership was the right decision. It was just assumed that's where you want to go. You're not going to hear us say that."
That official was Raphael Bostic, a leading scholar on home finance [rg note: and USC professor] and key policy adviser. An NPR report on Thursday morning said senior officials have acknowledged that their HAMP plan was largely a failure, and were leaning toward policy goals that promoted renting rather than buying. As a result, the report said, Fannie and Freddie might be entirely liquidated.
No people with memory loss in my back yard
In the midst of doing research on how NIMBYs fight facility for housing the elderly, I came across this story from last March in the Minneapolis Star Tribune:
The facility would go into a dead retail center: turning vacant space into useful space usually improves neighborhoods. The idea that Alzheimer's patients pose a risk to children is beyond preposterous. I understand having land use controls so that property owners don't have to deal with genuine nuisances, such as oil refineries. But what kind of people seek to deny the infirm a decent place to live? One hopes that once these neighbors are stricken with Alzheimer's, they retain enough of their long term memory to remember how badly they behaved.
When a released sex offender plans to move in next door, or a drug-treatment center is scoping sites for a new halfway house, a neighborhood's red flags invariably follow.
Now, the list of objectionable neighbors is growing.
In the face of overwhelming opposition from residents in an upscale community called Stonemill Farms in eastern Woodbury, plans for a 45-unit assisted-living facility for people with Alzheimer's disease and other forms of dementia have been put on hold.
The Alzheimer's facility is the latest in a growing list of projects across the metro that are meeting resistance from neighbors who perceive a threat to their communities or fear their property values will erode.
A decision on whether to recommend the Woodbury project for approval was to go before the city's Planning Commission on April 5, but the developer on Wednesday asked for more time to address issues, including concerns raised by neighbors, said Eric Searles, associate planner for Woodbury.
The move follows nearly a month of intensive protests and petitions by neighbors who mainly object to locating the facility in a failed retail site near a day care center and across the street from an elementary school. Many have also expressed a sense of betrayal that the original plans for the community never envisioned an assisted-living facility.
The facility would go into a dead retail center: turning vacant space into useful space usually improves neighborhoods. The idea that Alzheimer's patients pose a risk to children is beyond preposterous. I understand having land use controls so that property owners don't have to deal with genuine nuisances, such as oil refineries. But what kind of people seek to deny the infirm a decent place to live? One hopes that once these neighbors are stricken with Alzheimer's, they retain enough of their long term memory to remember how badly they behaved.
As I read the Washington Post "Top Secret America" series...
...I can't help but wonder how much deadweight loss this is all creating. The theatrics one encounters in airports also seems like it creates frictions that must have an impact on the economy--the ability to travel freely matters to economic productivity, and we travel less freely than we did ten years ago.
Fans of Ronald Reagan maintain that he got the Soviets to destroy themselves by making them spend so much on their defense (I think containment might have also had something to do with it). While as a fraction of GDP, our defense, security and intelligence spending is much smaller than the Soviet defense apparatus, the "invisible" impact of this stuff on the economy must be material. I some days wonder if we are doing exactly what Osama bin Laden wants us to do.
Fans of Ronald Reagan maintain that he got the Soviets to destroy themselves by making them spend so much on their defense (I think containment might have also had something to do with it). While as a fraction of GDP, our defense, security and intelligence spending is much smaller than the Soviet defense apparatus, the "invisible" impact of this stuff on the economy must be material. I some days wonder if we are doing exactly what Osama bin Laden wants us to do.
How Economics is better than Nassim Taleb says it is
The Black Swan is a great book, and deserves the hype it has received. It also features lots of nasty comments about economics, most of which the profession deserves.
But economics training (or at least my Wisconsin economics training) teaches empirical skepticism (something Taleb advocates) all the time. We worry about mis-measurement of variables, omitted variables, selection, reverse causality, and distributions all the time. We think hard about things we don't observe--in my context, when I think about measuring house prices, I worry about the fact that we only observe houses that actually sell. We do non-parametric statistics, and we reject the assumption of normality on a regular basis.
As a result of all this, economics has actually helped us understand certain things better, at least within the realm of applied microeconomics. One a lighter note, let me state an untestable hypothesis--of all the "silent" music that has been written, none has been better than J.S. Bach's.
But economics training (or at least my Wisconsin economics training) teaches empirical skepticism (something Taleb advocates) all the time. We worry about mis-measurement of variables, omitted variables, selection, reverse causality, and distributions all the time. We think hard about things we don't observe--in my context, when I think about measuring house prices, I worry about the fact that we only observe houses that actually sell. We do non-parametric statistics, and we reject the assumption of normality on a regular basis.
As a result of all this, economics has actually helped us understand certain things better, at least within the realm of applied microeconomics. One a lighter note, let me state an untestable hypothesis--of all the "silent" music that has been written, none has been better than J.S. Bach's.
Yves Smith on the Default of the Rich
She writes about this morning's story in the New York Times:
She slips in an important sentence--that refinanced mortgages lose their non-recourse status. Refinancings swamped purchase money mortgages in 2004 and were a substantial share of the market in 2005-2006. It would be interesting to see an estimate of the share of mortgage debt outstanding in "non-recourse" states that actually now come with recourse--I would imagine it is well over 50 percent. One might think that "sophisticated" investors are more likely to refinance than the general public (I did a paper with Lacour-Little some time ago that suggested that this was true), and so that "strategic" default could be particularly costly for this group. Certainly, if I were a lender and observed a borrower with a $1 million plus loan with recourse, I would go after the borrower for a deficiency judgment.
There is a broader point here as well. I have been reading arguments that America got itself into trouble because it is too borrower friendly, and that countries that avoided trouble, such as Canada and Germany, did so because of recourse. But the fact is that for all intents and purposes, the US is a recourse country too.
Another message here is that high income borrowers aren’t taking the Freddie/Fannie/bank bluster about strategic defaults seriously. Recall that the latest threat was that they would pursue deficiency judgments, as in sue borrowers who defaulted where the proceeds from the sale of the home, net of expenses, did not cover the mortgage debt. Now in some states that is not permitted (purchase money mortgages in many states are non-recourse, but refis never are). But independent of that, it is expensive to pursue defaulting borrowers, and if the borrower really is broke (say he had medical emergency, a business failure, or a costly divorce) litigation is just a costly wild goose chase. The most obvious group to pursue, nevertheless, would be defaulted owners of big ticket homes in affluent areas. They clearly regard the odds of legal action as low.
She slips in an important sentence--that refinanced mortgages lose their non-recourse status. Refinancings swamped purchase money mortgages in 2004 and were a substantial share of the market in 2005-2006. It would be interesting to see an estimate of the share of mortgage debt outstanding in "non-recourse" states that actually now come with recourse--I would imagine it is well over 50 percent. One might think that "sophisticated" investors are more likely to refinance than the general public (I did a paper with Lacour-Little some time ago that suggested that this was true), and so that "strategic" default could be particularly costly for this group. Certainly, if I were a lender and observed a borrower with a $1 million plus loan with recourse, I would go after the borrower for a deficiency judgment.
There is a broader point here as well. I have been reading arguments that America got itself into trouble because it is too borrower friendly, and that countries that avoided trouble, such as Canada and Germany, did so because of recourse. But the fact is that for all intents and purposes, the US is a recourse country too.
Two more thoughts about The Big Short
(1) One of Hayek's most compelling arguments for the virtues of markets over government is that markets (via prices) reflect the constantly shifting preferences of millions of agents, and as such are both efficient and democratic. But the market for Collateralized Debt Obligations and Credit Default Swaps did not reflect the preferences of millions--they reflected the views of a very small number of people, some of whom had enormous market power (for awhile, anyway). A takeaway from the book is how large institutions could rig prices of over-the-counter investments for long enough periods to do substantial damage.
(2) While I loved the book, and will indeed use it in class, it may suffer a bit from ex-post thinking. The heroes of the book, Michael Burry, Steve Eisman, Greg Lippman, bet early and often against subprime mortgages, and made lots of money as a result. Ex post, their bets seem obvious, and perhaps ex ante, they should have seemed obvious. My strong suspicion is that Burry--who went to the bother of actually reading and analyzing offering circulars--really did know that he had a positive NPV bet ex ante. And loan originators surely knew they were underwriting junk, because documentation was so week. But perhaps not even Burry knew how big his pay-off would actually be.
(2) While I loved the book, and will indeed use it in class, it may suffer a bit from ex-post thinking. The heroes of the book, Michael Burry, Steve Eisman, Greg Lippman, bet early and often against subprime mortgages, and made lots of money as a result. Ex post, their bets seem obvious, and perhaps ex ante, they should have seemed obvious. My strong suspicion is that Burry--who went to the bother of actually reading and analyzing offering circulars--really did know that he had a positive NPV bet ex ante. And loan originators surely knew they were underwriting junk, because documentation was so week. But perhaps not even Burry knew how big his pay-off would actually be.
Steve Malpezzi's Reading for Life
It is on the Wisconsin Real Estate blog:
13. Ahamed, Liaquat. Lords of Finance: The Bankers Who Broke the World. Penguin Press, 2009.
12. Akerlof, George A. and Robert J. Shiller. Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism. Princeton Unversity Press, 2009.
11. Bartik, Timothy J. Who Benefits from State and Local Economic Development Policies? Kalamazoo: W.E. Upjohn Institute for Employment Research, 1991.
10. Cronon, William. Nature's Metropolis: Chicago and the Great West. W.W. Norton, 1991.
9. Gomez-Ibanez, Jose A., William B. Tye and Clifford Winston (eds.). Essays in Transportation Economics and Policy: A Handbook in Honor of John R. Meyer. Brookings, 1999.
8. Green, Richard and Stephen Malpezzi, A Primer on U.S. Housing Markets and Policy. The Urban Institute Press for the American Real Estate and Urban Economics Association, 2003.
7. Hulme, Mike. Why We Disagree About Climate Change: Understanding Controversy, Inaction and Opportunity. Cambridge University Press, 2009.
6. Lewis, Michael. The Big Short: Inside the Doomsday Machine. W.W. Norton, 2010.
5. Reinhardt, Carmen M. and Kenneth S. Rogoff. This Time Is Different: A Panoramic View of Eight Centuries of Financial Crises. Princeton University Press, 2009.
4. Slemrod, Joel and Jon Bakija. Taxing Ourselves: A Citizen's Guide to the Debate over Taxes. MIT Press, 2008.
3. Tufte, Edward R. The Visual Display of Quantitative Information. Chesire, Connecticut: Graphics Press, 1983.
2. Wessel, David. In Fed We Trust: Ben Bernanke's War on the Great Panic. Crown Business, 2009.
1. http://wisconsinviewpoint.blogspot.com/
13. Ahamed, Liaquat. Lords of Finance: The Bankers Who Broke the World. Penguin Press, 2009.
12. Akerlof, George A. and Robert J. Shiller. Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism. Princeton Unversity Press, 2009.
11. Bartik, Timothy J. Who Benefits from State and Local Economic Development Policies? Kalamazoo: W.E. Upjohn Institute for Employment Research, 1991.
10. Cronon, William. Nature's Metropolis: Chicago and the Great West. W.W. Norton, 1991.
9. Gomez-Ibanez, Jose A., William B. Tye and Clifford Winston (eds.). Essays in Transportation Economics and Policy: A Handbook in Honor of John R. Meyer. Brookings, 1999.
8. Green, Richard and Stephen Malpezzi, A Primer on U.S. Housing Markets and Policy. The Urban Institute Press for the American Real Estate and Urban Economics Association, 2003.
7. Hulme, Mike. Why We Disagree About Climate Change: Understanding Controversy, Inaction and Opportunity. Cambridge University Press, 2009.
6. Lewis, Michael. The Big Short: Inside the Doomsday Machine. W.W. Norton, 2010.
5. Reinhardt, Carmen M. and Kenneth S. Rogoff. This Time Is Different: A Panoramic View of Eight Centuries of Financial Crises. Princeton University Press, 2009.
4. Slemrod, Joel and Jon Bakija. Taxing Ourselves: A Citizen's Guide to the Debate over Taxes. MIT Press, 2008.
3. Tufte, Edward R. The Visual Display of Quantitative Information. Chesire, Connecticut: Graphics Press, 1983.
2. Wessel, David. In Fed We Trust: Ben Bernanke's War on the Great Panic. Crown Business, 2009.
1. http://wisconsinviewpoint.blogspot.com/
Ken Rogoff thinks the BP spill might produce a groundswell for a carbon tax...
...but Mark Thoma is not so sure [Rogoff's take is here].
I am actually more inclined to agree with Rogoff on this one. When environmental problems are easily visible, they seem to generate political consensus for action. The air quality in Los Angeles, which was obviously awful 30 years ago, is much better currently--the vast majority of days are quite clear now(although we still have the problem of invisible small particulates). The 1952 smog disaster led to major policy changes in the UK. The BP disaster could similarly mobilize policy.
Mark could still be right about this--I just hope he is not.
I am actually more inclined to agree with Rogoff on this one. When environmental problems are easily visible, they seem to generate political consensus for action. The air quality in Los Angeles, which was obviously awful 30 years ago, is much better currently--the vast majority of days are quite clear now(although we still have the problem of invisible small particulates). The 1952 smog disaster led to major policy changes in the UK. The BP disaster could similarly mobilize policy.
Mark could still be right about this--I just hope he is not.
I am putting Michael Lewis' The Big Short on my FBE 589 reading list for this fall
So many great lines. Perhaps my favorite (from pp 151-152):
A couple of thoughts. First, I would bet (forgive the word) that gambling habits would be a good underwriting variable for predicting mortgage default. If lenders could know whether someone gambled more than one percent of their annual income in casinos, at the race track, or on lottery tickets, it might say something about propensity to repay a mortgage [full disclosure, I bet $18 once or twice a year at Santa Anita].
Second, I do remember being mystified at what happened to house prices on my street in Bethesda, Maryland. When my wife and I moved there in 2002, we thought it was awfully expensive, but decided that the schools and proximity to metro made it worth while. We swallowed hard and got a mortgage where our mortgage payments + property taxes were about 20 percent of our gross income. My wife was an attending physician at a large medical center, and I was a finance professor at George Washington.
By 2005 or so, the price of houses on our street had increased by about 2/3 (because all houses were 30s vintage colonials, every sale we observed was a good comp). The mysterious part was the buyers were young one-earner households. I wondered how on earth they were "affording" their houses. Now we know.
The only interested parties missing from the conference were the ultimate borrowers, the American home buyers, but even they, in a way, were on hand, serving drinks, spinning wheels, and rolling dice. "Vegas was booming," said Danny. "The homeowners were at the f**king tables."
A couple of thoughts. First, I would bet (forgive the word) that gambling habits would be a good underwriting variable for predicting mortgage default. If lenders could know whether someone gambled more than one percent of their annual income in casinos, at the race track, or on lottery tickets, it might say something about propensity to repay a mortgage [full disclosure, I bet $18 once or twice a year at Santa Anita].
Second, I do remember being mystified at what happened to house prices on my street in Bethesda, Maryland. When my wife and I moved there in 2002, we thought it was awfully expensive, but decided that the schools and proximity to metro made it worth while. We swallowed hard and got a mortgage where our mortgage payments + property taxes were about 20 percent of our gross income. My wife was an attending physician at a large medical center, and I was a finance professor at George Washington.
By 2005 or so, the price of houses on our street had increased by about 2/3 (because all houses were 30s vintage colonials, every sale we observed was a good comp). The mysterious part was the buyers were young one-earner households. I wondered how on earth they were "affording" their houses. Now we know.
I don't blame Goldman Sachs for taking 100 cents on the dollar of its Credit Default Swaps from AIG....
....I blame the government for offering it. I understand that there was a need to keep Goldman stable, but jeez.
Subscribe to:
Posts (Atom)