Thursday, October 30, 2008

Matt Kahn Celebrates the Spirit of Cooperation

He does so here:

Gary, Raphael and Stuart do a painstaking job of combining multiple data sets to get a sense of the wealth effect of housing, and find that it is real; the implication is that it could be a substantial drag on consumption for years to come.

When combined with the fact that consumption has been an extraordinary share of GDP (around 72 percent, which compares to a historic norm in the high 60s) and his been funded with home loans and consumer debt, it is highly likely that the next recovery will be driven from something other than consumption--such as exports or capital goods spending (for exports).

As for cooperation, let me point to a post I wrote around a year ago:

...if one looks at the top 50 research Universities as measured by The Center for Measuring University Research Performance at Arizona State, the leading metropolitan area for number of top research institutions is not Boston, nor is it Chicago, Philadelphia, or New York. It is LA, which has four in the top 50 (UCLA, USC, Cal Tech and UC-Irvine). If one stretches another 100 miles or so, UC-San Diego and UC-Santa Barbara get added to the mix.

Southern California rarely gets credit for being an intellectual mecca, but after spending a pleasant morning at UCLA and a pleasant afternoon at USC last week, I couldn't help but think that it is. Then again, Thomas Mann, Arnold Schoenberg and William Faulkner all managed to enjoy life in LA. Randy Newman might have been onto something...

It is nice to be here.

Sunday, October 26, 2008

Somebody needs to do a new hedonic regression

I came back to Washington this weekend to help my wife prepare for putting our house on the market. Per the instructions of the Realtor, we are working on "staging" it.

I wonder how much this really matters. Once one gets beyond structural and neighborhood characteristics, does "staging" matter to the ultimate sale price? One would need to collect data on sold houses (including some index of how well presented they were) and then run a hedonic regression that included the presentation index in order to find out.

Paul Carrillo at GW has a nice working paper where he finds that houses that are marketed on line with pictures get better outcomes than those that don't. But the pictures could just reflect the fact that Realtors are more likely to present pictures of houses that are better looking (and therefore more valuable) in the first place.

Monday, October 20, 2008

The Northern Urban Fringe of Los Angeles

Here are two pictures from the Northeast side of Lancaster:

In general, I saw fewer for sale signs than I was expecting, although there was one entire subdivision (near the place photographed above) that was in default. Retail real estate is more obviously suffering. I saw many nearly empty strip shopping centers.

Saturday, October 18, 2008

Equipment or Learning?

The idea of a "best orchestra ever" is silly; many orchestras, such as Szell's Cleveland, Reiner's Chicago, Karajan's Berlin and Ormandy's Philadelphia were pretty much perfect (I actually am not crazy about Karajan or Ormandy as interpreters of music, but they had magnificent bands, for which they are due considerable credit).

But the orchestra I have really liked since I was in high school (so for more than 30 years) is the Amsterdam Concertgebouw Orchestra. I write this because tonight I was listening to a recent Concertgebouw concert on KUSC, and damn if they didn't have many of the same qualities they had during Haitink's and even Van Beinum's days. In particular, the woodwinds--especially the double-reeds--have a very specific sound. They best way to describe it, I guess, is at once rich and transparent; it is kind of like getting the best of Berlin and Cleveland wrapped into one sound.

I went to the Orchestra's website to make sure the players weren't all 70 years old; they are not. Indeed, the principal oboe player has only been with the orchestra for about a year; the principal flute player looks like a rather young woman.

So what brings this consistency of sound over the years? Is it learning a tradition? Or is it just the unique sound of the wonderful hall?

Principles of economics, translated

Bill Gross says to Invest in Fannie-Freddie Debt

More generally, he says to invest close to the "government umbrella:" agency securities and government guaranteed debt. He also says that he thinks LIBOR will decline sharply once the various government programs actually start getting put into operation.

Gross is the Warren Buffet of fixed-income: for example, his bond funds avoided subprime (just as Buffet avoided the tech bubble). But one thing he doesn't mention in this Bloomberg interview is the prepayment-market risk embedded in GSE securities. I do wonder whether the increasingly tough underwriting standards for home borrowers will remain around for awhile. If they do, we should see a structural shift in prepayment behavior for a long time, with conditional prepayment rates (or PSAs) remaining low for years to come.

Friday, October 17, 2008

So which is it?

The McCain campaign argues:
(1) Obama is a socialist

(2) Obama is the second coming of Herbert Hoover

I am not an historian, but I am pretty sure that the intersection of (1) and (2) is the null set.

Thursday, October 16, 2008

I was wrong about Karl Rove

I used to think he was an evil genius. An item in his WSJ column this morning undermines the genius part. He writes:

The Investor's Business Daily/TIPP poll (which was closest to the mark in predicting the 2004 outcome -- 0.4% off the actual result) now says this is a three-point race.

Before he wrote this, I thought Rove understood data. But polls are (more-or-less) random samples, and a group of pools will produce a distribution of outcomes. It is of course the case that one poll will come closest to the population outcome; the fact that a particular poll does says nothing about the skill of the pollster. Now, if one pollster comes closest ten times in a row, we can be sure that something real is going on--that she has insights about sampling that the others don't. But one correct call is nothing but luck.

Every quarter, the Wall Street Journal picks a "best economic forecaster," which is based on close an economist's forecast to predicting economic conditions in a quarter. Check out how well that forecaster does in the following quarter. If you made any decisions based on who wins the award for one quarter, you may well be disappointed in the following quarter.

Wednesday, October 15, 2008

I really want to be good, but...

If I leave my house before 7:30 or after 9, I get to USC in 15-20 minutes. I used transit today--it took 70 minutes to get to work, and an hour to get home tonight.

In DC, the trade-off was a 40 minute drive against 50 minutes door-to-door with metro/walking. That was a good trade--the ten extra minutes were small price to pay for the exercise, the ability to read/listen to music on the train, and the opportunity to avoid DC drivers. But a 40-50 minute difference is a whole different story. And LA radio is good, and the drivers are better here.

Atrios makes an important point

He says:

owever given that we're in a financial crisis which has at its foundations declining home prices, now would not really be the right time to do away with that particular [i.e. mortgage interest] deduction. And I'd prefer that before we scrap the employer based health care system we... come up with something else!

I have published papers pointing out that the mortgage interest deduction does little, if anything, to stimulate homeownership, is distortionary, and is inequitable. But I think we can wait awhile now before we do anything about it...

I think my next plane trip will go faster.

John LeCarre has a new novel out. It is reviewed here by my second favorite spy novelist.

Tuesday, October 14, 2008

Capital and Prime Mortgages

At this morning's panel, I commented that I had been mistaken in thinking that 2.5 percent was a sufficient capital cushion for prime mortgages. One of the panelists, Don Ankeny, wisely noted that Fannie-Freddie's troubles did not arise from prime mortgages, but from Alt-A loans. So for true prime mortgages, 2.5 percent may indeed be enough.

A potential positive NPV earmark?

I was in San Diego this morning to moderate a ULI panel on (what else) the financial crisis. The panelists (Don Ankeny, Westcore Properties LLC, Rajiv Patel, Spear Street Capital and Sean Flannery, Wells Fargo) were excellent, and while the mood was generally pessimistic, I think everyone agreed the policy is moving in the right direction.

But this post is not about that. It is rather about the Surfliner, the train that runs from Los Angeles (actually San Louis Obisbo) to San Diego. The scenery along the Pacific Ocean is very beautiful, but the train is sloooooow. The tracks have lots of curves, and are largely laid on wooden, rather than concrete, ties. Despite the slow speed (2 hours 50 minutes from LA to San Diego), it was full.

As we search for infrastructure investment to stimulate the economy, it strikes me that upgrading this route might work as an investment--it certainly makes more sense to me than a bullet train from LA to San Francisco. But I am not exactly a disinterested party on the matter...

Monday, October 13, 2008

A Good Day for the Economics Profession

Paul Krugman today won something he long deserved to win. I remember especially enjoying his work on increasing returns to scale and patterns of trade when I was in grad school. And a few weeks ago, he produced a lovely, simple theoretical model of why capital infusion would be a more effective mechanism for bailing out banks than asset purchases (link to come).

Krugman's genius resides in his ability to develop simple models that are remarkably powerful at explaining a complicated world. Besides that, he is the rare economist who can write a graceful English sentence.

Wednesday, October 08, 2008

An Urban Economics Puzzle

I have now been at USC a couple of months, and it is a terrific place. Last night we put on a panel on the financial meltdown for the USC community (see link to a webcast below); the staff here pulled it together (organization and marketing) in less than a week, and we nearly filled a room that held about 450 people with our students, faculty and alumni. The ability of people here to cooperate across schools and functions is truly astonishing, and the level of collegiality is quite wonderful.

But I have discovered a fault of the place--no street food. Both Madison and Philadelphia have lots of great street food options--Falafel, Thai, Chinese, Vietnamese, Southwestern, etc. But there is nothing like that around USC. We have 33,000 students here. Why no market for food carts?

Finance & Real Estate Market Meltdown

Finance & Real Estate Market Meltdown

Monday, October 06, 2008

Jane Albrechtsen says America is dumb for having 30 year fxied rate prepayable mortgages.

In yesterday's Wall Street Journal, she writes:

This is made worse by the fact that traditionally many American mortgages were typically set at a fixed rate for the 25- or 30-year life of the loan and the borrower often has the nifty ability to refinance without penalty. Most Australian mortgages are usually subject to a variable rate of interest. Fixed-rate loans are limited to around five years. So when Australian lenders offer a fixed-rate loan for five years, they fund it by borrowing five-year money. If borrowers want to repay a fixed-rate loan early, sensible economics require that they pay the lender a "break" fee, which compensates the lender for the lost interest the loan would have brought in had it been carried to term.

Prepayment penalties are either prohibited or severely restricted in the U.S. Thus, an American lender who makes a 30-year fixed rate loan that the borrower can prepay at any time without penalty is simply making a bet about the average life of a loan. And while it's true that there are good quality statistics about how long American loans usually last, these are necessarily averages. Averages don't reflect actual experience and are especially misleading when real outcomes are at the extreme. If market interest rates fall below the fixed interest rates, borrowers will simply refinance at lower rates. Another fine deal for borrowers. If market rates rise above the fixed interest rates, borrowers will stand pat. So loans are terminated by borrowers when they are profitable for lenders and loans last longer when they are unprofitable for the banks. Who would want to be an American lender?

American lenders, in one form or another, have been making these loans since the 1930s. The whole idea is that lenders are more expert in managing interest rate risk than households, and that we don't want labor mobility inhibited by prepayment penalties.

But of course, the irony is that fixed rate mortgages are not the problem right now. According to the Mortgage Bankers Association, foreclosures on prime fixed rate mortgages happen at less than one-fifth the rate of foreclosures on prime ARMS; the subprime fixed rate default rate is one-third the ARM default rate. But in the eyes of the editors of the WSJ op-ed page, fixed-rate mortgages have been dangerously good for consumers.

Sunday, October 05, 2008

I liked Cokie Roberts years ago when she was on NPR

But I just read that she said this last August on ABC's This Week:

ROBERTS: Yeah, that he has certainly come nowhere near closing the deal. As we've talked about before, in this year that should be such a Democratic year given all the other indices, he is tied in the polls and stage-sided in the polls and going off this week to a vacation in Hawaii --

VICTORIA CLARKE (former Pentagon spokeswoman): Right.

ROBERTS: -- does not make any sense whatsoever. I know his grandmother lives in Hawaii and I know Hawaii is a state, but it has the look of him going off to some sort of foreign, exotic place. He should be in Myrtle Beach, and, you know, if he's going to take a vacation at this time.

Roberts is from Louisiana. Once upon a time the principal language there was French. So it, too, must be foreign and exotic, right?

A Paragraph in Today's NYT story on Fannie Mae stands out to me


Mr. Mudd added that it was almost impossible during most of his tenure to see trouble on the horizon, because Fannie interacts with lenders rather than borrowers, which creates a delay in recognizing market conditions.

FWIW, I came late to the group of people who thought there was a housing bubble. But by 2005, it was clear to me that things were out of whack in San Diego, the Inland Empire, Las Vegas, Arizona, and Florida. If it was obvious to me, it should have been obvious to the CEO of a company in the mortgage business.

Thursday, October 02, 2008

More from Morris Davis

This morning he writes to me:

Now that a week has passed, I'd like to restate my original points on the
bailout as first proposed: (1) a blank check of $700bn to Paulson seems
irresponsible since he has been wrong about the crisis from day 1; (2) we
have not adequately forecasted and compared the cost to GDP of doing nothing
versus the cost to GDP of doing something; and (3) are we sure that free
markets aren't going to work? I've heard there is quite a lot of private
equity waiting on the sidelines. More on this in a bit.

The fourth point I made is that Paulson offered no simple and convincing
explanation of the problem. To talk about a solution requires knowledge of
the problem. Let me now offer two things: 1. My beliefs about the core
problems and 2. What I think we should be discussing.

1. I've learned that our financial accounting statements are inadequate.
Example: John Oros gave a talk here at Wisconsin last week. Oros is a
director at JC Flowers, a private equity firm, and they had the option to
try to buy AIG. (JC Flowers has also had the option to buy Bear Stearns,
Lehman, Morgan Stanley, ...). Last week he told us that, before his team
went in, AIG HAD NO IDEA HOW MUCH CASH THEY HAD. AIG brought in stacks of
books for Oros's team to look at to try to figure out what was on their
balance sheet. This is AIG, the company with 150,000 (?) employees and the
world's largest insurer.

2. The government has created and is creating confusion in the marketplace.
Bearn Stearns and AIG bondholders were paid in full; Lehman and WAMU
bondholders got nothing; maybe the bill will pass, maybe it won't; etc.

In addition, there is a failure of analysis at the top levels of government.
For example, has anyone outlined what happens to GDP if we do nothing (i.e.
just let the banks sort it all out) and what happens to GDP if we do
something. We should know best-guess costs and benefits.

Unfortunately, right now most of what we hear from the government and the
news media looks like fear mongering: Look at Japan! Look at the Great

That is not analysis. I could say: The US economy had a stock market crash
in 2000, in 2001 there was 9/11 and an anthrax scare, and in 2003 we had a
hurricane wipe out New Orleans, and GDP barely noticed. Why is this episode
fundamentally different? And, how do these differences translate to GDP

One reason I am opposed to (more) government intervention is that I
fundamentally believe that the U.S. economy is more resilient to shocks and
disruptions than most acknowledge.

3. My understanding of the problem of financial institutions, from those I
trust, is that banks and financial institutions do not have enough capital,
and are therefore hesitant to originate new loans. If true, then if we are
to do something (debatable), then maybe we should inject equity into the
banking system. The government could partner with a set of private equity
firms to inject equity and claim ownership.

I realize the twice revised Paulson plan tried to do something like this in
a back-door fashion. What I couldn't figure out is if the revised plan
essentially created enough equity to be successful in recapitalizing the
failed institutions.

5. Many analysts, myself included, think house prices are going to fall
another 6 to 10 percent over the next 12 - 18 months. This will create more
distress in the financial system, since it implies that defaults and
foreclosures will rise and not fall. Thus whatever solution we come up with
now should be forward looking, in the sense that it should expect more
distress in the future.

My previous posts should make clear that I do not agree with Morris--the TED spread tells me that there is some urgency here, and if frozen credit markets inhibit capital formation, the pain from our current problems will last for a long time. I don't like the plan passed by the Senate last night either, but my view is the same as Krugman, Thoma and DeLong--Congress should hold its nose and pass it.

But I have enormous admiration for Morris' intellect, and so (with his permission) pass along his thoughts.

Wednesday, October 01, 2008

Europeans can sure be parochial

From today's LA Times:

Bad news for American writers hoping for a Nobel Prize next week: The top member of the award jury believes the United States is too insular and ignorant to compete with Europe when it comes to great writing.

As the Swedish Academy enters final deliberations for this year's award, permanent secretary Horace Engdahl said it's no coincidence that most winners are European.
"Of course there is powerful literature in all big cultures, but you can't get away from the fact that Europe still is the center of the literary world . . . not the United States," he said in an interview Tuesday.

He said the 16-member award jury has not selected this year's winner and dropped no hints about who was on the short list. Americans Philip Roth and Joyce Carol Oates usually figure in speculation, but Engdahl wouldn't comment on any names.

Speaking generally about American literature, however, he said U.S. writers are "too sensitive to trends in their own mass culture," dragging down the quality of their work.

"The U.S. is too isolated, too insular. They don't translate enough and don't really participate in the big dialogue of literature," Engdahl said. "That ignorance is restraining."

Harold Augenbraum, executive director of the foundation that administers the National Book Awards, said he wanted to send Engdahl a reading list of U.S. literature.

"Such a comment makes me think that Mr. Engdahl has read little of American literature outside the mainstream and has a very narrow view of what constitutes literature in this age," he said.

Barack Obama is a Smart Guy

His speech on the financial crisis is here as well as other places.

I think it is terrific.

As it happened, I watched it with a former cabinet secretary. I gave a talk to a group about the financial mess today, and he was there. The speech was on TV just outside of where I spoke, so I stopped to watch, and the official stopped along with me.

I said I thought BO possibly had the stuff for restoring confidence.

The official said, "well, he certainly is smart."

I said, "smart would be a nice change."

The official laughed.