Wednesday, September 30, 2009
I thought coaches were supposed to be tough, but I am guessing that Mr. Leach would have a tough time with course evaluations and peer review of his work; if you don't have a thick skin, you will not be happy in the academic game.
More important, we keep being told that football players are student athletes (in my experience, most try hard to be so). Students need to be allowed, indeed encouraged, to express themselves freely--that is part of what a university education is supposed to be about.
Thus the thing to focus on is that the prices of risky financial assets are very low—not as low as they were last March, when the S&P 500 kissed a level of 667, but still very low. Why are they so low? The answer is that the risk tolerance of the private market has collapsed. For example, consider what the University of Chicago’s Nobel Prize-winning economist Bob Lucas told Tom Keene of Bloomberg last March 30—that he was 100% in cash:
LUCAS: [T]here is no question that fear is what this liquidity crisis is. I mean the reason I got into money [with my portfolio] is that I got afraid to leave my pension fund in other securities. So I’m sitting there with a portfolio full of zero-yield stuff just because I’m afraid to do anything else. I think there are millions of people like me.
KEENE: What will be the signal for Robert Lucas to go back into the markets...?
LUCAS: I don’t know. Robert Rubin made a joke about that in the first session today. Nobody knows...
My personal investment strategy for retirement has been (and continues to be) to diversify across a set of passive index funds: some equities, some fixed income, some in the US, some abroad. I do not think I can forecast interest rates, nor can I pick stocks (although I try to pick REITS, mostly for fun, because I do, after all, teach real estate). I know that over my investment horizon (I expect to retire in something like 20 years), stocks and bonds will perform better than cash. I did not change my allocations last year, because, well, once the value of stocks fell, buying new ones seemed cheap. I never take short positions, because when it comes to investment, I am a coward, just not so much of one that I would ever think to put everything in cash (or even worse, gold).
The irony, of course, is that my investment strategy reflects a greater belief in efficient markets than Lucas'. To be fair, though, he is older than I, and so has more about which to be afraid.
Saturday, September 26, 2009
A few months ago, I posted my skepticism about Arthur Nelson's claim that boomers will downsize en mass when they age. Irina and Makoto find that the elderly take equity of of their house so they may continue to live in them, We like our houses!
Thursday, September 24, 2009
I am looking forward to seeing this paper at the Atlanta Fed-University of Wisconsin conference tomorrow
Federal Reserve Bank of Richmond Working Paper No. 09-10
July 7th, 2009
We analyze the impact of lender recourse on mortgage defaults theoretically and
empirically across U.S. states. We study the effect of state laws regarding deficiency
judgments in a model where lenders can use the threat of a deficiency judgment to deter
default or to shorten the default process. Empirically, we found that recourse decreases
the probability of default when there is a substantial likelihood that a borrower has
negative home equity. We also found that, in states that allow deficiency judgments,
defaults are more likely to occur through a lender-friendly procedure, such as a deed
in lieu of foreclosure.
Wednesday, September 23, 2009
Yet while the buildings are filled with ground floor retail, many of the floors above sit empty; my understanding is that they don't comply with current earthquake codes. But given that land is so valuable in LA, and that the bones of the buildings are so good, it is a bit of a mystery that the buildings haven't been retrofitted and leased out.
The answer, apparently, is that the ground floor leases are very valuable--so much so that one can't justify replacing the current ground floor retail with a functional mixed-used building. The retailers are not high end shops, either, but rather are immigrants who cater to other immigrants. This is a beautiful example of Alonzo's bid rent theory, where low income uses incorporate density to outbid high income uses.
Monday, September 21, 2009
This lecture has shown that the early Keynesians got a great deal of the working of the economic system right in ways that are denied by the five neutralities. As quoted from Keynes earlier, they based their models on “our knowledge of human nature and from the detailed facts of experience.” They used their intuitions regarding the norms of how consumers, investors, and wage and price setters thought they should behave. There is systematic reason why such knowledge and experience is likely to be accurate: by their nature norms are generated and known by a whole community. They are known to those who abide by them, and those who observe them as well.
We have shown ways in which macroeconomic variables will be affected by norms. The neutralities say that consumption should have no special dependence on current income; investment should be independent of current cash flow; wages and prices should not depend on nominal considerations. The very construction of those neutralities denies the possibility that peoples’ decisions might be influenced by their views regarding how they, and how others, should behave. However, in practice, the neutralities are systematically violated. Insofar as economists have felt it necessary to explain these violations they have appealed to a variety of different frictions, such as myopia and credit constraint. In so doing they have failed to consider that those violations would occur even in the absence of those frictions: they will occur because of decision-makers’ norms.
The incorporation of norms based on careful observation imparts an appropriate balance to macroeconomics. The New Classical research program was correct in viewing models of the early Keynesians as too primitive. They had not been sufficiently attentive to the role of human intent in choices regarding consumption, investment, wages and prices. But that research program itself has failed to appreciate the extent to which the Keynesians’ views of macroeconomics were also reflective of reality, since they were based on experience and observation.
A macroeconomics with norms in decision makers’ objective functions combines the best features of the two approaches. It allows for observations regarding how people think they should behave. It also takes due account of the purposefulness of human decisions.
As I have said in past posts, I am not a macroeconomist. Part of the reason for this, I think, is that Charles Manski has an enormous influence over how I think about economic issues, and so I worry about the reflection problem and identification. When I see Chicago-style macro-analysis, I see reflection problems and identification issues everywhere. I also see excuses ("it's all about frictions") when totemic hypotheses are tested against data, and fail. And when I see Chicago macroeconomists defending themselves now, the argument takes the form of "all reputable economics agree," which to me sounds very much like "every one I agree with agrees with me."
Keynes' analysis had a richness that is missing from much modern macro, and let's face it, he probably made the most spot-on macroeconomic forecast of the 20th Century.
The first two numbers are median prices for 2006 and 2007. 2008 and after: zip.
Sunday, September 20, 2009
Saturday, September 19, 2009
In light of this, I wish I had had the following graph on my flash drive:
The employment to population ratio has fallen to less than 60 percent; it peaked at nearly 65 percent at the end of the Clinton Administration. The share of us working has dropped precipitously in the last two years to levels not seen since the Carter-Reagan recessions.
This panelist also complained about comparisons to the Great Depression. The only common comparison I know is that this is the worst recession since the great depression. Given that California's unemployment rate has just reached its highest level since 1940, the comparison seems apt.
Friday, September 18, 2009
Wednesday, September 16, 2009
The IRR for the investor: 5.2 percent. Hmmm.
Tuesday, September 15, 2009
The problem: metropolitan Los Angeles is denser than metropolitan San Francisco, and considerably denser than the San Francisco Bay area (and no, the Bay itself is not in the denominator).
Los Angeles is a real, live city where people from all over the world seek their fortunes. When they do so, they double-up and triple-up in housing, meaning that more people get crammed into lower buildings. Koreatown is as dense a place as there is in the US outside of Manhattan, and the length of Wilshire Blvd is very dense (by US standards).
If the lead head wants not to like LA, it is no skin off my nose. But dislike it for a correct reason.
Now that I live in LA, I take transit about once a week, and part of the trip (a bus from Union Station to Campus)is subsidized by USC.
Before you yell sprawl, let me point out that in Washington I lived 9.3 miles from work while in LA I live 12 miles from work. So what is the difference?
For all that people complain about it, Washington Metro is well run. Connections are good, the buses and trains are clean, and the web site works great.
Transit in LA is not well run. The timing of the connections is often awful, and th web site is nearly useless. Many drivers on the Gold Line have a hard time figuring out where to stop in stations.
Could better management improve ridership in Los Angeles? Perhaps not, but it sure would be worth trying.
Monday, September 14, 2009
The list lacks some of the most important analysts of urban form and urban problems: Von Thunen, Ed Mills, John Kain, and Reynolds Fairly come immediately to mind. For us to better understand cities, we must understand externalities, and we must understand preferences, and that doesn't mean our own.
*I root for Buffalo to win football games, but I don't think it is coming back as a city. But Florida has provocative ideas worth investigating, and has had a profound and wonderful influence on his students.
During a discussion for the need for consumer protection, a Harvard Law Professor (it may have been Elizabeth Warren, but I am not sure) asked those in the room with an Adjustable Rate Mortgage to stand up--perhaps half the room did so. The professor then asked how many of those standing could name the index to which their loan rate was tied. Those who didn't know were asked to sit down, at which point half of the original group remained standing. The next question was about the size of the margin between in the index rate and the loan rate, at which point another half sat down. Finally, those who remained standing were asked if they knew roughly the maximum payment that they could make on their mortgage--only one person remained standing (and the person sitting next to me said, "I know that guy--he would never admit that he didn't know something in public anyway.")
So here is the point: a crowd of Harvard, Yale, Michigan, Princeton, etc professors and top policy makers did not fully understand the mortgages they had. How can we expect someone armed only with a high school diploma and no consumer finance training to knowledgeably negotiate the world of mortgages?
I used to cringe at the thought of imposing "suitability standards" on lenders. No more.
Sunday, September 13, 2009
But the long term fiscal position worries me a lot (and it bothers me when people I respect as much as Paul Krugman soft-peddle it). The question is how to we get out from under?
The good news is that we have gotten out from under budget shortfalls before. The Obama administration proposes raising taxes on high earners, and that is fine, but it is not enough. More fruitful, I think, would be to go after the tax expenditures.
Leonard Burman, Eric Toder, Christopher Geissler estimate the size of tax expenditures. It is huge: depending on the modeling strategy they employ (they look at tax expenditures with and without interaction effects, and with different assumptions about the Alternative Minimum Tax), they estimate tax expenditures for 2007 of 700 billion to 760 billion. The largest expenditures are for retirement plans (126 billion), employer contributions for health insurance (138 billion), the mortgage interest deduction (92 billion), and preferential treatment of capital gains (84 billions).
If we were to eliminate tax expenditures, the overall effect on the tax code would be largely progressive. Pretty much everyone would take a hit, but those at the top would take a bigger hit. If the earned income tax credit (about 43 billion) were left alone the impact would be more progressive.
According to CBO, the long-term fiscal deficit is somewhere in the neighborhood of 600 billion per year. Elimination of tax expenditures other than the EITC would put us back into fiscal balance in a progressive manner without raising rates. It would also make the tax code simpler and less distortionary.
Just a thought.
Friday, September 11, 2009
Whilst the last members were signing it, Doctr. FRANKLIN looking towards the Presidents Chair, at the back of which a rising sun happened to be painted, observed to a few members near him, that Painters had found it difficult to distinguish in their art a rising from a setting sun. "I have," said he, "often and often in the course of the Session, and the vicisitudes of my hopes and fears as to its issue, looked at that behind the President without being able to tell whether it was rising or setting: But now at length I have the happiness to know that it is a rising and not a setting Sun."
Thursday, September 10, 2009
The report on median incomes released yesterday, though, suggests to me a flaw with my line of reasoning. While the average new house has grown about 20 percent in size over the past ten years, median household incomes have actually fallen a bit. If house size is a proxy for house quality (and we have good statistical evidence to think that it is), then house quality has outstripped the ability of people to pay for it.
When comparing market prices to replacement cost, we really need to think about depreciated replacement cost. Depreciation comes in three flavors: physical, functional and economic. Physical depreciation happens because things wear out as they age--it is what Congress is thinking of when it allows depreciation deductions for investment property and plant and equipment.
Functional depreciation happens when a component of a capital asset does not perform its function well by current standards. Think of a furnace that uses lots of energy, and could be replaced by something more efficient. It is possible that it could work as a furnace for years, but it still would be best replaced by something more efficient.
Finally, there is economic depreciation, which happens when the demand for something (like Detroit real estate) disappears. It is possible that large houses have incurred economic depreciation because people lack sufficient income to afford them. If this is true, values can fall below original construction cost and stay there for some time.
Such considerations do not, of course, apply to reasonably well located, modest homes--I continue to believe that 1500 square foot houses in the San Fernando Valley and the central part of the San Gabriel Valley are reasonably priced now. But the market for larger houses may be troubled for some time yet to come.
One other implication: builders should construct smaller houses in the years to come. This vindicates a prediction I once made. Unfortunately, I made it in 1990.
Heckling has been a source of consternation since the town hall meetings started veering out of control this August; then a minor congressman's rude shout-out during the President's terrific speech last night captured disproportionate coverage on the news this morning.
I like President Obama a lot; I am pretty sure I wouldn't like Congressman Wilson at all. But could we get a grip? Elected officials are supposed to be big girls and boys, and they should be able to take control of events. Barney Frank showed us just how to do it a few weeks ago:
In the end, the heckler looks just plain stupid. And Nancy Pelosi did pretty well with the daggers she sent out into the House chamber--she reminded me of Mrs. Athnos when my 3rd grade class misbehaved (Mrs. Athnos was one of my all-time favorite teachers).
Should there be limits? Of course--whenever violence is threatened or implied, heckling goes beyond the pale. Congressmen (and Presidents) should be able to handle shouters, but people should not be allowed to brandish guns at political events, and effigy burnings are unacceptable. But yelling opinions (even inane ones) at politicians is part of the essence of democracy.
During my first year as an assistant professor, I lost control of a class to a couple of hecklers. Part of what they were heckling about was unfair: I was following in the footsteps of an influential and beloved teacher--James Graaskamp--and I really couldn't help the fact that I wasn't him. But part of the heckling was justified--I was trying to teach Sherwin Rosen's hedonic pricing paper to real estate MBAs, and it was simply inappropriate material given the goals of an MBA degree. I am not saying that I liked being heckled, but it made me think hard about how to teach what I was assigned to teach. I have never been treated rudely in class since then.
Wednesday, September 09, 2009
The amount Americans owe on credit cards and other consumer loans plunged a record $21.6 billion in July, clouding prospects that the budding economic recovery would soon extend to Main Street.
The drop in consumer debt for the month was the largest since the Federal Reserve began tracking the data in 1943 and the sixth straight monthly decline in outstanding consumer debt, the longest streak since 1991.
The amount of the decrease -- five times what analysts had predicted -- along with continued job losses and an uncertain housing market show that consumers are still skittish about borrowing money for big-ticket purchases, even though economic data show that the deep recession may have technically ended.
Consumer spending accounts for roughly 70% of the nation's economic activity.
That last sentence may seem like a throwaway line, but it actually underscores an important long term problem. While consumption this decade has been a little more than 70 percent of GDP, in the 50s and 60s it was around 63 percent of GDP, and as recently as the 90s, it was about two-thirds of GDP. The driver of consumption was consumer debt: the ratio of consumer debt to GDP rose from about 60 percent in 1995 to over 100 percent in 2007.
Recent levels of consumer debt and consumption are likely not sustainable in the long term. Investment and exports are in the end going to have to pick up the GDP slack. This is good news for the long-term outlook for industrial real estate; it is bad news for retail real estate.
Tuesday, September 08, 2009
The increasingly competitive environment in higher education has increased the level of anxiety that many high school students and their families experience (Lombardi, 2007; Kaufman, 2008). Beyond this, it is natural to wonder whether the increasingly competitive environment has made the typical high school student experience more productive. On one hand, an increasingly competitive environment could induce students to work harder at school and, as a result, to learn more during their high school years; on the other hand, certain mechanisms might lead to the opposite outcome. For example, capable students may spend time on activities that will enhance the chance they obtain admission to selective colleges at the expense of spending time on other activities that might be more productive; Holmstrom and Milgrom (1991) represent the classic formal model of this general phenomenon.
One thing student pretty much must do now to get into selective colleges is take AP courses. I am not sure this is such a bad thing--I look at the AP curriculum, and it is superior to what I got when I was in high school (and I had some outstanding teachers in high school--thanks Mrs Braithwaite, Mr Sipe and Mr Heath). Worrying too much about the AP tests may not be a productive use of time, but I think the courses are worthwhile. I can also really tell when students have been forced to write in high school, and the International Baccalaureate program puts lots of emphasis on writing. But if we could get rid of SAT prep classes, I think it would be a good thing.
Amongst the pop culture urbanists like Richard Florida and Jane Holtz-Kay, there are some that do good, accessible, interesting work and others that produce self-indulgent jeremiads (not to mention any names cough JamesHowardKuntsler cough …). Alex Marshall belongs in the former category. His book on suburbanization, How Cities Work, is both intelligent, accessible, entertaining, well-written, and delightfully non-histrionic in world full of repetitive screeds about the evils of American suburbs...
...Here, he discovers the roots of urban density that go way, way back. He provides a timeline for each city with major events, and the best part: cross-sections of the city by infrastructure era. So for Moscow, you have ascending from the bedrock: the secret subway system, the subway, the secret tunnels, Ivan the Terrible’s secret library and torture chambers, the sewer, water lines, and river culverts.
His thesis is that density doesn’t come through design or through policy. It’s the product of centuries-long urbanization processes. So perhaps my beloved Los Angeles can be forgiven for its settlement pattern given the fact that no planner visiting here in the late 1950s could have foreseen the millions of new people who would arrive, en masse, over the next few decades. Perhaps we should check in after another 100 years and see what LA looks like then.
(1) Policy has I think driven urban form in post-War American cities. Transportation policy, housing finance policy (i.e., VA and FHA rules) and zoning must have something to do with the way we have spread out.
(2) That said, I do not understand the snobbery against suburbs. People like quiet, leafiness and privacy, and there is nothing wrong with any of these things. I just dropped my daughter off to live in Chinatown for her second year at NYU, and we rented an apartment in Greenwich Village for a few days. I think Greenwich Village is one of the best places on earth, but for day-to-day living, I prefer my quiet street in Pasadena. If that makes me banal, so be it.
Monday, September 07, 2009
[Investment] bankers plan to buy “life settlements,” life insurance policies that ill and elderly people sell for cash — $400,000 for a $1 million policy, say, depending on the life expectancy of the insured person. Then they plan to “securitize” these policies, in Wall Street jargon, by packaging hundreds or thousands together into bonds.
So says a story by Jenny Anderson in yesterday's New York Times. Does anyone else see a problem with this? Benefits paid earlier are more valuable than benefits paid later (because of discounting). Doesn't this give investors an incentive to encourage people to die earlier? My colleague Larry Harris taught me that laws prohibit me from buying life insurance on a third party's life that leaves me as a beneficiary, for pretty obvious reasons. This kind of proposed securitization strikes me as a similar sort of thing.
Perhaps I am too paranoid, but events of the past few years leaves me good reason to be so.
Thursday, September 03, 2009
The town's biggest hospital, Gundersen Lutheran, has long been a pioneer in ensuring that the care provided to patients in their final months complies with their wishes. More recently, it has taken the lead in seeking to have Medicare compensate physicians for advising patients on end-of-life planning.
The hospital got its wish this spring when House Democrats inserted that provision into their health-care reform bill -- only to see former Alaska governor Sarah Palin seize on it as she warned about "death panels" that would deny care to the elderly and the disabled. Despite widespread debunking, those warnings have led lawmakers to say they will drop the provision.
"It's really distressing," hospital official Bud Hammes said. "These things need to be addressed."
The way certain politicians have preyed upon people's fear of death is just infuriating.
[Full disclosure note: my dad practiced cardiology at Gundersen for many years].
It turns out that they forecast undiscounted cash flows and compare them to the loan balance. (This is indeed what FAS Statement 121 says). If the undiscounted cash flows are greater than the balance, they are not required to mark down the troubled loan. This makes no sense to me, and also implies that bank balance sheets are worse then they appear.
Hard numbers and recent history suggest two facts. One, the deficit is too wide to be closed exclusively by raising taxes on "the rich." Two, "the rich" do have a lot of money, even after the bust, and raising their taxes would raise significant sums without hampering the economy.
Wednesday, September 02, 2009
You guys don't believe that Modigliani-Miller bullshit, do you?
I felt the need at the time to defend M&M, even though REITS--especially leveraged REITS--were earning terrific rates of return at the time. In the end, it just took a year or two for M&M to bite those who thought leverage was a free lunch.
But leverage can be a risk management tool, because it allows owners to diversify across more than one property. Consider an investor who has enough equity to buy one building with cash, or two buildings with a 50 percent LTV loan. Suppose real estate earns an 8 percent return, and mortgage rates are 6 percent (this is hypothetical). Also suppose that each property has a standard deviation of 5 percent on returns, and the correlation of the returns is .5. An unlevered portfolio with both properties would have a standard deviation of a little under 4 percent (the magic of diversification).
But the fifty percent LTV loans necessary to obtain both property doubles the volatility of equity returns, to a little under 8 percent. On the other hand, because of positive leverage, the six percent loans help push up return on equity to ten percent. So in exchange for a 3 percentage point increase in risk, one gets a two percentage point increase in returns [we should subtract some risk-free rate from returns in this analysis, but I am not certain what the correct risk free rate is right now. The fed funds rate is close to zero]. One also avoids a total loss should one building burn down.
Tuesday, September 01, 2009
That’s why the two concerns Bruce has about the Bush tax cuts–(1) that they were and are unaffordable; and (2) that they did not permanently reduce marginal tax rates and hence weren’t true “supply side” tax cuts–lead to only one conclusion, and that’s that we need to be thinking more seriously about fundamental (truly base-broadening, keep-rates-low) tax reform.
But of course, now it’s the Obama Administration who’s in charge, and they’ve decided to include $2 trillion worth of deficit-financed Bush tax cuts in their own 10-year budget–that’s $2 trillion of the possible $2.6 trillion of the entirety of the Bush tax cuts.
So left-leaning commentators are reiterating their disdain towards the Bush tax cuts:
[by Robert Creamer on Huffington Post:] [L]et’s be clear, the Bush tax cuts didn’t just produce fewer jobs than advertised. They didn’t produce any private sector jobs at all. The whole experiment in handing over money to the wealthiest people in America so they could use it to benefit the rest of us was a colossal - empirically verifiable - failure.
Turns out that when given the chance to use all of those tax cuts, the top two percent of the population used them to speculate in exotic derivatives, to drive up the prices of high end real estate, pay exorbitant prices to the designers of $4,000 blouses and $2,000 shoes. There is absolutely no evidence that they made any more investments in new manufacturing plants, or started up any more businesses than they would have had they paid the same tax rates that they did when Ronald Reagan took office and private sector job growth was 3% per year.
No, instead the rich used the Bush Tax Cuts to create the gigantic economic “bubble” that ultimately burst and caused immeasurable hardship and suffering to millions of average Americans and everyday people across the globe.
Bottom line is that the rich sold America a bill of goods. Give us big tax cuts and we’ll give you jobs growth, they told us. America kept its end of the bargain, and the rich reneged entirely on theirs.
In a word, the economic theories of the Republicans and the Right were simply wrong. In fact, they were elaborate intellectual justifications for the richest among us to enrich themselves even more…
…but are failing to recognize that almost all of the tax cuts that President Obama has proposed–and in fact all of the deficit-financed tax cuts President Obama has proposed–are in fact the old “Bush tax cuts,” which will now become the “Obama tax cuts” as soon as President Obama signs the extension into law before the end of next year. And while those who have hated the Bush tax cuts but love President Obama would like to believe that President Obama is letting the worst part of the Bush tax cuts (those “for the rich”) expire, the truth is that the “Obama tax cuts” will still go disproportionately to “the rich,” even with the upper tax brackets expiring.
Yep. The Bush/Obama tax cuts are a sad truth that all of us (Reagan supply-siders, Clinton fiscal conservatives, and even the most liberal of Obama supporters) don’t want to believe our new President who stood for “change” could let happen.
Talking about baseball and watching game, with Bill James - Joe Posnanski - SI.com
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* August 1, 2007: BNP Paribas, one of Europe's largest banks released better-than-expected earnings...
* August 9, 2007: Bloomberg reported that BNP Paribas halted withdrawals from three funds because they could no longer "fairly" value their holdings...
This news, coupled with the fact that the CEO of the bank seemed oblivious to the situation just eight days prior, sent European markets into a tail spin. Trust between banks was shattered, and the overnight loans that banks provide to one another all but disappeared.
In response, the European Central Bank (ECB) was forced to intervene to stabilize markets and provide liquidity.
The piece is entertaining and short, and does a nice job of capturing some of the personalities involved.