Thursday, March 29, 2012

Mr DeMarco, Would you consider a debt-equity swap?

From Bloomberg:

The U.S. government has spent $190 billion to shore up the companies since they were taken into federal conservatorship in 2008 after their investments in risky loans soured. DeMarco said adding to the firms’ costs would be a violation of his legal responsibility to restore them to financial health.
Using principal forbearance instead of forgiveness so far has been better for taxpayers, DeMarco said. Forbearance reduces monthly payments while requiring borrowers to pay back the full amount of the loan when they sell the house.
“If the borrower is successful on the modification, allows them to stay in their house and they stay in their house and start making mortgage payments, the taxpayer gets to share in the upside of that borrower’s success,” DeMarco said in the Bloomberg Television interview. “If we forgive the principal up front and the borrower is successful, that upside all goes to the borrower and is not shared with the taxpayer.”
There is another way to allow taxpayers to get the upside of borrowers' success--replace the debt they owe with a shared equity arrangement.  The taxpayer may be better off with principal forbearance for houses that are 10 percent underwater, because through amortization people can get themselves right-side up in a relatively short time (particularly if they can get a refinance at a low rate of interest).

But for places like Las Vegas and the Central Valley of California, where many people are 40-70 percent underwater,  it is hard to see how default and large losses aren't inevitable.  A debt-equity swap would allow people to move freely, which aligning incentives between lenders and borrowers.


Wednesday, March 28, 2012

Andrew Zimbalist on Frank McCourt's sale of the Dodgers

From ESPN:

"It's problematic," Zimbalist said. "He was looking for some kind of ongoing income stream and he got it. Here's a guy who borrowed practically all the money to buy the team for $430 million and now he's selling it for $2.15 billion and he's coming out with a healthy capital gain -- it's repulsive. This is someone who doesn't deserve to walk away with a healthy profit after eight years of running the Dodgers in the most egregious, the most inefficient, the most self-interested, and the most vainglorious, idiotic way possible. It really is repulsive that he will still be making a profit in some way."

If ever there were a parable about how some people can thumb their nose at the rules and make out like bandits, the story of McCourt's ownership of the Dodgers is it. 

A poignant moment from a poor country

The laundry here "ruined" a couple of my shirts--whoever ironed tore the collars a bit from the bodies of the shirts. Being an American, I threw them in my trash basket. 

The man who cleans my room, upon discovering them in the trash, asked if he could have them. I said, "of course." 

He then asked me to write a note, saying that I had explicitly told him he could have them, lest anyone think he might have stolen them. Of course I did that as well. He seemed extremely happy to have the shirts.

Tuesday, March 27, 2012

When liberals undermine liberalism

I consider myself a liberal.  On social issues, I am very liberal; on economic issues, while in general I like markets, I think governments can and should correct large market failures (such as failures in private insurance markets and negative externalities), that the one percent (maybe even the ten percent) should pay higher taxes than they do now, and that there should be a floor on living standards.

It therefore drives me crazy when liberals embrace waste and hypocrisy.  So the following paragraph in the LA Times caught my eye:

Instead, the rail authority has agreed to run fewer trains at slower speeds on tracks shared with commuter rail systems, Amtrak and freight trains. In the early years, passengers will probably have to transfer trains to get from one end of the system to the other. The concept, known as the blended approach, was pushed last year by Bay Area politicians, who fought the original plan to run high-speed trains through the region on 60-foot high viaducts over local neighborhoods. The idea has attracted support in Southern California as well.

So places that will rail against the automobile are doing everything possible to make sure "bullet train" service (whose potential for success I am skeptical about anyway) cannot possibly be a competitive transport mode. The "blended" system will also make freight rail relatively less competitive with trucks, and will waste a lot of money that could be better spent on places California really needs to spend money, such as K-12 education and state universities (and no, I do not work at one).

The whole thing reminds me of perhaps my all time favorite Onion headline.

Saturday, March 24, 2012

Mark Twain on Monetary Policy (h/t Patricia Harris)

First published in 1879 as "Mark Twain as a Presidential Candidate."

My financial views are of the most decided character, but they are not likely, perhaps, to increase my popularity with the advocates of inflation. I do not insist upon the special supremacy of rag money or hard money. The great fundamental principle of my life is to take any kind I can get.

Monday, March 19, 2012

New data since I posted yesterday

From this morning's Economic Times (one of India's leading newspapers).

NEW DELHI: The number of India's poor fell to 29.8% of its population in 2009-10 from 37.2% in 2004-05, one of the sharpest falls ever. This suggests India has not only grown faster than the world economy, but that this growth has lifted millions out of poverty. 

In absolute terms, the number of poor in the country declined by around 13% to 354 million during the fiveyear period with rural poverty falling faster thanurban poverty. During the period, rural poverty declined by 8 percentage points to 33.8%, almost double the decline of urban poor by 4.8 percentage points to 20.9%. 

"This is not surprising. Such an outcome is on expected lines as this is the period when the government increased the expenditure on flagship programmes substantially. We gave money to the people and the result is a direct impact of that," said Mihir Shah, member, Planning Commission. 
The numbers also re-affirm the impact of the government's flagship Mahatma Gandhi National Rural Employment Guarantee Scheme that entitles 100 days of work at a minimum rate of Rs 100 per day to all rural households. The scheme was launched in 2006 and has single-handedly transformed rural India. 
It is interesting that India started a war on poverty in 2006, and it seems to be winning.  Not that one thing necessarily caused the other, but it is some coincidence.

Sunday, March 18, 2012

What would Rawls say?

Since India liberalized its economy in 1991, PPP GDP per capita has increased from about 1400 in 1992 to about 3200 in 2009 (see Penn World Tables, I am using only two significant digits because the exact numbers depend on definition).  That is 5 percent per capita per year; by any standard this is an impressive performance.  Eyes, moreover, don't lie--I have been coming to India for eight years now, and one can see living standards improving.  This is gratifying.

But in an enormously important dimension, India has not improved at all.  According to the Food and Agriculture Organization of the United Nations, the share of undernourished people in India moved from 20 percent in 1992 to 19 percent in 2008; the number of hungry rose from 177 million to 224 million. 

China has done much better, having cut the rate of hunger nearly in half over the same time period (from 18 to 10 percent), despite the fact that its GINI coefficient is higher. 


Saturday, March 17, 2012

Rail transit and what is physically possible

I have written posts in the past that reflect my admiration for John Kain's work in transportation economics.  He is known, among other things, for training legions of students: "bus good, trains bad."

In general, buses are cheaper and much more flexible to operate than trains.  But a visit to Bangalore made me wonder if it can really thrive as a city without a metro system (which it is currently in the process of building).  Bangalore is very dense and the streets are, for the most part, very narrow.  Congestion is already terrible, and is composed mostly of auto-rickshaws, motorcycles, and scooters. The city already has many buses, that move dreadfully slowly.  To get from the airport into the business district, a distance of 40 kilometers, takes a minimum of 90 minutes.

People who know these things better than I have told me metro systems are never cost effective.  In this particular case, however, I can't help but wonder.

Wednesday, March 14, 2012

"Green Jobs" will be real, but invisible

John Whitehead quotes Joe Romm:
Last week economist William Nordhaus slammed global warming deniersand explained that the cost of delaying action is $4 Trillion. As I wrote, Nordhaus’s blunt piece — “Why the Global Warming Skeptics Are Wrong” – is worth reading because, like most mainstream climate economists, he is no climate hawk. 
Those costs are real.  Those costs shift the supply curve for stuff in.  Those costs reduce employment.  So "Green Jobs" are largely not those building windmills and solar panels (the total number of these jobs will be small relative to the economy).  "Green Jobs" will be the jobs saved from cost reductions associated with reduced greenhouse gases.  This is why good environmental policy is also good economic policy.

(h/t Mark Thoma)

Tuesday, March 13, 2012

Why owning a house may not be the American Dream

Lots of societies outside of America seem to have a preference for home-ownership. I have spoken to policy makers and scholars in several countries--India, Bangladesh, South Africa, Peru--about the importance of a well functioning rental sector.  Rental housing allows for mobility, and for people to use savings to invest in such things as small businesses.  Rental housing is also a way for small entrepreneurs to earn a return on investment.

Yet everywhere I go, I am told that people don't want to rent, they want to own.  The principal reason seems to be security of tenure; in places where enforcement of contracts remains an issue, fear of abuse by landlords sours people on renting as an option.  And so it is that people want to be owners.

Many countries in Western Europe--Germany and Switzerland in particular--do not have fetishes about homeownership.  But tenant protections in these countries are strong (see this piece on Germany and this piece on security of tenure beyond lease terms in Switzerland), so renting is sort of "owning-light" in these countries.  

Sunday, March 11, 2012

Who are you going to hug?

As I watch the ridiculous controversy over Barack Obama's hugging Derrick Bell, I can't help but think that if only people who agreed with me hugged me, I would never be hugged.

When I wrongly and mistakenly supported the second war in Iraq, my wife and daughters all told me how wrong and mistaken I was.  And yet they continued give me hugs, thank goodness.

Friday, March 09, 2012

Banks seem to be lending

The Flow of Funds data for the fourth quarter of 2011 is out.  Total net lending by commercial banks and savings institutions has been solid for two quarters in a row, and the fourth quarter was quite strong.  This is indeed a good sign.

Eduardo Porter reminds me of a favorite Joan Robinson quote

...the misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all.  From Economic Philosophy.

Thursday, March 08, 2012

James Q. Wilson the teacher

The past few days have brought encomiums to and reflections of the work and life of James Q. Wilson (see here for example). But I have yet to see anything about Wilson the teacher.

When I was 17 years old, I took Government 30, American Government, from Wilson, Sydney Verba and H. Douglas Price.  The whole course was good, but I found Wilson to be an awe-inspiring figure.  He behaved the way I thought a Harvard professor was supposed to be--he was elegant, he had an easy-to-listen-to voice, and despite the fact that we had been a national champion debater, he never spoke too quickly or aggressively.

Both the style and substance of his lectures were memorable.  Leonard Bernstein once wrote of Beethoven that has never had a note out of place--every note followed inevitably from the previous note.  The same was true with Wilson and words.  The prose coming out of his mouth was flawless, but never flowery.  I remember that some of my classmates didn't like this--they deemed the polish to be slickness.  To me, however, the pristineness of his language meant that it never detracted from the substance he was communicating.  His lectures were also models of organization and clarity; as such, he made sophisticated ideas easy to grasp.

Because I was a 17 year old naive liberal from Wisconsin (a state once known for clean government and progressive traditions), I came to college thinking that people got involved in government because they wanted to do good.  Wilson managed to convey the idea that bureaucrats, members of congress and interest groups often behaved in, well, their own interests.  This may seem obvious, but it was actually a bit of a bolt out of the blue for me at the time.  But the great thing is that he conveyed these "conservative" sentiments without demeaning the idea that there is a role for idealism in government.


Tuesday, March 06, 2012

Not sure when it will pop, but it must be a bubble

Rental yields on housing in India are now at times less than one percent in some large cities; people have been saying to me "it's OK--we are getting 15 percent appreciation."  

Monday, March 05, 2012

A nice sentence by Peter King of Sports Illustrated

Peter King is, by far, my favorite football writer.  But I liked this non-football related gem today:

Dick Ebersol has urged me not to mention anything about politics in this presidential-election year. And so I won't. But as a college grad and father of two college graduates and a husband of a college graduate, boy, am I dying to.

The wonders of great design

I am making my annual visit to the Indian School of Business in Hyderabad (I will report on rent data collected by students here in a couple of weeks).  The temperature is in the upper 90s F. today, and yet I was comfortable eating lunch in an open air setting, specifically here:

This is the atrium of the Academic Centre, which was designed by John Portman (the picture comes from the ISB web site).

The air flows so well through it that it is comfortable to sit in, even when the outside temperature is very high.  Portman thus created functional space that doesn't need to be air conditioned, even on beastly hot afternoons.