The Future of the GOP?

Data from the US Census. Population Projections.

Couldn't help but think about this while I watched the debate for a few minutes last night.

When leaving the Ukraine

Don't wear a sportscoat or a suit or anything that might make it appear that you have money. The following conversation more or less happened immeidately after passport control:

Guy in Border Guard Uniform: How much money do you have with you

Me: I don't know, maybe $400 and 200 Euros

Border Uniform: Let me see it

Me (opening wallet): here it is

Border Uniform: I want to count it

Me (handing over money): OK

Border Uniform (fans out money like cards, and then unfans): OK, here is is back. You can go.

Me (assuming I am $20-$40 lighter): thank you sir.

Lots of people are posting this

So I will join them:

http://www.etc.cmu.edu/global_news/?q=node/42

Pausch is magnificent. He is also about my age (he's six months younger). His children are considerably younger than mine; I can't imagine how much it would sadden me not to have been able to see my kids grow up.

The Argumentative Indian

About a year ago, my Senior Associate Dean recommended Sen's book to me; my wife bought it for me the other day. It is so far very good. I am particularly taken with this passage.

"The nature of [western descriptions of the Indian intellectual tradition] has tended to undermine an adequately pluralistic understand of Indian Intellectual traditions. While India has certainly inherited a vast religious literature, a large wealth of mystical poetry, grand speculation on transcendental issues,
and so on, there is also a huge--often pioneering--literature, stretching over two and a half millennia, on mathematics, logic, epistemology, astronomy, physiology, linguistics, phonetics, economics, political science and psychology, among other subjects concerned with the here and now.

Even on religious subjects, the only world religion that is firmly agnostic (Buddhism) is of Indian origin, and further the atheistic schools of Varvaka and Lokatay have generated extensive arguments that have been studied by Indian religious scholars. themselves...

...What is in dispute here is not the recognition of mysticism and religious initiatives in India, but the overlooking of all other intellectual activities that are also abundantly present. In fact, despite the grave sobriety of Indian religious preoccupations, it would not be erroneous to say that India is a country of fun and games..."

I have been privileged to visit many places in my life. I am gaining a better understanding about why India has been among my favorite.

Is the Ukraine the most efficient country in the World?

In one respect, it appears to be. The bid-ask spread for currencies is less than .5 percent. It is hard to imagine how the small cambios in this business make a profit. I don't think there are price controls either, because there are dozens (if not more) currency exchamge businesses within a 20 minute walk of my hotel.

Now if only the passport lines at the airport were faster...

Bethesda House Prices

Forgive the selfishness of reporting a price index for my neighborhood, but I was just looking at Zillow data.

The top line (light blue) is my zip code; the bottom line (dark blue) is the zillow estimate of my house.

The last year is likely all inside the zillow confidence interval, but it does suggest that prices, after declining, have firmed this year.

Silly things.

There are blogs that blame the National Association of Realtors for the run-up in house prices, saying that without their cheer leading of the housing market, prices never would have risen so much. I give people more credit than that--most people can guess that Realtors like houses as much as Steve Jobs likes ipods.

On the other hand, NAR is saying it's the media's fault that the housing market is so lousy now. The media have little to do with it--the housing market is bad because there is excess supply and because credit outside of the conforming prime loan market has gotten relatively expensive. Until inventories begin to fall, it won't matter what either the media or NAR say.

Not to be snarky, but...

Leslie Stahl, in introducing a section of her 60 minutes interview with Alan Greenspan, said, "Alan Greenspan will give his economic predictions for the future." Not his predictions for the present or past?

This is Disheartening

http://www.latimes.com/news/local/la-me-ucilaw13sep13,0,5893599.story?coll=la-home-center

I thought UC-Irvine was a school on the rise. I now know not to take it seriously until it gets a new Chancellor.

Greatest Conductor of the last 100 Years?

I love music, and especially symphonies. There are only a few things that thrill me as much as a great orchestra playing a great symphony (such as Beethoven 3, Schubert 9, Bruckner 7 or Mahler 6) really well.

I've been listening to a wonderful recording of Brahms 2 tonight. It features the London Symphony, with a conductor who is distinctly unglamorous, and who is not particularly famous in the US. But compared to him, Bernstein (who I really like, by the way) is too fussy; Karajan is too slick, Solti and Toscanini are too driven, Furtwangler is too sloppy, and Abbado is too slack.

Bernard Haintink has been making extraordinarily satisfying recordings for more than 40 years now, before with the Concertgebouw Orchestra of Amsterdam, and now with the London Symphony. His Brahms, Beethoven, Schubert, Mahler and Bruckner are all great. He did a wonderful Zauberflaute, too. Now if only he'd get around to Haydn, Berlioz and Sibelius, but I guess we have Colin Davis to take care of that.

The Democratic Party and Subprime

I am a Democrat. Some people who are close to me are not. They they are not has always been something of a mystery to me; as a railroad worker and an executive secretary, they would surely benefit from Democratic policies relative to Republican policies. But I think the sub-prime crisis has given me some insight into why they are Republicans.

This couple, while not affluent, have always been financially responsible. As such, it is not difficult for them to find credit at a cheap price. They would also never think to sign a piece of paper that represented their income to be something other than what it actually was.

Let me stipulate that among sub-prime borrowers, there are many who were harmed by unscrupulous lenders who engaged in deceptive practices. We know, for instance, that many sub-prime borrowers would have qualified for prime mortgages. That they did not receive such mortgages is a problem that need to be remedied. Policy should make it easy for them to refinance out of their subprime mortgages into something more favorable.

But there are also borrowers in the sub-prime market who speculated on the housing markets, and there are borrowers who misrepresented their income and assets. For many of those of have followed the rules, anything that might smack of of a bail-out of those who speculated or borrowed fraudulently will induce anger. My friends are such people, and they believe that the Democratic Party has long been in the vanguard of diverting resources away from them toward those who don't, in Bill Clinton's phrase, "play by the rules." As we seek to solve this problem, and to remedy that harm that was done to those who were victimized by truly bad actors, we Democrats need to remember those who have always played by the rules.

Best article title I have seen in some time

Repugnance as a Constraint on Markets, by Alvin Roth, Journal of Economic Perspectives, Summer 2007.

Tyler Cowen on Economics Education

"Teaching economics. Give students open-ended problems, no answer, want students to struggle, argue with their classmates, write them up on their own. But many don't, and are comforted when they just hear the answer in class. Hard to get students—and ourselves—to do the hard work necessary to learn. Generally, teaching that way is not popular. Painful to have to defend your own propositions in the face of being challenged. We don't understand very well how education works. Can you replace teachers with DVDs of the great lecturers? Probably wouldn't work, but why not? What makes education effective? Reading a blog may be as good a way to learn economics as reading a book. Hearing people chat, tell stories. Talking about each other's ideas is intrinsically valuable, valuable to be part of a small discoursing community. Emulates the dinner table. Anecdote: Alfred Marshall was teaching a class, and Pigou was only student. Pigou sits down, Marshall just reads his lecture notes."

A long interview with him is at:

http://www.econtalk.org/archives/2007/09/cowen_on_your_i.html

Housing and the Business Cycle

Ten years ago, I wrote this: Follow the Leader: How Changes in Residential and Non- residential Investment Predict Changes in GDP

RICHARD K. GREEN George Washington University REAL ESTATE ECONOMICS, Vol. 25 No. 5, Summer 1997

Abstract: This paper examines the effect of different kinds of investments on the business cycle. Specifically, it examines whether residential and non-residential investment Granger cause GDP, and whether GDP Granger causes each of these types of investments. The paper uses quarterly National Income and Products Data for the period 1959 to 1992. Under a wide variety of time-series specifications, residential investment causes, but is not caused by GDP, while non-residential investment does not cause, but is caused by GDP. Thus, housing leads and other types of investment lag the business cycle. The results also suggest that policies designed to funnel capital away from housing into plant and equipment could produce severe short-run dislocations. About a month ago, Ed Leamer wrote this: http://www.kc.frb.org/publicat/sympos/2007/PDF/2007.08.03.Leamer.pdf Where he showed that declines in the housing cycle are remarkably strong predictors of recessions. I have a ($1) bet with my boss, Susan Phillips, about whether we are heading into recession this year: I say yes and she says no. She was a Fed Governor, and so has insight that I don't begin to have. I would also prefer to lose the bet. By after last Friday's jobs numbers, I like my chances.

Joe Morello

Joe Morello never ceases to amaze me. Listen to how he keeps the 5/4 signature alive through is complicated solo.

Why Private Equity?

Last month, Hamid Moghadam, CEO of AMB, spoke to my Wharton West class. He was a remarkable speaker.

AMB is an industrial REIT that has a private subsidiary whose existence is a puzzle to me. The REIT and the subsidiary share profits until the subsidiary reaches a return target, after which the public company gets the lion's share of the profit. In other words, the public and private companies split the risk, but the public company has more upside potential. This makes no sense in a Modigliani-Miller world (or any reasonable world, for that matter).

The benefit of the private company in this context is that it is not priced every day. Managers of institutional portfolios like this, because they don't have to report losses until they are realized. With stocks, managers can be measured on a minute-to-minute basis. Chris Mayer at Columbia, who knows more about this stuff than I, confirms that this can be a motivator for how fund managers choose their investments.

How big is the Subprime mess?

Let's figure this out. Subprime and Alt-A Mortgage Debt outstanding is something like $1.5 trillion. Let's say 20 percent default (double the default rate during the great depression). That is $300 billion in bad loans. If the loss that is 70 percent (probably an overestimate), that leaves $210 billion to clean up.

The S&L Crisis cost around $150 billion in present value terms (see http://www.erisk.com/Learning/CaseStudies/USSavingsLoanCrisis.asp). But the economy in 1995, which was pretty much when the clean-up ended, was half the size in nominal terms as it is now. So in the context of its economy, the subprime crisis is smaller than the S&L crisis, which was one of a number of events that led to a relatively mild, short-lived recession.

But there is an important difference. This crisis appears to have done serious reputational harm to rating agencies, which is turn means that lenders have less confidence about their ability to get repaid. This is turn means that non-residential lending is being affected by the subprime crisis. How much these spillovers matter will determine how much the crisis matters to the macroeconomy.

Professor John Taylor of Stanford presented a graph at Jackson Hole that suggested that the spillover from the subprime market to US credit markets was large, but that credit markets in other countries have to this point been immune from contagion. Let's hope this continues abroad, and that the non-subprime debt market in the US returns to normal reasonably soon.

The paper I have with Wachter at the Jackson Hole Symposium

http://www.kc.frb.org/publicat/sympos/2007/PDF/2007.08.21.WachterandGreen.pdf

Still needs a little cleaning up, but it is basically what we will submit for the symposium issue.

The Theme that runs through the Bourne movies

Is it me, or does it sound an awful lot like the prelude to Die Walkure?

BTW, if you like action movies at all, The Bourne Ultimatum is about as good as it gets.

An Interesting Idea from Andrew Samwick and Dean Baker

http://www.projo.com/opinion/contributors/content/CT_baker31_08-31-07_8G6SA6I.1c1d9dc.html

Allow those who defaulted stay in their homes at fair market rent. Only houses at less than median value would qualify. This is an interesting idea. I'll need to think it through at greater length...

House Price Indices: Case-Shiller and OFHEO

Two house price indices came out this week--the Case-Shiller and the OFHEO. Case-Shiller is down, while OFHEO is flat (quarter-to-quarter). It is natural enough to wonder why.

The two indices have three principal differences:

OFHEO has only houses financed with conforming mortgages (those with balances of less than $417,000). CS uses all sales.

OFHEO includes appraised values for refinance loans. CS looks only at sales.

OFHEO includes houses that may have been substantially improved from one sale to the next. CS throws those houses out.


In short, CS is better. The only advantage OFHEO has is that it covers the whole country--CS only covers the 20 largest metropolitan areas.

You know you're travelling too much when

You actually look forward to getting the Lemon-pepper Tuna in the $5 United snack box.

I know people hate United, but I don't think they are any worse than any other US airline (save one), and if you fly them a lot, you get seats with more legroom. You also get to listen to Air Traffic Control, and they have the tasty tuna.

Lots of people seem to love Southwest--I am not sure why. But Jetblue is really great. They just don't go enough places yet.

Jim Hamilton writes from Jackson Hole about GSEs

One of the (many) great things about getting to participate in the Jackson Hole conference was getting to meet Jim Hamilton, along with his wife, Marjorie Flavin, both of whose work I have admired for some time.

Jim makes a connection between the GSEs and the current mortgage crisis.

http://www.econbrowser.com/cgi-bin/mt-tb.cgi/633

The problem is that we really need the GSEs to step in and help right now (I think Jim's comments suggests that he agrees with this), but we don't want to write a big fat check to Fannie and Freddie.

Perhaps the thing to do is embodied in a comment I wrote on a paper by the USC gang for a Brookings Volume:

"The United States has idiosyncratic institutions whose purpose is to provide capital to mortgage markets while not originating loans. Two of these institutions, Fannie Mae and Freddie Mac, are among the largest financial intermediaries in the world, with assets of about $800 billion each.[i] Each company guarantees well over $1 trillion of off-balance-sheet mortgages.[ii]

Beyond being large, both of these companies are highly profitable, with typical book returns on equity of 25 percent.[iii] Critics of the firms argue that, on a risk-adjusted basis, they are too profitable.[iv] Specifically, they argue that shareholders whose debts are implicitly guaranteed by the U.S. government should not earn such large returns.

The size and profitability of the companies are likely the reason that they are required to meet affordable housing goals. The original charters of the companies were silent on the issue of affordability. Rather, they emphasized stability, liquidity, and ubiquity.[v] It was not until 1992, with passage of the Federal Housing Enterprises Financial Safety and Soundness Act, that Fannie Mae and Freddie Mac faced a regulatory requirement to target mortgage funding to “low- and moderate-income” borrowers, to “underserved” census tracts, and to “very low-income” borrowers or low-income borrowers in “low-income” areas. It is not a stretch to think that Congress felt that, in light of the companies’ special status and profitability, they had a special obligation to help those at the margins of the housing market. These targets became known as the “affordable housing goals.”

The paper by An, Bostic, Deng, and Gabriel asks a very simple question: Did the regulatory requirements put in place in 1992 work...

...[An, Bostic, Deng, and Gabriel’s] results taken as a whole imply that the affordable housing goals have accomplished little in terms of directing mortgage capital to the “underserved.” One could look at the goals as a classic outcome predicted by the public choice literature, which argues that government attempts to cure distortions that it created itself with other distortions.[i] In this particular case, regulators are trying to “cure” a distortion that arises from the existence of Fannie Mae and Freddie Mac: an unnaturally high return on equity to the shareholders of these two companies. This distortion arises from the perceived backing that the two companies receive from the federal government.[ii]

The purpose of the goals is to tax the companies and send shareholder benefits to underserved borrowers and neighborhoods. Structured as they are, however, the goals may simply shift profits from Fannie and Freddie shareholders to mortgage originators. An unusually explicit example of this happened in 2003, when Freddie Mac paid Washington Mutual $6 billion to “borrow” mortgages for goal-counting purposes.[iii] This transaction did nothing to add liquidity to the mortgage market anywhere and yet was a perfectly rational reaction by both parties to the goals.

The problem with the goals is that they do not tackle the distortion created by the existence of Fannie Mae and Freddie Mac in a head-on manner. The companies earn large profits because they are allowed to borrow at low risk-adjusted interest rates. Moody’s, for example, notes that it gives Freddie Mac an Aaa rating in part because of “dependence between Freddie Mac and the U.S. government.”[iv] In fact, Moody’s states that the default risk of Freddie Mac’s portfolio is at the level of an Aa1-rated financial institution. This is an excellent credit rating and reflects well on the management of the company, but it is still lower than Aaa: the company thus borrows at a lower rate than its credit characteristics warrant.

Congress could tackle this problem directly in one of two ways. It could raise the capital requirements for both companies, or it could follow the suggestion of Glaeser and Jaffee or Jaffee and Quigley and tax Fannie Mae’s and Freddie Mac’s issuance of new debt.[v] The second solution is particularly appealing, because it preserves the ability of Fannie and Freddie to guarantee mortgages—something that has been good for mortgage consumers in the United States—while reducing, if not completely eliminating, the ability of the companies to arbitrage their favorable borrowing position. The money raised via a debt tax could, in turn, be funneled into the Section 8 rental voucher program and, as such, could directly assist those facing the greatest housing needs.

To make this concrete, consider the impact of a 20-basis-point fee on the issuance of new debt. If the companies have at any one time $1.5 trillion in debt outstanding and turn debt over every three years, such a fee would produce $1 billion in revenue each year. This would allow for a $2,000 housing subsidy for 500,000 low-income renter families. Compared to what is currently in place, this is surely a more effective and efficient policy.


[i]. Neither Fannie Mae nor Freddie Mac has issued current financial statements. According to their most recent restated financial statements, each of the companies has more than $800 billion in assets on its balance sheet. For Freddie Mac’s consolidated financial statement for 2006, see freddiemac.com/investors/ar/ [March 2007]. For Fannie Mae’s 2003 consolidated financial statement, see www.fanniemae.com/ir/annualreport/index.jhtml?s=Annual+Reports+%26+Proxy+Statements [March 2007]. [ii]. For Freddie Mac, see freddiemac.com/investors/volsum/pdf/0107mvs.pdf [March 2008]. For Fannie Mae, see www.fanniemae.com/ir/pdf/monthly/2007/013107.pdf [March 2007].[iii]. The current five-year average return on equity is 24.1 percent for Freddie Mac and 28.9 percent for Fannie Mae. For Freddie Mac, see finapps.forbes.com/finapps/jsp/finance/compinfo/Ratios.jsp?tkr=FRE [March 2007]. For Fannie Mae, see finapps.forbes.com/finapps/jsp/finance/compinfo/Ratios.jsp?tkr=FNM [March 2007].[iv]. See, for example, Frame and White (2005).[v]. For the text of Freddie Mac’s original 1970 charter, see www.freddiemac.com/governance/pdf/charter.pdf [March 2007]. For the text of Fannie Mae’s original charter, see www.fanniemae.com/global/pdf/aboutfm/understanding/charter.pdf [March 2007].


[i]. See Tullock (1965) for the classic argument.
[ii]. I have argued that, on balance, this backing has been a good thing, because it creates liquidity in the market for conventional conforming mortgages. See Green (2005).
[iii]. See Berenson (2004a).
[iv]. Moody’s Investor Services (2006).
[v]. Glaeser and Jaffee (2006) and the paper by Jaffe and Quigley in this volume.