Saturday, November 22, 2008
Public Works
Friday, November 21, 2008
Brad Delong Blogs on Luck and Laptops
Thursday, November 20, 2008
Dick Cavett is a national treasure
Practical Greenhouse Gas Reduction/Transportation
Bad manners
In defense of mortgage backed securities
Wednesday, November 19, 2008
More on regional differences
Tuesday, November 18, 2008
This morning on NPR
http://media.vmsnews.com/MR.pl?id=111808-896263-U001574416
Sunday, November 16, 2008
Biggest Loser since 1950
This brought to mind a conversation I had with John Weicher some years ago about which city had lost the most population. Just to be clear, we were talking about municipalities, not metropolitan areas. I went to the census web site this morning, and generated the following growth (loss) rates between 1950-2007 for the 50 largest municipalities in 1950:
Jacksonville 293.91%
San Diego city 278.82%
Houston city 270.40%
San Antonio city 225.38%
Dallas city 185.53%
Fort Worth city 144.57%
Oklahoma City city 124.75%
Columbus city 98.92%
Los Angeles city 94.60%
Indianapolis city 86.21%
Long Beach city 86.04%
Memphis city 70.21%
Omaha city 69.04%
Miami city 64.36%
Atlanta city 56.69%
Louisville/Jefferson County metro government (balance) 51.11%
Portland city 47.31%
Denver city 41.50%
Seattle city 27.08%
Norfolk ciy 10.41%
New York city 4.85%
Oakland city 4.40%
San Francisco city -1.34%
Kansas City city -1.37%
Toledo city -2.83%
Milwaukee city -5.52%
St. Paul city -10.95%
Richmond city -14.14%
Worcester city -15.15%
Jersey City city-18.94%
Chicago city -21.66%
Akron city -24.28%
Boston city -25.22%
Washington city -26.66%
Minneapolis city -27.66%
Birmingham city -29.52%
Philadelphia city -30.02%
Providence city, RI -30.18%
Dayton city -32.02%
Baltimore city -32.88%
Syracuse city -33.22%
Cincinnati city -34.04%
Rochester city, NY-34.29%
Newark city -36.16%
Detroit city -50.42%
Cleveland city -52.12%
Buffalo city -53.01%
Pittsburgh city -54.02%
New Orleans city-58.08%
St. Louis city -59.06%
[sorry for the formatting--if anyone has good ideas for table formatting in blogger, I would love to hear them].
Some striking things emerge. First, only 22 of the 50 top 50 from 50 gained population. And among the 22, Jacksonville, Los Angeles and Oklahoma City had lots of land within their municipal boundaries in which to grow, and Louisville, Nashville and Indianapolis merged with their counties. Denver and Miami are quite remarkable stories, because their boundaries were both fixed and pretty tight in 1950. But keep in mind that the country doubled in population between 1950 and 2007, so if a city's growth is anything less than 100 percent, it is underperforming. By this standard, only 7 of America's top 50 in 1950 has matched or surpassed the country. This illustrates starkly how the country's population has spread.
That said, the cities on the bottom of the list are those that have suffered the most stress. New Orleans does reflect Katrina: before Katrina is population loss was actually fairly typical of a city from the top 50 in 1950.
Phoenix and Las Vegas are not on the list because they were not among the top 50 cities in 1950.
Saturday, November 15, 2008
Larry Summers for Treasury
He was, to say the least, socially awkward: he stood in a corner of the room, by the food, and kept his mouth solidly stuffed with cheese and crackers. This was no politician.
But then he gave a ten minute speech explaining the five great economic accomplishments of the Clinton Administration (rising wages for all, budget surpluses, etc.) and the five things a Gore Administration would do (reduce income inequality, health care for children, etc.) to make things even better. It was a brilliant, inspiring, and visionary ten minute speech. His valedictory speech as Harvard president was equally good.
Lots of people I know do know Summers well. They all say that he sometimes forgets to think before he lets words come out of his mouth. They also all say that when he doesn't forget to think, the words that come out of his mouth are smarter than anyone else's. When it comes to deciding who should be running Treasury right now, that should be the only criterion that matters.
Regional Attitudes
These attitudes had been around for awhile. Addison DeWitt (George Sanders) in "All about Eve:"
San Francisco. An oasis of civilization in the California desert. Tell me, do you share my high opinion of San Francisco?"
Alvie Singer (Woody Allen) in "Annie Hall:"
In Beverly Hills ... they don’t throw their garbage away. They make it into television shows
So I am now curious as to whether these attitudes remain as strong as ever, or whether they have attenuated over the years. As I am writing this from my back deck, next to my kumquat tree, on a glorious, sunny, warm, slightly breezy day in mid-November, I suppose I really shouldn't care.
Thursday, November 13, 2008
I am Gloomy about the future of Shopping Centers
(1) We have built a lot of shopping center space over the past 15-20 years. According to ICSC, there was 38 percent more space in 2005 than 1990.
(2) Depression era cohorts are savers; boomers are spenders. According to Pew Surveys, Depression era cohorts think they owe their kids an inheritance and are far less stressed about their finances--even though they made less money.
(3) As depression era cohorts leave us, spending should on average rise, except for the fact that
(4) Boomers have borrowed like crazy in order to spend. Even though median incomes have not risen over the past eight years, consumer spending as a share of GDP has. This is because household debt levels rose dramatically. The Mortgage Debt Outstanding to GDP ratio grew from the high 60s to 100 percent; other consumer credit outstanding to GDP grew from 12 to 18 percent. Boomer households borrowed to spend; it will be years before they will have such access to credit again (which is not at all a bad thing--it just means that the mechanism that has allowed for substantial retail spending has disappeared for awhile).
(5) Retail margins reached historically high and therefore possibly unsustainable levels recently.
(6) The current weakness in retail will likely last a lot longer than the weakness in housing.
(7) We need to hope that inheritances and immigration can bail us out.
(8) Consumption cannot lead us out of this recession--which means it will need to be Investment and Net Exports.
[Note: this is the first time I have tried linking to a Google App; I would appreciate it if someone in comments would let me know whether it worked. rkg]
Wednesday, November 12, 2008
On my Reading List for 2009
Tuesday, November 11, 2008
I think I have a new hero
The school system is doing "an abysmal job," said Ms. Rhee, who has been on the job for 17 months. According to Department of Education data, about 60% of the district's high-school students finish in four years with a diploma. By comparison, nearby suburban districts have a graduation rate of 78%. More telling: In some Washington, D.C., high schools, only about 6% of the sophomores can read or do math on grade level.
While she is realistic that children in her school district come to school with "significant challenges," Ms. Rhee said it is "complete crap" that those students can't perform at a high level because of their environments. "It's easy to blame external factors as the reason why poor minority kids aren't achieving at the same level. It's a false premise. You have to put supports and mechanisms in place around those kids, but I refuse to allow the adults in the system to use that as an excuse."
Transit Authority Thinking
A caller noted that light rail in LA had a serious problem--that its average speed (with stops) is about 15 mph. The transit guy responded that it was OK, because the average speed of buses in LA was 8 mph.
What this fails to note is that it is easier to change bus routes to get buses close to where people live and work than it is to change rail lines and stations. The issue is not the speed of the mode; the issue is the speed of the total trip. This is why rail must be fast for it to be a desirable mode.
To give an extreme example, when I commuted from Washington to Philadelphia, I had the choice of driving at 60 mph on average or taking a train that had a top speed of 120 mph and made stops at 3 places. The door-to-door trip was a toss-up, because I could drive directly from home to Penn, instead of having to go to and leave from a rail station.
John Kain taught us about all of this years ago, and I have never seen evidence that he was wrong, and yet the people who run public transportation for us seem to pay him no attention.
Sunday, November 09, 2008
Streets
Wide streets within residential areas do three things: they make developments less compact, they add to the impermeable area and therefore accelerate run-off, and they encourage drivers to speed through neighborhoods, thus reducing their attraction for walking.
Many of the world's most successful cities have narrow streets. Here is an example of a one:

Paris has pretty much the same residential density as Manhattan. The reason that it doesn't need many high-rises to accomplish this is it wastes so little land on things like excessively wide streets. Compare it to Anaheim from the same elevation:

You get the idea.
People love doing "green things," such as building LEED certified buildings and harnessing solar energy. These are indeed wonderful things. But doing simple things such as building more compact places would almost certainly have at least as large an impact as more glamorous pursuits.
Saturday, November 08, 2008
Brad Delong explains why things will get better
Here are the talking points for Obama-Biden administration personnel selections. They have the added advantage of being true:
1. The bench is very deep right now. Practically everyone competent and qualified for high executive office has come over to the Democratic Party over the fourteen years since the coming of Gingrich. Thus there are a huge number of superb choices available for every position.
2. Everyone being considered for high federal office is intellectually honest: they understand not just the advantages of their own views, but their flaws and disadvantages as well; they understand the pluses of views opposed to theirs. Policy will be realit-based: it will depend upon our collective best guesses as to the way the world works, and not the idiosyncratic intellectual hobbyhorses of ex-AEI staffers.
3. Everyone knows that the American people have elected Barack Hussein Obama and Joe Biden--not their staffs. Everyone knows that the jobs of staffers will be to present Obama and Biden with the options, their pluses and minuses, and then strive to implement their choices as best they can. The policies of the Obama-Biden administration will be Obama-Biden policies.
4. Everyone thinks it would be a great honor to work for the Obama-Biden administration.
5. Everyone knows that the bench is deep, and that their chances--however qualified they are--are low.
6. Everyone's knows that this is bigger than any of us, and that the right attitude is to ask for an oar, find a place on a bench, and start rowing. There is an awful lot to do.
Based on the little I know (I did a modest amount of work for the campaign), this is exactly right.
Friday, November 07, 2008
I paid $2.50 for a gallon of gas in Upland yesterday
How about a $1 per gallon tax that is used to fund a cut in the payroll tax?
Should we worry about the deficit?
What he failed to note is that during WWII, households saved like crazy, in part because materiel was needed for the fight against fascism. Because there was plenty of personal savings with which people could buy bonds, the run-up in the debt was quite manageable. The US doesn't have such savings right now. It is fortunate for us (but perhaps dangerous from a political point of view) that the rest of the world has done a better job savings.
David Stiff of Fiserv Writes (important update for S&P Case Shiller Discussion)
I am responsible for quantitative research at Fiserv Lending Solutions, the company that calculates the S&P/Case-Shiller indexes.
Your recent blog entry "What Do House Price Indices Currently Mean?", contains some incorrect information regarding the S&P/C-S indexes.
The Case-Shiller model does not include a foreclosure dummy. In general, sales of bank-owned (REO) properties are included in the repeat sales pairs used to estimate the indexes if they occur at least 6 months after a previous arms-length transaction. (Note: Bank repossessions of properties that are recorded at deed offices are not included in the repeat sales pairs, because they are not arms-length transactions.) I am not sure how this misconception about a foreclosure dummy started -- I need to talk to Chip Case about the details of this discussion at the Berkeley/UCLA conference.
If you don't mind, could you please modify your entry to indicate that there are no foreclosure dummy versions of the S&P/C-S indexes? This misconception is generating a lot of confusion for our index customers. Thanks.
A less consequential misunderstanding -- the Los Angeles S&P/C-S index only covers Los Angeles and Orange counties. Data from Riverside and San Bernardino counties are not included in the S&P/C-S index for Los Angeles.
Wednesday, November 05, 2008
Morris Davis Answers a Question
He replies:
The underlying issue for both the high foreclosures and big bank failures we’ve observed is that house prices are falling. When the price of any asset (such as housing) falls, losses are incurred.
Equity holders suffer the first losses. In the case of housing, the equity holders are the homeowners. If the losses are large enough to wipe out the equity, the ownership of the asset is transferred from the debt holder to the equity holder. (In the case of housing, this is foreclosure). Debt holders then absorb any other losses. With housing, the holders of the debt are the institutions or people that own the mortgage notes.
The price of housing has fallen rapidly enough that many homeowners had their equity wiped out -- leading to high rates of foreclosure. The losses were steep enough that in many cases the debt holders have also taken losses, which led to the high rate of failure of mortgage holders (such as Lehman Brothers, etc.).
The point of all this is to say that someone needs to take losses because of falling house prices. A “foreclosure moratorium” or widespread “mortgage modification” would reduce the losses suffered by homeowners (equity holders) and increase the losses suffered by mortgage holders (banks and financial institutions). Thus, a moratorium does not correct the fundamental problem, the decline in house prices. It just shifts losses around.
A policymaker might say, “Let’s just let those ‘greedy’ banks and financial institutions absorb the losses.” There are two problems with this. First, our banking system appears quite fragile right now. Many economists are worried about a deep recession because lending institutions, i.e. banks, are not lending very much right now because of the losses they have already absorbed. Any future losses absorbed by banks might make them even more hesitant to lend. Second, because of FDIC insurance, the government is effectively a large debtholder in many financial institutions. Thus, any moratorium on foreclosures or widespread forced mortgage modifications would effectively shift losses from many households engaged in somewhat speculative behavior (i.e. zero-down mortgages) to mostly responsible taxpayers (i.e. those households that chose not to refinance their housing with zero-down).
Personally, I think a brief foreclosure moratorium is worth considering as a method for developing an orderly process for dealing with the large number of defaulted mortgages. We just don't have the servicing infrastructure to deal with them all right now.
Tuesday, November 04, 2008
When School Districts become Financial Intermediaries
The school district borrowed $165 million to purchase Collateralized Debt Obligations. Now that the CDOs are failing, the district may have trouble paying its loan back. So the bank holding the loan will have its capital position erode...etc.
This sort of thing happened to Orange County in the early 1990s. It sure would be nice if we didn't have to learn the same lessons over and over again.
What Do House Price Indices Currently Mean?
This is a problem. CS is a repeast sales index, with the idea being that by looking at houses that sell twice, and seeing how their value changes across time, one has a constant quality house price change. The problem with including foreclosures is that the constant quality feature is almost certainly eliminated--foreclosed houses are almost certainly undermaintained (there are newspaper reports about this--I would be curious to know if there is a rigourous study), meaning that they are no longer constant quality houses. This feature will bias estimate downward.
My colleague Chris Redfearn notes another problem with the current index. For the LA area, the index is being disproportionately influenced by Riverside and San Bernardino counties, where foreclosure sales have produced big upticks in sales volumes. In stable neighborhoods with financially stable households, people are simply not putting their house on the market, so the relative stability is not reflected in the index. If one looks at any real estate web site, one will find that the number of listings in Santa Monica, for instance, is quite small.
All of this suggests that the CS Index is currently biased downward. While there can be no doubt that house prices here in Southern California have fallen a lot, they have almost certainly not fallen as much as the CS index suggests.
It is going to be hard to think about work today
Sunday, November 02, 2008
A Post on the Growth Commission Blog
One of the villains of the current financial crisis is "securitization." The alphabet soup of securities structures--CMOs, CDOs and SIVs--is roundly blamed for the current financial world's mess.
The irony is that it was not so long ago that emerging countries looked to securitization as a savior for the problems that they faced in developing capital markets. Specifically, many countries (particularly in Latin America) looked to Fannie Mae/Freddie Mac Mortgage Backed Securities as models for instruments for providing housing finance, and others (such as India) looked at special purpose vechicles as a potential method for getting around the poor financial conditions of local government attempting to finance infrastructure.
So which is it: villain or savior? Well, of course the answer is neither. Securitization is just an instrument, and when applied appropriately under appropriate circumstances, is a useful instrument. So let's begin by dispensing with the notion that securitization is it self a villain, and then talk about why it is not a savior either.
I believe investors made two fundemental mistakes about subprime mortgages. First, some investors thought US house prices would never fall nationally, in part because they never had (in nominal terms) in the post-was era. So long as house prices rose, these investors reasoned, mortgage borrowers would retain a powerful incentive not to default; consequently, default risk for all mortgages was deemed to be low. True story--around 2005 I was in the elevator of a large investment bank, and one person said to another, "you can't make a bad real estate loan." That happens to be the moment that I began to worry about the subprime market.
The problems with this line of reasoning were two: just because house prices had never fallen nationally didn't mean that they couldn't, and even if house prices did rise nationally, if they fall regionally (as they did in the US Midwest in the 1970s, in Texas in the 1980s and in New England and California in the 1990s), one will still see defaults. This was an underwriting issue, not a securitization issue.
The second problem is that Wall Street Ph.D.s thought they could outsmart bad underwriting. This reflected insufficient modestly about how confident we can be about parameters. The idea behind Collatoralized Debt Obligations was that one could combine subordinated securities (those that were in the first loss position) and use diversification to get a very precise estimate of the losses that one could expect from those securities. Suppose that the expected loss of a security was ten percent with a standard deviation of ten percent. By combining 30 securities, one reduces the standard deviation by 1/(sqrt(30)), or by more than 1/5, so investors can have confidence that the actual realized loss would fall within a narrow band. Investors could then use the knowledge to further slice and dice.
For this to work, however, one needs to know that the parameter estimates for expected losses and standard deviaion of losses are correct. For a whole host of reasons, we didn't have remotely enough information about parameter stability to make these sorts of judgments. Something we need to remember is that as our models get cleverer, we start losing degrees of freedom. But we also need to remember that the vanilla MBS security structure, and even simple senior-subordinated tranching, worked very well for a very long time. Securitization is a good way to match up households with capital markets, and remains true today.
But the recent crisis suggests that securitization is no magic bullet for emerging countries. For securitization to work, investors need to understand the loans that are being securitized, and that means the loans must be underwritten robustly and consistently. For this to happen, emerging economies will need stronger financial infrastrucure (such as well developed banking systems) and property rights infrastructure (so investors can have confidence in collatoral). I remember when I did a Bank mission in one very low-income country, I was asked about whether it should develop a Fannie Mae. This was a country whose courts couldn't enforce foreclosure rules, and that had no long term sources of finance. If any good news arises from the current crisis, it is that emerging countries might focus on getting fundementals right, instead of hoping for a magic securitization scheme to solve all their problems.
Counterparties
Two distinguished scholars said things that surprised me. One noted that the net position of derivatives was zero (a correct statement) and therefore derivatives were nothing to worry about. The other said that the size of the subprime losses would likely be around $400 billion, which should have been managable. I should note that I made a similar statement about subprime losses around a year ago, but I didn't really think through the implications of it.
Had the $400 billion of subprime loan losses been held with equity, the implications of the crisis would have been much smaller. This is why the collapse of the tech bubble, while meaningful to the economy, resulted in only a mild recession. The problem is that the $400 billion in losses on subprime mortgages and the derivatioves they support are being realized by highly levered institutions, and so losses precipitate a chain of events that go well beond he original losses.
Let's start with the loans themselves. Suppose a bank owns subprime loans, and assumes a loss rate of 5 percent, and holds sufficient capital to bakstop those loans. Now suppose the loss rate doubles. The bank may still be solvent (i.e., have positive value), but its capital position has been eroded, perhaps to the point that it can no longer make loans. This is not hypothetical--I have recently talked to some community bankers who have told me this is exactly their position.
The inability to make loans means the value of the banking business falls--and so share prices fall. This means it is difficult for banks to recapitalize, because issuing stock is expensive. Credit markets freeze up, and the implications of losses arising from subprime get transmitted to the general capital stock--banks lose the ability to finance P&E. The reduces the future value of the broader economy beyond the initial subprime loss.
But now let's consider a bank that was smart enough to buy credit default swaps so that its balance sheet would remain healthy in the event of poor subprime performance. The bank gives up cash flow to pay premiums to insure against future problems. But the bank is assuming that the counterparty with which it has contracted can make good on its obligations. If the counterparty is highly levered, a subprime meltdown will produce bankruptcy. It is here that the ex post net derivative value goes negative: the payouts from the insurance company are smaller than the losses incured by the bank, because the value of the insurance company is truncated at zero. This creates its own set of multiplier effects.
Thursday, October 30, 2008
Matt Kahn Celebrates the Spirit of Cooperation
http://greeneconomics.blogspot.com/
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 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
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?
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?
Bill Gross says to Invest in Fannie-Freddie Debt
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?
er
(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
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...
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
H
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.
Tuesday, October 14, 2008
Capital and Prime Mortgages
A potential positive NPV earmark?
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
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
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?
Monday, October 06, 2008
Jane Albrechtsen says America is dumb for having 30 year fxied rate prepayable mortgages.
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
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.
Friday, October 03, 2008
Thursday, October 02, 2008
More from Morris Davis
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
Depression!
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
loss.
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
Geez!
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
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.
Tuesday, September 30, 2008
A quote from Tony Blair's last day as PM
"Some may belittle politics but we who are engaged in it know that it is where people stand tall. Although I know that it has many harsh contentions, it is still the arena that sets the heart beating a little faster. If it is, on occasions, the place of low skulduggery, it is more often the place for the pursuit of noble causes."
I have been thinking about yesterday's vote in the House. Like Paul Krugman and Brad Delong and Mark Thoma, all of whom I admire, had I been in Congress, I would have held my nose and voted for the deal, which has many aspects I didn't like.
But the press today has been about the venality of members who were afraid to vote for the plan because it is unpopular with voters. Having had some conversations today with friends who are to the left of me, and who opposed the plan, I think that the votes against the plan may well have been sincere votes, dictated not by expediency but by principle. Many Democrats view the plan as having insufficient consideration for consumers, and many Republicans genuinely find the idea of socializing risk to be anathema. As it happens, I disagree with this Republican point of view, but in this instance it is honest and defensible (although I think the business about cutting capital gains taxes is nonsense).
So while I think Congress made a mistake yesterday, I find it entirely plausible that the vast majority of members, on this one particular occasion, voted with their heads and hearts,
Coleman, Lacour-Little and Vandell argue that house prices made sense until 2004
The cause of the "housing bubble" associated with the sharp rise and then drop in home prices over the period 1998-2008 has been the focus of significant policy and research attention. The dramatic increase in subprime lending during this period has been broadly blamed for these market dynamics. In this paper we empirically investigate the validity of this hypothesis vs. several other alternative explanations. A model of house price dynamics over the period 1998-2006 is specified and estimated using a cross-sectional time-series data base across 20 metropolitan areas over the period 1998-2006. Results suggest that prior to early 2004, economic fundamentals provide the primary explanation for house price dynamics. Subprime credit activity does not seem to have had much impact on subsequent house price returns at any time during the observation period, although there is strong evidence of a price-boosting effect by investor loans. However, we do find strong evidence that a credit regime shift took place in late 2003, as the GSE's were displaced in the market by private issuers of new mortgage products. Market fundamentals became insignificant in affecting house price returns, and the price-momentum conditions characteristic of a "bubble" were created. Thus, rather than causing the run-up in house prices, the subprime market may well have been a joint product, along with house price increases, (i.e., the "tail") of the changing institutional, political, and regulatory environment characteristic of the period after late 2003 (the "dog").
This result is hardly consistent with the charge that the GSEs were the principal source of the problem. It also says something about having a purely private mortgage market.
Monday, September 29, 2008
LA House Prices again
The Fannie/Freddie Conservatorship seems to be working OK
-Interest rates on conforming loans have dropped substantially, helping both homebuyers and sellers in the conforming market. Underwriting standards, though., remain more stringent (good in the long run, perhaps not so good in the short run).
-Senior management got removed without golden parachutes
-Shareholders get largely, but not entirely, wiped out
-The taxpayer, holding 80 percent of the company, gets susbstantial particiation in any upside (which in F&F's case, I think likely).
On net, this looks pretty good. It also looks kind of like Sweden's temporary nationalization of its banking system in 1992, which worked pretty well.
Can't anyone play this game?
Sunday, September 28, 2008
Is Lincoln Forecasting its own Demise?
Note to Self: Always listen to Warren Buffett
This was 2002 and 2003, so default risk was not a great worry: the company's underwriting practices at the time were sound, and mortgages were protected either by 20 percent downpayments or mortgage insurance, and property values were still rising, but not yet at a bubble like pace in places like Las Vegas and Florida. As for interest rate risk, the company purchased hedges so that its balance sheet would always have duration of less than a month, and so that duration risk was quite small too--although while hedging duration is pretty straightforward, convexity is more complicated (duration is basically the first derivative in how capital value changes with respect to interest rates; convexity is the second derivative). FWIW, I also thought the people who executed risk management at Freddie were very good at their jobs.
In these discussions, we failed to predict the principal reason the company got into trouble: we had no idea that senior management would recklessly gamble the charter through accounting that was both misleading and (it turned out) incompetent. I have arguments with William Poole, but when he said that management risk was a huge problem with having institutions like Fannie and Freddie, he was right.
But one among us (whose name I will reveal if he/she gives me permission to do so) did predict a major source of the current problem: counterparty risk. For example, Freddie Mac would buy instruments called swaptions, which would give the company the option to swap floating rate debt for fixed rate debt, and vice versa. These swaptions would allow Freddie to manage its balance sheet when interest rates changed in the future. Suppose, for instance, Freddie borrowed long-term in order to finance fixed rate mortgages. Now interest rates fall and borrowers refinance. Swaptions allowed Freddie to trade its expensive fixed rate debt into less expensive floating rate debt to match the lower return on its portfolio (and the converse when interest rates rise). But of course, swaptions would be useless if the institution with which Freddie contracted could not make good on its part of the bargain when interest rates changed.
In 2003, Warren Buffett called derivatives (such as swaptions) weapons of mass financial destruction. Like everyone else, I have long admired Buffett, but I though he got this one wrong. Derivatives allowed institutions to hedge and therefore reduce risk! Or at least, I thought this was the purpose of derivatives.
But of course, investors can also use derivatives to speculate, and when they do so (and particularly when they do so using leverage), derivatives become very dangerous. AIG, for instance, guaranteed against mortgage default. This meant that when defaults rose to levels not seen since the Great Depression, it didn't have enough capital to meet its responsibility to its counterparties. So the counterparties who thought they had hedged their risk found themselves exposed, which in turn ate into their capital position, and so a cascade was on.
Derivatives can be used for good, or for evil. Buffett understands human nature far better than I, and I should always remember that.
Friday, September 26, 2008
A readers asks where to get data about Fannie Mae loan performance
The comparisons are not exactly apple-to-apples, but because the MBA data are a little older than the FF data, it is actually likely the case that the GSEs have performed relatively better than the comparison above would suggest.
Thursday, September 25, 2008
Full Disclosure
I made many close friends at Freddie, and learned more about mortgages that I could have possibly learned had I never left academia. I also found myself very disappointed with the company in all kinds of ways, which is why I didn't stay very long (although I also didn't stay long because I missed being a professor). I think senior management there has made a series of awful decisions.
Readers may draw their own conclusions about how seriously to take my views in light of this.
Wednesday, September 24, 2008
Morris Davis writes to me
Morris is currently at Wisconsin-Madison, and was formerly at the Fed.
Why I am opposed to the bailout, by Morris A. Davis
First, I've decided it is bad economics. Suppose the bailout costs 500 billion. Suppose the bailout is effective in avoiding a recession -- The bailout itself costs 3-1/2 percent of GDP. I think you have to go back to 1982, maybe further, to get that kind of contraction in GDP during a recession.
Second, Paulson and Bernanke have proven, repeatedly, they have no idea what is going on. For example, here is a published quote from Bernanke on June 5, 2007, available on the Federal Reserve Board web site: "At this point, the troubles in the subprime sector seem unlikely to seriously spill over to the broader economy or the financial system." I can find similar quotes from Paulson.
If Bernanke and Paulson have been wrong, every time, why would they be right about the effectiveness or cost of a bailout now.
The reason I have no faith in Bernanke or Paulson is that they have no simple theory to explain what is going on. They know all the bits and details of current events, but they have no simple unifying underlying theory for events.
Third, what assets should be bought in a bailout? Mortgages? How about underperforming stocks? How will the government decide which markets are illiquid and which ones aren't? Forget the adverse selection problem for the moment. Just ask: Why would the government know which class of assets to buy and why?
Fourth and Fifth, the precedent this sets is terrible. This bailout means we have lost faith in free markets to allocate scarce capital to its most productive use. It also tells punishes responsible investors (who did not underwrite or hold high yield junk mortgages) and rewards exp-post the participants in financial markets who took the riskiest bets.
Tuesday, September 23, 2008
Charles Calomiris and Peter Wallison blame Fannie Mae for the Subprime Mess
(1).jpg)
Hmmmm. The loan performance on Fannie's book of business is substantially better than the overall mortgage market. And starting in 2002, Fannie Freddie (pink line) lost market share to ABS (light blue line). The data underlying the graph is from the Federal Reserve,
| Table 1173. Mortgage Debt Outstanding by Type of Property and Holder. |
Monday, September 22, 2008
Could we please stop saying that it was the hybrid feature of Fannie/Freddie that caused them to fail?
Perhaps the new rule going forward is going to have to be that any financial institutions with assets of greater than $X billion will be required to have paid-in capital of greater than Y percent. I have no idea what X and Y should be, but the costs of making X a little too small and Y a little too big are almost surely smaller than the costs of the converse.
Demanding some Accountability is not Partisan Squabbling
Saturday, September 20, 2008
How big could a new RTC be to remain comparable to the old RTC?
We did manage to get through the early 90s with a fairly mild recession.
Degrees of Freedom
But while Bernanke/Paulson have more information than the rest of us, they have no foundation for calibrating a model to inform them how to move forward. We are completely outside the support of the data. As Charles Manksi describes it so simply and eloquently, because we are in a world of Xs we haven't seen before, we cannot possibly know how to relate those Xs to Ys. And so at the end of the day even our smartest policy makers must rely heavily on judgment. I am not reasurred when I remember that Isaac Newton lost a bunch of money in the South Sea Bubble .
I do think I support the RTC type plan that Paulson is proposing. My worry with it, however, is political more than financial. If we get the wrong sort of people (say those who went to grade school with the Vice-president, or those who were until recently running the interior department) running it in the future, it could produce cronyism and kleptocracy unlike anything we could have before imagined.
Friday, September 19, 2008
Are we at the Bottom in SoCal?
(1) From a user cost perspective, owning really does look pretty good in many SoCal markets right now, especially for houses that are inexpensive enough to use conforming loans. Mortgage rates are down about 75 basis points on Fannie-Freddie loans since they were placed into conservatorship. People have to live somewhere.
(2) Lots of sales are distressed sales (around 40 percent). This means the prices we are observing are not arms-length transactions, and may be below equilibrium market prices.
(3) While I am wary of anecdotal evidence, I have been getting a lot of anecdotes about bidding wars for modestly priced houses (modestly priced by California standards, anyway).
But there are a number of cautions:
(1) After rising sharply for the past four years, rents in Southern California are stagnant, and perhaps are falling a little bit.
(2) Unemployment has risen sharply in San Bernardino, Riverside, Orange and Los Angeles Counties.
(3) The overall sense of pessimism arising from the financial market crisis could keep buyers from buying.
Altogether this suggests to me that house prices won't be going up a lot anytime soon, they won't be falling much more either.
Tuesday, September 16, 2008
I should write something about Lehman...
I also dropped my younger (by 45 minutes) daughter off at college today. It has been wonderful to see my self-confident, hard-working girls just bubble over with joy while starting out at great universities in great cities. But it has also left me, for the moment, profoundly sad. I am a little surprised at this. Some wisdom does indeed come only through experience.
Friday, September 12, 2008
If not a hybrid, then what?
Where I was mistaken was to think 2.5 percent capital was sufficient backing for the GSEs--I thought home mortgages were so safe, that 2.5 percent plus a stress test would be OK. I was wrong. And it is becoming increasingly clear that the GSEs' managements were reckless with the charters, which gives evidence that Robert Van Order's powerful argument that GSE management would never want to screw up a wonderful franchise was also incorrect.
So maybe the correct answer is a hybrid with more capital--say 5 percent. After all, thanks for FDIC and the Federal Home Loan Bank System, Banks are really hybrids too.
The Power of Simplicity
Tuesday, September 09, 2008
Megan McArdle doesn't like fixed rate mortgages.
This argument makes no sense. The way to look at the issue is to consider households to be financial intermediaries. Financial intermediaries are most stable when their liabilities and assets have the same duration. Most households have two principal assets--their house, and their human capital. The house has long duration; the duration of jobs is variable. Fixed rate prepayable mortgages can have long duration, and because they have an embedded call option, the duration can be made variable.
Thus a prepayable fixed rate mortgage is a liability that matches well to a house's long duration and the owner's desire to have a free option to move to a new job. It helps stabilize household balance sheets.
Elitism
First, I am sure that my statement that I would not vote for a creationist comes across as elitist. But the fact is that when someone identifies herself as a creationist, she is revealing something to me about her decision process--that she makes decisions based on faith, rather than evidence. I am uncomfortable with this, and have reason to think that decisions based on evidence tend to turn our better than those based on faith, or or one's gut. It is true that sometimes there is not all the evidence that one would like to make a decision, and then one must take a leap, but evidence first strikes me as a good rule. The Red Sox won World Series after they started listening to Bill James (who explicitly rejects baseball mythology when it conflicts with data).
Second, I grew up in what was then red state America--a town of 50,000 in Western Wisconsin. The benefits were real--I came to appreciate hunting and especially fishing, and I could ride my bike anywhere at any age in safety. But the town was homogeneous in a way that was stifling--when I was growing up, my guess is that there were maybe 50 African-Americans and 50 Jewish people in the whole town. The town, moreover, did not at the time welcome those who were different, and I remember at 17 being engaged in a debate with fellow Democrats (!) about whether it was appropriate to use government funds to support a battered women's shelter. I am happy to say that the place has since changed considerably: it is far more heterogeneous and far more welcoming than it was when I was growing up there. Nevertheless, even though I liked my family (by that I mean I liked hanging out with my parents and brother), and even thought I had three close buddies who were staying in Wisconsin, I took as many classes as I could in high school to get out of town as soon as possible, and left for college after my junior year. My "lack of respect" for the place I grew up arose from the fact that its values were different from mine. Is this elitist? Perhaps.
So college was the ultimate elitist experience: the fanciest of fancy-pants Ivy League Schools. Intellectually, the place was at times truly thrilling: I still can remember specific sentences from lectures on Shakespeare, on moral reasoning, on international relations, on Japanese-US relations, on Public Finance (where Malcolm Gillis made me realize that I wanted to be an economist). It also was the place where I met my wife, one of the most remarkable people I have ever known, and for that I will always be grateful.
But for all that, it could be truly insufferable and provincial. Harry Lewis inadvertently underscored this phenomenon when he wrote in Excellence without a Soul, "if I hadn't been able to teach at a place like Harvard, I would have gone into the computer industry." So whatare students who don't go to "places like Harvard," chopped liver?
So when Harvard disdains the heartland, and when the heartland disdains Harvard, they both have some basis for doing so. Interestingly, both places have trouble dealing with the "other," but my sense is that both places are getting better at doing so.
FWIW, among the Universities where before this year I spent time (Harvard, Wisconsin, George Washington and Penn), my favorite by far has been Wisconsin (although after a month at USC, I think it likely that it will match Wisconsin--and the weather is a lot nicer here. The sushi is better here too--oops, that's elitist!). Wisconsin is also an intellectually thrilling place--it doesn't have as many superstars as Harvard, but it has plenty, and it was a treat to hear lectures from and talk with Harold Scheub, Dave Demets, Stanley Kutler, Arthur Goldberger and Buz Brock, among others. At the same time, because the students were predominantly Midwesterners, and generally quite good, there was little if any disdain for the heartland. Indeed, one of the striking things about the atmosphere in Madison is how modest very accomplished people there tend to be. It is almost is if Berkeley were crossed with Lake Wobegon.
Finally, I need to say something about the South (I have lived on both coasts and the Midwest, but never the South). Anyone who stereotypes Southerners as dumb should be ashamed. In the first place, such generalizations are always wrong, and in the second place, the region has produced Faulkner, Tennessee Williams, Martin Luther King, Thomas Jefferson, etc. and has many great universities, such as Chapel Hill, UVA, Duke, etc.
But two facts remain about the South that are truly problematic. The states with the lowest high school graduation rates in the country are in the South. This is not because the South is rural--the states with the best high school graduation rates are in the Midwest, and are generally rural. And if people are looking for respect, waving the Confederate flag is not the best way to do it. Southerners who do so will argue that they are celebrating a heritage, but it is a heritage in which a large group of people were deemed subhuman. African-Americans rightly feel disrespected when they see that flag, and people who want to wave that flag should understand that.
Just because one might not like NASCAR, or country-western music, or, heaven forbid, football doesn't mean he needs to look down on it. But that flag is something else.
Lifted from Comments: Scott corrects my History
He writes:
I think there may be a bit of anachronism here although I am not entirely sure. Bryan ran for president in '96, '00 and '08 with national debut "Cross of Gold" speech catapulting him into prominence in 1896 much as Humphrey, Reagan, and Obama would later be sent into orbit (Reagan literally) by their national debuts. The Scopes trial was in 1925, and Bryan had started to vehemently attack Darwinism after WWI. He had spoken out against it earlier as well, but after his initial run.Bryan was not a young earth creationist and not really one in the modern sense. And it was not really uncommon to reject Darwinism at the turn of the century. Indeed, most scientists did. They didn't reject evolution, but they did reject Darwinism, primarily because a workable theory of heredity was lacking. This was rectified from 1900-1918 from the rediscovery of Mendel to Fisher's crucial paper integrating Mendelism and Darwinism. But it really should be emphasized that many major scientists rejected Darwinism before 1900. Now they probably rejected it for different reasons from Bryan, but the Darwinian mechanism of evolution certainly wasn't a settled fact at the time. Did Bryan have contempt for the evidence at the time that he ran (which is when you could have voted for him)? Very unclear. How far was he willing to integrate evidence into his biblical worldview? I don't really know, but at least one historian (Ronald Numbers) claims that he was willing to accept a geologically old earth and read 7 days figuratively.So while it is true that at the end of his life (or a few days before the end) he rejected Darwinism because he was very worried that the mechanism of natural selection (espcially as seen through the light of Social Darwinism) led to the moral decay he saw in WWI, he may not have held that view 3 decades before and certainly the science wasn't settled at that time.
Of course, current politicians have no such excuses.
Sunday, September 07, 2008
Just wondering
Saturday, September 06, 2008
What has been the real benefit of Fannie and Freddie?
Rather, is has been the transfer of interest rate risk from households to investors. So far as I know, the US is the only country in the world with long-term, fixed-rate, 95 percent LTV loans that do not have prepayment penalties. When interest rates rise, borrowers are protected; when they fall, they are not mad e immobile by yield-maintenance and lockout clauses.The low down payments (and five percent equity seems to be OK) effectively give households with modest incomes access to capital markets. I have written elsewhere that I believe that the peculiar structure of Fannie and Freddie has helped bring about the unique American mortage.
One could argue that the current environment shows that none of this has been worth it. But I would disagree with that argument.
Thursday, September 04, 2008
Why I will never vote for a candidate who thinks creationism is arguable
I cannot vote for someone who has contempt for evidence. A suggestion that creationism is an arguable alternative to evolution is equivilent to a suggestion that Ptolemy's Earth-centered model of the universe is an arguable alternative to Copernicus' deplacement of the Earth from the center (although to be fair, Ptolemy was a great empiricist, and his views had much stronger scientific foundations than creationism).
We have now experimented with government that does not care about evidence. I don't like it, and I fervently hope that it doesn't continue.
A new paper from Francois Ortalo-Magne and Morris Davis on Housing Expenditures and Wages
We use micro data from the 1980, 1990, and 2000 DCH to document that the expenditure share on housing is remarkably constant across MSAs and over time. We study the equilibrium properties for housing rents of a simple model consistent with this observation. A key distinguishing feature of our general spatial equilibrium model, relative to many papers in the urban economics and local public finance literatures, is our use of Cobb-Douglas preferences. This assumption yields a constant housing expenditure share in equilibrium, consistent with the evidence we uncover. The same assumption has been used to explain the distribution of population across places(Eeckhout 2004) and to study the internal structure of cities (Lucas 2001 and Lucas and Rossi-Hansberg 2002).
Our multi-location model predicts that in the aggregate, the ratio of rental price-
per-unit to per-capita income is constant as long as the aggregate stock of housing
per capita is also constant. This is a common result of macroeconomic models when
households have Cobb-Douglas utility. We show that this result does not hold at the
MSA level; instead, rental prices disproportionately reflect income differentials. We
conclude that the intuition – commonly assumed by policy-makers and housing-market commentators – that local house price indexes should increase at the same rate as local per-capita income is incorrect whenever income growth differs across MSAs.
Wednesday, September 03, 2008
Mattresses and Mortgages
But the thing about autos is that a Toyota Corolla is the same, regardless of who sells it. Once can test drive it and read reviews on Edmunds about it, and then go from dealer to dealer to get the best deal possible on it (the web allows you to do this very efficiently). Mattresses, however, change names from one store to the next, so you can't really comparison shop to get the best deal possible.
In this mattresses resemble mortgages. Unless one gets a zero closing cost mortgage, it is hard to shop from one broker to the next. Many brokers, moreover, will not offer a rate lock until they have gathered a lot of information, meaning that one needs to do a lot of work before he can even get a price. There may be some value of having a regulation that says that mattress companies must sell all comparable mattresses under one brand name. And there may also be value to requiring mortgage companies to offer mortgages that have just two prices--a rate and a closing cost.
Monday, September 01, 2008
Is it a bottom? Or just one strange month?
As I have written before, prices in California have fallen so rapidly that in many markets it is now just as sensible financially to own as it is to rent--assuming one can get her hands on financing. There are, moreover, many cash buyers in places like the Inland Empire right now, and cash buying is a powerful indicator of a bottoming market. Finally, I am hearing lots of anecdotes about multiple offers on properties for sale.
The problem is that a very large number of the sales are foreclosure sales or short sales--properties that lenders are trying to dispose of, and are therefore selling at extremely low prices. Whether this tendancy will extend to the rest of the market is very much an open question. But if the next few months are similar to July, we may well be at bottom out here.

