Links to Cousins!

My counsin Jon's site:

http://www20.kellogg.northwestern.edu/facdir/facpage.asp?sid=1299

My cousin Scott's site:

http://www.google.com/search?hl=en&q=scott+rifkin+ph.d.+yale&btnG=Google+Search

If other cousins have sites, I will link to them too.

Where is the J-Curve?

Paul Krugman notes that Exports have off-set declining housing investment:

http://krugman.blogs.nytimes.com/2007/12/29/why-we-havent-had-a-recession-so-far/

Jim Hamilton actually made this point some time ago:

http://www.econbrowser.com/archives/2007/11/some_observatio.html

All this is a natural result of the depreciation of the dollar. My question, though, is whether to be surprised by the fast improvement in net exports. I thought that when the currency depreciated as rapidly as the dollar has, the terms of trade effect in the short run is more important than how consumers adjust to changes in relative prices. That is, because foreign goods are more expensive, and because it takes awhile to substitute out of foreign goods, the net export position should actulaly worsen for awhile.

I am not complaining, but am rather looking for an explanation...

An Obvious Point, but....

The large numbers of defaults in Inland California, Nevada, Arizona and Florida will cause pain for homeowners and endanger macroeconomic stability. That said, prices in these markets got well beyond fundamentals, and more corrosively, turned affordable housing markets into expensive markets (the USC group did some great work on how once inexpensive Riverside and San Bernardino Counties became havens for Southern Californians seeking homeownership.)

When prices in these places return to normal--and it is likely that they will--middle class household will again have large markets in which they can afford housing without strain. And that will be a good thing.

PE Ratios for Housing

Mark Thoma passes along comments from Paul Krugman and Brad Delong on the PE ratio for housing:

http://economistsview.typepad.com/economistsview/2007/12/more-links.html

Krugman thinks a 50 percent fall along the coasts is possible. I am doubtful. The problem with using a PE ratio is the composition of the rental stock evolves differently from the compostion of the owner stock--the quality of owner occupied housing is generally improving more rapidly than the quality of the renter stock. For a working paper on this, see my piece with Cutts and Chang:

http://www.gwu.edu/%7Ebusiness/research/workingpapers/Chang%20Cutts%20and%20Green%203-17-2005%201%20.pdf

This is under revision for a journal--I guess it is time to finish it up!

The Breadth of House Price Declines

The Case-Shiller Index is declining in most cities (see http://blogs.wsj.com/economics/2007/12/26/home-prices-few-metro-areas-spared/).

So far as I know, this is unprecedented in the post-WWII era. In the past, even when a few housing markets have seen price declines, most have not. This means thar default risk and cost has been managable to investors in Mortgage Backed Securities.

The current environment is much tougher to deal with, and could mean that default costs arising from sub-prime mortgages will be higher than I expected earlier. It also cannot help but have a negative impact on house price expectations nearly everywhere. As I have said before, it is hard to see a turnaround coming anytime soon.

One bright side: when the commerical real estate market collapsed in the early 1990s, some analysts thought it would take a decade to recover--instead in took around 3-4 years to do so. Strong population growth in Arizona and Neveda should put some cushion underneath those markets (although the slowdown in Florida's population growth will further weaken a market that is already pretty devastated).

Some Great Scholarship at GW

The Eleanor Roosevelt Papers project is at GW. Information about it is here:

http://www.gwu.edu/~erpapers/publications/

This is something for which the university should be proud.

GW Studies itself for Reaccreditation

Our report is here:

http://www.gwu.edu/~gwaffirm/gwselfstudy/index.cfm

I was involved with the Chapter on the University's finances.

Ports and Social Costs

Yesterday the LA Times had a story on the "greening" of the two big ports in LA:

http://www.latimes.com/news/local/la-me-port25dec25,1,1611877.story?coll=la-headlines-california

Two paragraphs stand out:

A month ago, they [the ports of Long Beach and San Pedro] approved a joint mandate to replace the area's fleet of 16,800 dirty cargo trucks with new or retrofitted models by 2012. Last week, the two ports approved a cargo fee to raise $1.6 billion to put the cleaner trucks into service.

and

The stakes are indeed high. The clean trucks program could yield a cumulative economic benefit of $5.9 billion from reductions in premature deaths, lost work time and medical problems, according to the Southern California Air Quality Management District.

If these numbers are remotely correct, then the policy of requiring the clean trucks is a no-brainer. Yet there is still a question about whether it will in fact get done, for reasons given in the remainder of the story.

The Coasian solution is to just assign property rights and step aside. If the people living near the port have the property rights, they can insist that the trucks get cleaner, and if the port is still profitable in the aftermath of incurring the costs, the port will continune to operate with lower levels of pollution (otherwise it will shut down, but this is highly unlikely); if truckers have the rights, the neighbors should find it worthwhile to pay for the trucks to get cleaner. The problem, though, is a coordination problem--it is difficult to get everyone to cooporate to get to the best economic outcome. This is why sometimes regulations really are the only practical method for getting something close to an economically efficient outcome.

Nouriel Roubini forecasts a hard landing...soon

It is here:

http://www.rgemonitor.com/blog/roubini/234115

To some extent, this sounds like a liquidity trap story: regardless of interest rates, people won't invest because they don't trust anything or anyone. The stubbornly high spreads on LIBOR and prime jumbo mortgages suggest that there is something to this. It also explains why people such as Larry Summers think a fiscal stimulous is necessary.

But even with a fiscal stimulous, it is hard to see how housing will not be a drag for awhile. Inventories are high, meaning house prices will have to come down in some markets to restore equilibrium. This will put pressure on mortgage performance, which will make lenders even more wary. Ironically, once prices fall to equilibrium levels, mortgages going forward will again be very safe loans. But evidence from Jeremy Stein in one paper and David Genesove and Chris Mayer in another implies house prices are sticky downward, so it may be awhile before we reach that equilibrium point.

When technology fails

My iPod is frozen, I can't get it unstuck, and I have a coast-to-coast flight tomorrow. Sigh.

Slate needs a geography lesson

Slate is running a slideshow called Christmas in non-Western countries. It is here--http://todayspictures.slate.com/20071221/--and it is very nice.

Two of the pictures, however, are from Mexico, and one is from Colombia. Last time I checked, they were in the West.

Ten Favorite Classical Recordings (as of today)

Something to think about while procrastinating:

Beethoven, Symphonies 5 and 7, Kleiber, VPO, DGG
Bach, Goldberg Variations, Schiff, Decca
Shubert, Symphony 9, Giulini, Chicago Symphony, DGG (Very weird, but I love it)
Mahler, Symphony 9, Haitink, Concertgebouw, Philips
Brahms, Piano Concerto 1, Serkin, Szell, Cleveland, Columbia
Hildegard of Bingen, 11,000 Virgins, Chants for the Feast of St. Ursala, Anonymous 4, Harmonia Mundi
Stravinky, The Rite of Spring, Davis, Concertgebouw, Philips
Beethoven, String Quartet, Op. 131, Tokyo Quartet, RCA
Mozart, Piano Sonata in c, K 310, Uchida, Philips
Chopin, Polonaises, Pollini, DGG

By next week, the list could be completely different.

Speaking of Transportation Costs

WMATA is raising peak travel-time fares on Metro by 30 to 60 cents. From the transit agency's perspective, this makes sense--demand is highest at these times (sometimes to the point where the system is over-capacity), and so raising peak fares will encourage riders to travel at off-peak times.

On the other hand, any policy that discourages metro ridership at peak periods encourages automobile use at times when DC area roads are already jammed. If there were a London or Singapore type arrangement, under which drivers would have to pay a fee to drive into the city, an increase in metro fares could be accompanied by an increase in the cost of driving, so that travelers who were flexible would be encouraged to avoid both metro and the roads during peak periods. But DC has no such mechanism. It really needs one.

Different Market Baskets for Different Income Levels

I keep reading stories about food pantries being under particular pressure this year. The stories would be more helpful if they could explain explicitly why the food stamp program (perhaps the most successful anti-poverty program in the US) isn't sufficient to prevent this. We do know that not everyone eligible for food stamps uses them, but this has always been true, and so wouldn't explain a change in demand at the pantries; we need to look elsewhere for an explanation.

My suspicion is that an accurate measure of CPI would vary by income group. The most obvious example is that low income people spend a higher fraction of income on heat, electricity and transportation than higher income people. Even if the entire CPI is flat, if the energy and transportation sectors see large rises in prices, it will likely have a particularly large impact on the bottom quintile of the income distribution, and hence cause real incomes within this group to fall. Of course, gas and heating oil prices gave risen a lot over the past couple of years.

When I look at the BLS web site, I don't find anything about different market baskets for different income classes--I do wonder if there is something out there.

An American Language

A film by Morgan Green

In Praise of Green Bay

Having dissed the city earlier today, I thought I should say a word or two in its favor. But before I do so, let me note that I am a Wisconsin homer--I grew up there, got my Ph.D. there, and taught on the faculty at Madison for a long time.

The thing that prompted me to note Green Bay's core strength is this piece by Dick Meyer that appeared in this morning's Post.

The piece is here: http://www.washingtonpost.com/wp-dyn/content/article/2007/12/21/AR2007122101886.html?hpid=opinionsbox1

It begins with:

I went to my last professional football game this month. My son and I braved frigid, remote FedEx Field to see our beloved Chicago Bears, the fallen Super Bowl champions, humiliated 24-16 by the struggling Washington Redskins. It wasn't the depth of our despair that will keep us away from football stadiums for good but the depravity of the fans.

I suppose depravity is a strong word. But what better describes drunken adult men, egged on by other grown beer-swillers, belly-shouting the most spectacular obscenities imaginable as they stand next to a 13-year-old boy? Every play was a competition to produce a more vile insult or a different suggestion about which Bear body part might be stuffed up which orifice.

As it happens, during my many years in Wisconsin, I was only able to obtain tickets to one Green Bay Packers game--a game against the Bears that took place in November 1989 (I remember the year because my wife was pregnant with our two girls). The Bears were very good at that time, and had long been the Packer's arch-rival. Green Bay fans are fiercely loyal to their team, and yet, I saw none of the behavior Meyer described from his experience at FedEx field. People in the stands were unfailingly polite. I should mention that Wisconsin had a pretty strong drinking culture--when I was a kid growing up there, I thought the three leading beverages must be milk, beer and Old Fashioneds. Yet I don't recall any obnoxious, loudmouthed drunks at the game.

Which brings me to the principal point--people in Wisconsin, and so far as I can tell, throughout Wisconsin, are friendly, modest and polite. Minnesota is this way too (Garrison Keillor pretty much nails the culture). I kind of miss that.

Calculated Risk Points to an interview with BOA Chief Kenneth Lewis

It is here:

http://calculatedrisk.blogspot.com/2007/12/bofa-attitudes-changing-towards-default.html

The gist is that prime borrowers are more ruthless about default compared with the past. I am not so sure. The distribution of borrowers is very different from the past, because many households who previously would never gotten close to a mortgage were able to obtain one within the past five years.

The default rate on prime mortgages remains quite low. I am not sure that we have any evidence that prime borrower attitudes have changed. We will need to wait and see.

Bias and Media venue

Rush Limbaugh symbolizes Talk Radio; DailyKos symbolizes the Blogosphere. One could tell a variety of stories (and many have) about why this is true.

But there is another relationship between media venue and ideology where it would be harder to tell a story. Daily newspapers seem more conservative that the alternative weeklies (the one exception, perhaps, is that in my old town of Madison, the weekly paper, Isthmus, was a little less knee-jerk than the afternoon daily, the Capital Times. On the other hand, it was well to the right of the daily that people actually read, the Wisconsin State Journal. Isthmus was also the best paper in town). Put from another perspective, I have never seen a widely read weekly with conservative inclinations. One could speculate why this is the case--for example, writers for the weeklies don't get paid much. But from what little I know about the newspaper business, outside of the most famous papers, reporters for dailies don't get paid much either.

Cities as a Financial Strategy

I rarely use Internet Explorer (I'm a Foxfire guy), and so I have never changed the home page from the default MSN page. When I accidentally opened IE yesterday, I saw a teaser for a story about "best starter cities for young couples." The thrust of the story is that it if one is young, it is better to live in Baltimore than San Francisco, so that one can buy an inexpensive house and accumulate wealth.

The problem with that idea is that successful (more expensive) cities are often places where people accumulate human capital, which can also lead to riches (and life satisfaction). Successful cities allow labor specialization (specialists often learn higher wages than generalists), have sufficiently deep labor markets for both members of a married couple to get good job matches, allow the development of networks (Silicon Valley is Exhibit A; Wall Street is Exhibit B), and also provide a greater variety of consumer and service goods (Burmese Restaurants, for example).

For a really good take on the labor market issue, go here: http://ideas.repec.org/p/max/cprwps/57.html, although Rosenthal and Strange do not cast the issue in quite so positive a light as I.

Going bank to the MSN piece, the top five places it gives for young families are

• Atlanta

• Minneapolis/St. Paul

• Des Moines, Iowa

• Provo, Utah

• Green Bay, Wis.

I can see Atlanta (although while housing is cheap there, the commute will kill you) and Minneapolis (the only downside being, of course, the cold). But Des Moines and Green Bay? They are pleasant enough small cities, and housing is cheap in both places. But for long-term labor market opportunity, it is hard to make a case for either.

Foggy Bottom has long-term Mortgages--why not Korea?

Mortgages in South Korea generally have short terms--three to five years at most. As such, they resemble the bullet mortgage that predominated in the United States before the Great Depression.

One of the reasons for the short term is that the longest term Korean benchmark security is a five-year treasury note. When I ask Koreans why the longest term is so short, they tell me it is the same reason why the county does not get a AAA bond rating--investors are nervous about the folks just to the north. Now that the rhetoric out of Pyongyang and Washington seems to be cooling, it will be interesting to see whether this ultimately extends the yield curve in the South.