It's a good thing Texas Tech coach Mike Leach is not a professor

I ran across this item where he banned a player for using twitter. Apparently he didn't like the fact that the player pointed out that he was late for practice.

I thought coaches were supposed to be tough, but I am guessing that Mr. Leach would have a tough time with course evaluations and peer review of his work; if you don't have a thick skin, you will not be happy in the academic game.

More important, we keep being told that football players are student athletes (in my experience, most try hard to be so). Students need to be allowed, indeed encouraged, to express themselves freely--that is part of what a university education is supposed to be about.

I guess I think markets are more efficient than does Robert Lucas

I was astonished to read the following in Brad Delong's blog today:

Thus the thing to focus on is that the prices of risky financial assets are very low—not as low as they were last March, when the S&P 500 kissed a level of 667, but still very low. Why are they so low? The answer is that the risk tolerance of the private market has collapsed. For example, consider what the University of Chicago’s Nobel Prize-winning economist Bob Lucas told Tom Keene of Bloomberg last March 30—that he was 100% in cash:

LUCAS: [T]here is no question that fear is what this liquidity crisis is. I mean the reason I got into money [with my portfolio] is that I got afraid to leave my pension fund in other securities. So I’m sitting there with a portfolio full of zero-yield stuff just because I’m afraid to do anything else. I think there are millions of people like me.

KEENE: What will be the signal for Robert Lucas to go back into the markets...?

LUCAS: I don’t know. Robert Rubin made a joke about that in the first session today. Nobody knows...

My personal investment strategy for retirement has been (and continues to be) to diversify across a set of passive index funds: some equities, some fixed income, some in the US, some abroad. I do not think I can forecast interest rates, nor can I pick stocks (although I try to pick REITS, mostly for fun, because I do, after all, teach real estate). I know that over my investment horizon (I expect to retire in something like 20 years), stocks and bonds will perform better than cash. I did not change my allocations last year, because, well, once the value of stocks fell, buying new ones seemed cheap. I never take short positions, because when it comes to investment, I am a coward, just not so much of one that I would ever think to put everything in cash (or even worse, gold).

The irony, of course, is that my investment strategy reflects a greater belief in efficient markets than Lucas'. To be fair, though, he is older than I, and so has more about which to be afraid.

Kudos to Morris Davis..

..for organizing the most stimulating housing/urban conference I have been to in some time.

Arthur Nelson, call Irina Telyukova

I saw Irina (UCSD) give a nice paper (joint with Makoto Makajima) on home equity withdrawal at the UW-Atlanta Fed Conference. While not the basic point of the a paper, she found evidence in the Health and Retirement Survey that a little over one percent of elderly households decided to downsize for the sake of downsizing--over the course of a decade,

A few months ago, I posted my skepticism about Arthur Nelson's claim that boomers will downsize en mass when they age. Irina and Makoto find that the elderly take equity of of their house so they may continue to live in them, We like our houses!

I am looking forward to seeing this paper at the Atlanta Fed-University of Wisconsin conference tomorrow

Andra C. Ghent and Marianna Kudlyaky
Federal Reserve Bank of Richmond Working Paper No. 09-10

July 7th, 2009

Abstract

We analyze the impact of lender recourse on mortgage defaults theoretically and
empirically across U.S. states. We study the effect of state laws regarding deficiency
judgments in a model where lenders can use the threat of a deficiency judgment to deter
default or to shorten the default process. Empirically, we found that recourse decreases
the probability of default when there is a substantial likelihood that a borrower has
negative home equity. We also found that, in states that allow deficiency judgments,
defaults are more likely to occur through a lender-friendly procedure, such as a deed
in lieu of foreclosure.

Program Note

I will be on Airtalk with Larry Mantle on KPCC at 11 am PDT tomorrow.

Why hasn't Broadway (the Los Angeles one) been redeveloped?

Broadway in downtown Los Angeles has among the most beautiful art deco buildings in the United States (for a nice photo, go here).

Yet while the buildings are filled with ground floor retail, many of the floors above sit empty; my understanding is that they don't comply with current earthquake codes. But given that land is so valuable in LA, and that the bones of the buildings are so good, it is a bit of a mystery that the buildings haven't been retrofitted and leased out.

The answer, apparently, is that the ground floor leases are very valuable--so much so that one can't justify replacing the current ground floor retail with a functional mixed-used building. The retailers are not high end shops, either, but rather are immigrants who cater to other immigrants. This is a beautiful example of Alonzo's bid rent theory, where low income uses incorporate density to outbid high income uses.

As I read the debate over the stimulus...

...I can't help but think of George Akerlof's AEA Presidential Address. The conclusion:

This lecture has shown that the early Keynesians got a great deal of the working of the economic system right in ways that are denied by the five neutralities. As quoted from Keynes earlier, they based their models on “our knowledge of human nature and from the detailed facts of experience.” They used their intuitions regarding the norms of how consumers, investors, and wage and price setters thought they should behave. There is systematic reason why such knowledge and experience is likely to be accurate: by their nature norms are generated and known by a whole community. They are known to those who abide by them, and those who observe them as well.

We have shown ways in which macroeconomic variables will be affected by norms. The neutralities say that consumption should have no special dependence on current income; investment should be independent of current cash flow; wages and prices should not depend on nominal considerations. The very construction of those neutralities denies the possibility that peoples’ decisions might be influenced by their views regarding how they, and how others, should behave. However, in practice, the neutralities are systematically violated. Insofar as economists have felt it necessary to explain these violations they have appealed to a variety of different frictions, such as myopia and credit constraint. In so doing they have failed to consider that those violations would occur even in the absence of those frictions: they will occur because of decision-makers’ norms.

The incorporation of norms based on careful observation imparts an appropriate balance to macroeconomics. The New Classical research program was correct in viewing models of the early Keynesians as too primitive. They had not been sufficiently attentive to the role of human intent in choices regarding consumption, investment, wages and prices. But that research program itself has failed to appreciate the extent to which the Keynesians’ views of macroeconomics were also reflective of reality, since they were based on experience and observation.

A macroeconomics with norms in decision makers’ objective functions combines the best features of the two approaches. It allows for observations regarding how people think they should behave. It also takes due account of the purposefulness of human decisions.

As I have said in past posts, I am not a macroeconomist. Part of the reason for this, I think, is that Charles Manski has an enormous influence over how I think about economic issues, and so I worry about the reflection problem and identification. When I see Chicago-style macro-analysis, I see reflection problems and identification issues everywhere. I also see excuses ("it's all about frictions") when totemic hypotheses are tested against data, and fail. And when I see Chicago macroeconomists defending themselves now, the argument takes the form of "all reputable economics agree," which to me sounds very much like "every one I agree with agrees with me."

Keynes' analysis had a richness that is missing from much modern macro, and let's face it, he probably made the most spot-on macroeconomic forecast of the 20th Century.

Has the Detroit Housing Market Disappeared?

I was looking at the NAR median house price series for metropolitan areas today, and noticed the following line for Detroit:

19820

Detroit-Warren-Livonia, MI

151.7

140.3

N/A

N/A

N/A

N/A

N/A

N/A

N/A

The first two numbers are median prices for 2006 and 2007. 2008 and after: zip.

Is this really a success?

Jennifer Steinhauer thinks that light rail in Phoenix is a success. Her evidence is that while projected daily ridership was 26,000, it has clocked in at 33,000. The reason that ridership is better than forecast is because of weekend riders--people are using the line for pub crawls, among other things.

But ridership of 33,000 per day translates to about 12 million per year. The system cost $1.4 billion to build, not including lost revenue to businesses located along the line (which was probably largely displaced to other business). Let's assume that the cost of capital to Phoenix is 6 percent and that the system depreciates at 2 percent per year. Therefore, the capital costs of the system are about $110 million per year.

Assuming fares cover operating costs (and they almost certainly don't), this means that each ride is subsidized to the tune of more than $9, and according to the article much of the subsidy is going to entertainment.

I think it is great that some people in Phoenix are leaving their cars at home when they go out drinking. But I would guess that a free shuttle service going from bar to bar would have cost the taxpayers of Phoenix a lot less money.

Freddie seems materially different from Fannie right now.

Both companies (or perhaps I should say, wards of government) put out financial disclosures each month called monthly volume summaries. Freddie's most recent summary shows a serious delinquency rate of 2.95 percent for single family borrowers and 0.11 (!) percent for multifamily. Fannie, on the other hand, has a delinquency rate of 3.94 percent for single family borrowers and 0.51 for multifamily. Fannie's credit enhanced book (i.e., book of mortgages that had loan to value ratios of less than 20 percent at origination) is performing very poorly.

The difference in single family performance may reflect differences in the mix of loan originators from whom the two companies purchase mortgages. But the difference in multifamily performance puzzles me.

Multifamily performance is still good well because apartments continue to produce reasonably good cash flow. But when multifamily loans come due, rising cap rates and falling rents will make them difficult to refinance, so we will start seeing defaults in this sector increase in the next few years.

Underemployment

The other night, I was on a panel sponsored by the UC-Berkeley Alumni Association, the UCLA Anderson School and the USC Lusk Center and Marshall School of Business. One of the panelists was a business economist, and he claimed that the employment picture wasn't as dire as the media suggested. He also scoffed at the notion that there was underemployment, arguing that people generally consider themselves underpaid, and therefore, by extension, underemployed (most people in the audience did not agree that they were underpaid). He also scoffed at the concept of discouraged workers.

In light of this, I wish I had had the following graph on my flash drive:




The employment to population ratio has fallen to less than 60 percent; it peaked at nearly 65 percent at the end of the Clinton Administration. The share of us working has dropped precipitously in the last two years to levels not seen since the Carter-Reagan recessions.

This panelist also complained about comparisons to the Great Depression. The only common comparison I know is that this is the worst recession since the great depression. Given that California's unemployment rate has just reached its highest level since 1940, the comparison seems apt.

Clawbacks and Capital

The two Cs will go a long way toward preventing future catastrophes. If people (and firms) have their own money at risk, and if short term windfall compensation based on short term profits can be wiped out in the event of longer term catastrophe, risk will be priced appropriately.

Arizona has Chutzpah

The Daily Show last night featured the sale-leaseback deal that Arizona is trying to get for its capitol. Sales price of $735 million, lease payments of $60 million for 20 years, property reverts to state at end of the 20 years.

The IRR for the investor: 5.2 percent. Hmmm.

David Byrne is better at music than math

In his piece in the Wall Street Journal on what makes a perfect city, David Byrne extols the virtues of San Francisco--and then complains that Los Angeles isn't dense enough.

The problem: metropolitan Los Angeles is denser than metropolitan San Francisco, and considerably denser than the San Francisco Bay area (and no, the Bay itself is not in the denominator).

Los Angeles is a real, live city where people from all over the world seek their fortunes. When they do so, they double-up and triple-up in housing, meaning that more people get crammed into lower buildings. Koreatown is as dense a place as there is in the US outside of Manhattan, and the length of Wilshire Blvd is very dense (by US standards).

If the lead head wants not to like LA, it is no skin off my nose. But dislike it for a correct reason.

Blocking and Tackling and Transit

When I lived in Washington, I took Metro to work nearly every day--I took it so often that I didn't have a parking space at GW.

Now that I live in LA, I take transit about once a week, and part of the trip (a bus from Union Station to Campus)is subsidized by USC.

Before you yell sprawl, let me point out that in Washington I lived 9.3 miles from work while in LA I live 12 miles from work. So what is the difference?

For all that people complain about it, Washington Metro is well run. Connections are good, the buses and trains are clean, and the web site works great.

Transit in LA is not well run. The timing of the connections is often awful, and th web site is nearly useless. Many drivers on the Gold Line have a hard time figuring out where to stop in stations.

Could better management improve ridership in Los Angeles? Perhaps not, but it sure would be worth trying.

Lists

Planetizen http://www.planetizen.com/topthinkers has produced a list of 100 "top urban thinkers." While the list has some sensible names (Don Schoup, Tony Downs, Ed Glaeser, Joel Garreau, my USC colleague Manuel Castells, and even though I am not sold on everything he says, Richard Florida*), it also consists of a poseur (Prince Charles), a hater of cities (Thomas Jefferson) and a whole bunch of people who like to attend salons at which they put down the "banal" people who chose to live in "nowhere," including a man whose most famous project became the set for the movie "The Truman Show."

The list lacks some of the most important analysts of urban form and urban problems: Von Thunen, Ed Mills, John Kain, and Reynolds Fairly come immediately to mind. For us to better understand cities, we must understand externalities, and we must understand preferences, and that doesn't mean our own.

*I root for Buffalo to win football games, but I don't think it is coming back as a city. But Florida has provocative ideas worth investigating, and has had a profound and wonderful influence on his students.

Why we need consumer protection for mortgage borrowers: a story

A few years ago, I went to a Joint Center for Housing Studies sponsored conference at the Harvard Business School. While my memory may be faulty, the broad outlines of the following story are true.

During a discussion for the need for consumer protection, a Harvard Law Professor (it may have been Elizabeth Warren, but I am not sure) asked those in the room with an Adjustable Rate Mortgage to stand up--perhaps half the room did so. The professor then asked how many of those standing could name the index to which their loan rate was tied. Those who didn't know were asked to sit down, at which point half of the original group remained standing. The next question was about the size of the margin between in the index rate and the loan rate, at which point another half sat down. Finally, those who remained standing were asked if they knew roughly the maximum payment that they could make on their mortgage--only one person remained standing (and the person sitting next to me said, "I know that guy--he would never admit that he didn't know something in public anyway.")

So here is the point: a crowd of Harvard, Yale, Michigan, Princeton, etc professors and top policy makers did not fully understand the mortgages they had. How can we expect someone armed only with a high school diploma and no consumer finance training to knowledgeably negotiate the world of mortgages?

I used to cringe at the thought of imposing "suitability standards" on lenders. No more.

Time to Return to TRA 1986?

I am fine with the current fiscal deficit--the evidence is pretty clear to me that we would be worse off in the absence of the stimulus, and so long as we can borrow cheaply, and build projects cheaply (because contractors are eager to get work), there are positive NPV opportunities for the public sector.

But the long term fiscal position worries me a lot (and it bothers me when people I respect as much as Paul Krugman soft-peddle it). The question is how to we get out from under?

The good news is that we have gotten out from under budget shortfalls before. The Obama administration proposes raising taxes on high earners, and that is fine, but it is not enough. More fruitful, I think, would be to go after the tax expenditures.

Leonard Burman, Eric Toder, Christopher Geissler estimate the size of tax expenditures. It is huge: depending on the modeling strategy they employ (they look at tax expenditures with and without interaction effects, and with different assumptions about the Alternative Minimum Tax), they estimate tax expenditures for 2007 of 700 billion to 760 billion. The largest expenditures are for retirement plans (126 billion), employer contributions for health insurance (138 billion), the mortgage interest deduction (92 billion), and preferential treatment of capital gains (84 billions).

If we were to eliminate tax expenditures, the overall effect on the tax code would be largely progressive. Pretty much everyone would take a hit, but those at the top would take a bigger hit. If the earned income tax credit (about 43 billion) were left alone the impact would be more progressive.

According to CBO, the long-term fiscal deficit is somewhere in the neighborhood of 600 billion per year. Elimination of tax expenditures other than the EITC would put us back into fiscal balance in a progressive manner without raising rates. It would also make the tax code simpler and less distortionary.

Just a thought.

A Rising not a Setting Sun

h/t Brad Delong

Whilst the last members were signing it, Doctr. FRANKLIN looking towards the Presidents Chair, at the back of which a rising sun happened to be painted, observed to a few members near him, that Painters had found it difficult to distinguish in their art a rising from a setting sun. "I have," said he, "often and often in the course of the Session, and the vicisitudes of my hopes and fears as to its issue, looked at that behind the President without being able to tell whether it was rising or setting: But now at length I have the happiness to know that it is a rising and not a setting Sun."