Month: December 2007

The real Bush mortgage relief plan

CalculatedRisk writes:

A lot of people are very worked up over the idea that the New Hope Plan
is, in essence, the government mandating a kind of reneging on private
contracts (the PSAs or Pooling and Servicing Agreements that govern how
securitized loans are handled). I personally think you can all stand
down on that one. From what I have seen about the plan to date, it is
clear to me that it is in fact structured with the overarching goal of
making sure that it stays on the allowable side of the existing
contracts. I proceed from the assumption that nobody could write such a
convoluted and counter-intuitive plan if that wasn’t the goal. So
everyone who is thinking, “Gee, we’re violating contracts and we still
don’t get much out of it!” is thinking the wrong thing, in my view.
It’s more like “Gee, we don’t get much out of it when we don’t violate

The full post has more explanation than any sane person can follow, also see the NYT coverage.  I don’t understand many of the details of the plan, but it seems like a push in the right direction, namely encouraging settlement within the previous contractual framework.  That said, I don’t expect it to have a major positive impact.

Many critics would like to see more of a debt jubilee, but I keep thinking of two quotations reproduced over at Megan McArdle’s blog:

There are many nuances related to mortgages. For instance, if you
default, what are your rights in foreclosure? How can you redeem, and
when? But it wasn’t any nuances that tripped people up. "The monthly
payment is more than I can afford" is not a "nuance."

. . the lesson here appears to be that if you see everyone else
borrowing well beyond their means, you should too, since the government
cannot credibly allow large numbers of homeowners to go into

There are two main arguments for breaking the loan contracts.  The first
is that we could limit human suffering.  The second is that we could
forestall macroeconomic catastrophe.  Put together, these arguments have captured many hearts and minds, but neither is very strong on
its own.

On the first, there are many better ways for our government to help
poor people.  Maybe you respond: "The perfect should not be the enemy of the good," but I am sorry: keeping lower income people in homes and out of apartments is too far down the list of efficient transfers for that rhetoric to succeed.  Can we now allow the perfect to be the enemy of the not-good?  Contract-breaking is not an especially fair way to
help the poor, given that the very poorest probably never borrowed any
mortgage money in the first place, and the most responsible of the poor won’t get anything either.  Should we also reimburse the non-wealthy for their unlucky investments in stocks?  Go back to square one.

On the macroeconomic issues, there is a real chance of a cascading
credit crunch in the next few months.  Having the federal government arbitrarily rewrite legally binding loan contracts will, if anything, make that problem worse rather than better.  It will hurt bank capitalization, plus it will weaken confidence that future loan agreements will be left intact.  Uncertainty is the enemy of lending.  Further side effects include the savaging of the subprime loan market (currently most subprime loans are being repaid without incident, thus putting deserving borrowers into homes) and seriously curbing floating rate lending in the future.

If you think that the macroeconomic skies will fall from future
mortgage interest rate resets, I am willing to listen.  But your case
had better be really really good, given the macro problems of the debt jubilee.  Aid as you will, but don’t make it a tax on the lenders.

The foreclosures story combines a few popular memes: lower income people suffering, possible macroeconomic
catastrophe, and a fair amount of misleading salesmanship (can I get my money back for having bought a computer with Vista?).  But if we adopt widespread contract abrogation as the intended solution, I truly fear for the future of this republic.

Addendum: Here is testimony by Randall Kroszner, via Greg Mankiw.  And Arnold Kling has a very good and lengthy analysis.

The Food of the Gods

"Yes, but think of the dead!"

Another voice took up the strain.  "The dead," it said.  "Think of the unborn…"


"Whatever it dislocates," said Redwood, "My little boy must have the food."

Those are both from H.G. Wells’s excellent and far ahead of its time, The Food of the Gods and How it Came to Earth.  The novella concerns a new tool of genetic engineering that makes people thirty-five feet tall, and of course occasions social conflict.  Well’s short fiction is in general much underrated.

The best economics books of the year

Here is Arnold Kling’s list.  I liked this part:

Two books that show economic intellect to advantage are Discover Your Inner Economist, by Tyler Cowen and One Economics, Many Recipes, by Dani Rodrik. Cowen’s book is a set of observations on everyday life, while Rodrik’s book looks at the high-level issue of which economic institutions to recommend for underdeveloped countries.  I made the case for Cowen’s book here and the case for Rodrik’s book here.

What Cowen and Rodrik have in common is a gentle approach.  In contrast to Caplan and Clark, who self-assuredly hammer away at alternative viewpoints, Cowen and Rodrik allow room for disagreement and self-doubt.  Cowen and Rodrik encourage their readers to think, and I encourage readers to try to learn how to think like Cowen and Rodrik, whether or not you agree with them.

The entire list is useful, so go out and elevate the practice of holiday gift-giving.

Next MarginalRevolution book forum

You may remember our very successful book forum on Greg Clark’s A Farewell to Alms.  In short, we all read the book together and I offered running commentary on the contents.  There was a special encouragement for reader comments, and Greg very graciously responded at length.  Next Alex and I, along with some specially invited guest bloggers, will be doing Tim Harford’s new The Logic of Life: The Rational Economics of an Irrational World.  Tim’s book won’t be out until January 15, so of course the forum won’t start until a little after then.  But if you wish to pre-order, now is as good a time as any.

Loyal MR readers already know about Tim, a regular columnist for The Financial Times and author of The Undercover Economist.  Here is Tim’s blog, and here is Tim’s homepage.

Jeffrey Lonsdale writes

I am wondering what you think of your expositional method in which you lay out different possible explanations and then mention which reasons are the most significant in your mental model.

This is a great rhetorical device for a blog, but is it how you approach communications with smaller groups as well? I can think of some reasons why it might work…

1. Listing many different possibilities causes you to look at the solution from different angles.

2. It gives your readers/listeners the impression that you have analyzed the problem from many different angles.

3. Bringing up possibilities and labelling them insignificant preempts critiques from those who disagree.

4. It is implicitly admitting that there are many possible contributory causes to specific effects. Not listing different possibilities is a sign of overconfidence.

5. Listing different possibilities reduces your bias regarding them as you think over which possibilities are the most important.

6. Your debate background is naturally kicking in and you instinctively try to "spread" your opponents. ( )

7. This is the way that you naturally think. Your list isn’t a deceptive rhetorical strategy, you are just laying out your thoughts in your head as they occur.

8. Successful lists are left as lists.  When the signal to noise ratio in the list is low, the list can be shortened and turned into separate paragraphs.

9. It doesn’t beat around the bush with long winded narratives and gets straight to the points.

I like points 1, 2, and 7 through 9 the most.

I am considering occasionally adopting this style of communication in my job as a global macro market analyst. 
The downsides I see of using it at work would be:
1. Lists might be perceived as having high noise to signal ratios.

2. The method can work for broad overviews of some subjects, but complexity is limited. I find myself using a second list in this email to cover the cons, something I’ve never seen you resort to in one post.

3. I would be broadcasting my ignorance if I left one of the "obvious" reasons off the list.

4. I would feel self conscious about parodying you, even if I was only trying to efficiently organize my thoughts.

I’m most worried about 2 and 3.
Those are excellent points, I might add:

1. Numbered points create more space on the blog page and make it more appealing to read.

2. Blog commentators can refer to numbered points quickly and easily, and

3. I did it once without thinking, and I enjoy repeating a practice for its own sake.

CBO Director’s blog

You’ll find it here, the mission statement is here:

CBO has launched a Director’s Blog (at ) that
**  introduce new reports and testimony,
**  explain or clarify CBO’s analysis when there appears to be
significant misinterpretation or misunderstanding of that analysis, and
**  link CBO’s work to relevant outside research from academic or other
institutions that may shed additional light on the issues the Congress
is working to address.

Thanks to a loyal MR reader for the pointer.

In which countries do kids respect their parents the most?

Here was my earlier post on the topic, now Ban Chuan Cheah is kind enough to send me questionnaire data from the World Values Survey.  The question is:

With which of these two statements do you tend to agree? (CODE ONE ANSWER ONLY)
A. Regardless of what the qualities and faults of one’s parents are, one must always love and respect them.
B. One does not have the duty to respect and love parents who have not earned it by their behaviour and attitudes.

1. Always
2. Earned
3. Neither

Some rates of answering "Always" are:

Netherlands: 31.9 percent, Denmark: 35.9, Germany: 59.2, Belarus: 70.9, Japan: 71.6, France: 74.7, United States: 77.2, Canada: 77.6, India: 88.8, China: 94.5, Puerto Rico: 97.5, Vietnam: 99.3.

Based on these and other numbers, I tentatively conclude that wealth breeds parental disrespect, being Asian brings greater respect for parents, and having a strong welfare state is correlated with disrespect for parents.  Being a former East Bloc totalitarian state doesn’t have nearly the oomph I would have expected; many East European countries fall into the 70-80 percent range.

The best article so far on the writer’s strike

Not surprisingly, it is in the FT (or try this link instead).  Excerpt:

But when the rules changed in 1995 the four US networks – ABC, now
owned by Walt Disney; CBS; Fox, part of News Corporation; and NBC, now
controlled by General Electric
– integrated production with their broadcast, sales and distribution
businesses. The independents began to lose ground to in-house producers.

content allows networks and studios to exploit it internationally via
syndication or DVD sales. But while broadcasters have more rights, they
also have to fund production, which is increasingly expensive. The cost
of a one-hour scripted drama has tripled from about $1m in the early
1990s to $2.7m, according to some executives. The cost of a 30-minute
comedy has doubled to around $1.5m.

This, together with
competition from cable channels, explains why the broadcasters are
taking such a hard line, says Garth Ancier, president of BBC Worldwide
America, the BBC’s commercial arm. “They are fighting for their lives.
They need every last piece to come together, every last revenue stream.”

There is much more, do read the whole thing, it also explains why cable is not the only reason why TV programs have gotten better.

Have crows avoided a Malthusian equilibrium?

Our greatest effect on crows is on their survivorship, not on their reproduction…if an adult crow lives near people it is likely to survive, but if it lives more than three miles from people, it will likely die.  Mortality over a two-year period was 2.3 percent near people and 38.9 percent far from people…Populations in remote wildlands are not likely to be self-sustaining…

If urban crow populations are simply self-sustaining, why are so many exploding in size?  Immigration is the answer, we suggest…young crows are moving to the cities to exploit their riches.

That is from In the Company of Crows and Ravens, a fascinating book.  Most of all this volume stresses how much crows have co-evolved with humankind.

The same day, Michael Vassar wrote me: "One problem I have with
Greg Clark’s thesis is that I don’t understand how a Malthusian Earth
could have left so much land forested and unproductive.  If food was
the limiting factor in population why didn’t people clear more land for
farms?"  And here’s Nick Szabo’s challenge to Greg Clark.

Simple public choice

Here is Dani Rodrik defending Hillary on trade, here is Paul Krugman.  Here is the very good critique from Clive Crook.  So what’s up?  My uninformed default assumption is that Hillary wants to win the Iowa caucases.  That means her goal is to signal protectionism to Iowa activists and voters, and sophisticated non-protectionism to the more trade-oriented elites and donors.  Congratulations if you were able to pick out the latter signal, but don’t confuse it with a defense of what she said, why she said it, or when she said it.

The Allocation of Talent

Talent flows to where it is highly rewarded so if price and wage control limit rewards in one sector of the economy, talent will flow to the uncontrolled sector.  Mark Ramseyer looks at one implication:

The Japanese national health insurance
provides universal coverage. Necessarily, this entails a subsidy that
dramatically raises the demand for medical services. In the face of the
increased demand, the government suppresses costs by suppressing
prices. By combining extensive biographical (including income) data on
all 449 Tokyo cosmetic surgeons and a random sample of 499 other Tokyo
physicians, I explore the effect of this price suppression on the
allocation of talent and the development of expertise. Crucially, the
national health insurance does not cover services – like elective
cosmetic surgery – deemed medically superfluous. Facing price caps in
the covered sector but competitive prices in these superfluous sectors,
the most talented doctors should tend to shift into the superfluous
sectors and there to invest heavily in their expertise. I find evidence
consistent with this: cosmetic surgeons earn higher incomes than other
doctors; are more likely to have attended a national (generally more
selective) medical school; are more likely to have served on the
faculty of a medical school; and are more likely to be board-certified.
I speculate on the broader implications this phenomenon poses for the
allocation of talent in medicine.

Hat tip to Larry Ribstein at Ideoblog.

Three tales of a falling dollar

There is my own piece, Brad DeLong, and Don Boudreaux, all of which express different degrees of optimism about the current state of the dollar.  Yet the approaches differ in both theory and rhetoric. 

DeLong cites the near-equality of nominal interest rates
between America and Europe as an important consideration.  To him this signifies that the market does
not expect the dollar to fall much further and thus that foreign investors won’t be
scared off.  I believe this emphasis reflects Brad’s "upbringing" in
sticky-price open economy macro models, a’la Rudy Dornbusch and
Harvard/MIT circa the early 1980s.  I never drank of that tradition
with much fervor, instead receiving the influence of Fischer Black.  I don’t
expect current interest rate spreads to tell us much about future currency changes, which I view as mostly news and noise in the short to medium run.  Brad is somewhat less optimistic than I because he would
start worrying if a nominal interest rate differential opened up
between the U.S. and Europe.  I would tend to shrug it off, thinking
the variance of future currency movements still dwarfs the new change
in forecast.

Don Boudreaux starts with the view that having a trade deficit wasn’t bad in the first place, so getting rid of it — through a falling dollar — is no gain.  For him the key is to have policies, such as free trade and low taxes, that keep America a prosperous nation.  The value of the dollar will then take care of itself.  I also read Don thinking that a market-generated
real exchange rate will possess Hayekian properties and pass along the
right information to investors.  I am more likely to think that the value of the dollar is an accident, and more likely to think we can simply make
do with "the wrong exchange rate."   I recall the strong dollar in 1985, and the weak dollar in 1988; in between not that many other things seemed to change.  I conclude that when it comes to the value of the dollar it is sometimes possible to "stuff a lot into the box," and at many different angles. 

Most of all, my relative economic optimism stems from a very naive look at current conditions, which do not (yet?) indicate collapse.  Because of
Austrian influences and again Fischer Black, I am suspicious of long chains of reasoning, or for that matter medium-long chains
of reasoning, which imply that an apparently OK state of affairs must
end in ruin.  Current market prices are indeed very noisy, but no intertemporal theory gives us better forecasts.  Caution is always in order but right now equity prices and interest rates are not predicting ruin.  Furthermore growth and recovery are the natural and more likely state of affairs in a relatively free economy, so I will believe in them until I see otherwise.  Don, in contrast, is more
likely to worry about state interference messing up the U.S. exchange rate,
and the U.S. economy.  In that sense he is potentially more pessimistic than either Brad
or I.   Plus Brad and I both put some stock in the aggregate demand stimulating effect of a lower dollar, while Don doesn’t seem to.