Category: Current Affairs

It's getting worse.  Here is one bit:

The other crumbling dam against mass mortgage default is house prices. House prices are driven by the size of mortgages that banks give out. That is why, even though Irish banks face long-run funding costs of at least 8 per cent (if they could find anyone to lend to them), they are still giving out mortgages at 5 per cent, to maintain an artificial floor on house prices. Without this trickle of new mortgages, prices would collapse and mass defaults ensue.

However, once Irish banks pass under direct ECB control next year, they will be forced to stop lending in order to shrink their balance sheets back to a level that can be funded from customer deposits. With no new mortgage lending, the housing market will be driven by cash transactions, and prices will collapse accordingly.

While the current priority of Irish banks is to conceal their mortgage losses, which requires them to go easy on borrowers, their new priority will be to get the ECB’s money back by whatever means necessary. The resulting wave of foreclosures will cause prices to collapse further.

That is from Morgan Kelly — read the whole thing.

The real estate bubble is helping out:

Internet chat groups have sprang up where women exchange advice on how to conceive girls.

Rising property prices are driving the change, which is expected to be confirmed by China’s once-a-decade census that started on Monday, because Chinese families must traditionally buy a flat for a son before he can marry.

“My husband and I don’t earn much and I can’t imagine how we can buy a flat for a son,” says Zhang Aiqin of Pujiang in Zhejiang province.

“And it is not only a flat,” says Zhang Yun, a Shanxi province native who lives in Shanghai, alluding to the cost of educating and marrying off a boy. “Sons bring economic pressure†‰…†‰[but] ‘a daughter is a warm jacket for a mother’ when she is old,” she says, quoting an ancient Chinese idiom to illustrate the fact that many urbanised Chinese think daughters are better caregivers.  

What governments spend on relief work is secondary to what it spends on its armies…Merchants are the knights who will save this region from famine and must avoid investing in worthless projects…

The answer is here, no peeking!

Are they extending it to the U.S.?  Didn't Nimzovich once say "The threat is stronger than the execution"?  Read earlier posts by Reihan Salam and Tim Worstall on the issue and here is the background paper (pdf) I've already linked to.

Most of all the Chinese leadership is worried about maintaining jobs (sound familiar?).  And so:

It will lower real interest rates and force credit expansion 

This of course will have the effect of unwinding the impact of the renminbi appreciation.  As some Chinese manufacturers (in the tradable goods sector) lose competitiveness because of the rising renminbi, others (in the capital intensive sector) will regain it because of even lower financing costs.  Jobs lost in one sector will be balanced with jobs gained in the other.

But there will be a hidden cost to this strategy – perhaps a huge one.  The revaluing renminbi will shift income from exporters to households, as it should, but cheaper financing costs will shift income from households (who provide most of the country’s net savings) to the large companies that have access to bank credit.  So China won’t really rebalance, because this requires a real and permanent increase in the household share of GDP.  Instead what will happen is that it will reduce Chinese overdependence on exports and increase China’s even greater overdependence on investment.

This will not benefit China.  It will fuel even more real estate, manufacturing and infrastructure overcapacity without having rebalanced consumption.  Expect, for example, even more ships, steel, and chemicals in a world that really does not want any more.

That's from Michael Pettis, and here is more.

Here is his Wikipedia page.  McKenzie was one of the most important figures in proving the existence of a competitive general equilibrium and also in developing the turnpike theorem.  Here is a short bio.  He was a formative factor in founding and shaping the graduate economics program at the University of Rochester, where he taught for decades.  He was especially famous in Japan for having taught and guided so many Japanese doctoral students.  His paper "Demand theory without a utility index" remains a classic, as it helped show how much of standard economics was independent of particular assumptions about utility.  He was an early influence on the idea of computing economic equilibria.  He also had respected papers in trade theory; here is McKenzie on scholar.google.com.

The 33 trapped Chilean miners have moved to stop any individual from profiting at the expense of the group, drawing up a legal contract to share the proceeds from the story of their ordeal.

The group have already rejected requests for interviews and have instead made plans to jointly write a book about the days spent trapped below the Atacama Desert following the mine collapse on August 5.

We'll see if that holds up.  The full story is here and for the pointer I thank Eric Hartley.  Is it unethical to pay an individual miner for the story of the group?

They are the new winners of the Nobel Prize.  I'll be adding updated information for the next hour or two, so if you use RSS please visit the blog's home site for the latest!

This is a prize for search theory and labor markets and job matching, all very important ideas today, especially in the United States.  It is a well deserved prize and all authors have produced very well-cited and very influential papers.  It is a theory prize, although Diamond in particular also has some empirical papers.  I'll write a separate post for each economist.