Category: Economics
Ed Glaeser on Obama’s housing plan
He praises its moderation. His conclusion is: "It could have been much worse."
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I thank Patrick Hidalgo for the pointer.
Google searches for fun
Try "evidence for fiscal stimulus," with the quotation marks. Maybe that is funny wording, but only three results come up (plus this post, presumably, soon enough), and two of them are from this blog.
I thank Leigh Caldwell for the pointer, here is his interesting post (includes a joke) on that same topic.
What to think of Obama’s housing plan
The ever-worthy Mark Thoma rounds up reactions and analyses, including some critical remarks from CalculatedRisk and some praise from Felix Salmon. Willem Buiter is negative (worth a read). Simon Johnson says it's not enough. WSJ surveys a few reactions as well. I'll add some observations:
1. Housing prices ought to be lower, and as quickly as possible. So aiding homeowners cannot be justified on the grounds of propping up prices, which is difficult to accomplish anyway. Such aid has to be justified in some other way. The main argument is that our ex post procedures for foreclosures are not what we would have chosen ex ante, had we known that such a severe housing and financial crisis could be possible. That opens up some room for beneficial intervention, but a good plan it still hard to pull off.
2. When it comes to refinancing the Fannie and Freddie loans, and expanding those agencies, how many foreclosures will this avoid? We should be reducing the size of the mortgage agencies rather than putting another $200 billion into them.
3. We should not be helping people stay in their homes if their mortgage payments are at 43 percent of their income. (The bill requires banks, in such cases, to lower interest rates until monthly payments are at 38 percent of income. The government then steps in to lower payments to 31 percent of income.) I don't feel moral outrage (although it is morally outrageous), I just don't think it is a good use of money. I also wonder how it works when your income is quite variable year to year. Are they sure there is no way to game this?
It will in the short run prevent some (enough to matter?) foreclosures. But it won't keep up the long-term price of homes or prevent eventual foreclosures when the home has negative equity. It adjusts interest rates on the payments, not principal on the loans (thank goodness).
Most of all it is a bad precedent which we will live to regret. It is a significant move away from the idea of commercial decisions based on contract.
One source,
by the way, suggests that lenders will have veto rights over these
"renegotiations" by choosing to foreclose instead of accepting the lower payments. But foreclosure is quite costly for the bank, so I don't feel so much better.
By the way, aren't we trying to help the banks?
4. Sellers receive various bonuses for modifying eligible mortgage loans. This is ideally a Pareto improvement if more of these contracts could be modified than is currently the case. My doubt is whether the subsidy will affect many modification decisions; so far I don't see that lenders are putting a lot of effort into renegotiations. Here is a good article on when modifications work and when they do not. I doubt if an extra 1k will make much difference.
5. Guidelines for modifying eligible mortgage loans are established. Ideally this could give more scope to the Coase theorem, but see my reservations under #4.
Felix Salmon, who likes the plan, nonetheless offered up a scary bit:
But really nobody has a clue how much it will cost: that's entirely
dependent on whether or not the plan succeeds in arresting the fall of
house prices.
The bottom line: #3 is a deal-killer for me. Just say no, and you don't even need a moral hazard argument (they are overrated, anyway) to see why this is troubling. I'd like to see the plan's proponents predict how many foreclosures it will forestall and be willing to take their lumps if they are wrong.
How $8 a week can best boost the economy
Here are answers from many economists, here was mine:
In my view, fixing the banking sector is more important than getting
the stimulus right. So if you can afford to lose the money, go to a
large bank (more likely to be insolvent), find their most overpriced
service, and buy as much of it as you can. That way you are doing your
part to recapitalize our banking system.If you’re stuck for ideas, just keep on using ATM machines, owned by
other banks, so you can pay large fees to take out small sums of money
from your checking account. When you need to, take all of your
withdrawals and deposit them back in the account once again and start
all over with the process.
What’s bank insolvency anyway?
Here is a good post on that topic, hat tip to Kevin Drum. It's not as simple as you think. So when someone says "The government should close down insolvent banks" he needs to specify which measure of insolvency he has in mind. It makes a big difference.
The economic collapse of Japan and the Phoenix Suns
Most of you have heard about the Japanese gdp report; it implies an annualized rate of decline of almost 13 percent. OK, they depend on exports but why is it so dire there?
You also may have heard that the Phoenix Suns have been trying to unload All-Star players Amare Stoudemire and Shaquille O'Neal. They are not hoping to get equal talent in return but rather they need to lower their payroll. (Why pay $75 million a year for a fringe playoff club?) And the New Orleans Hornets, former contenders, traded center Tyson Chandler simply to unload his salary.
I think of the Suns or Hornets as similar to a highly leveraged institution. I don't know the debt level of their corporate structure but that is not the point. The Suns have been spending lots in recent years toward the goal of ever-rising prices for season tickets and corporate boxes. Does that strategy sound familiar? If the future price hikes don't come on the main asset, they can't afford their obligations and so they will try to shed illiquid and hard-to-value assets into an unwilling market. Sound familiar? (As an aside, I wonder if barter is one way to jump start trading in illiquid financial assets.)
Does this sound familiar?:
"You've got a market loaded with motivated sellers and only a very
small group of buyers," one NBA executive told ESPN.com. "It's really
ugly. Owners are scared to death right now."
Institutions can have receipts and obligations which require growing revenues even if they don't have much explicit debt on their books. I think also of the artistic non-profits which invested in expensive facilities, in the hope of ever-rising donations from their investment banker patrons. Many other parts of the economy may be "leveraged" in this fashion, with or without high levels of debt.
Japan, of course, has high levels of government debt and also a demographic problem. I wonder whether their future-oriented export strategies make them even more leveraged, de facto, in a manner resembling the (former) business strategy of the Phoenix Suns.
One lesson of this crisis will be how deep the concept of leverage extends. That's another reason why this is fundamentally a crisis of sectoral shifts.
Targeted? Infrastructure Spending by Unemployment Rate
The ProPublica site maps/graphs infrastructure spending per unemployed worker against the unemployment rate but in effect that puts the number of unemployed people on both sides of the regression/graph and if there is any measurement error this can result in bias. The graph with spending per unemployed worker is similar to the above but with a slightly more negative slope.
Free Market Bank Nationalization
I believe that bank nationalization is now very likely. It may even be desirable. The term nationalization, however, clouds judgment on both sides of the debate. It's better to think of what we want to do as bankruptcy. Many of the major banks are insolvent. When the liabilities of an ordinary firm exceed its assets the firm enters one of a variety of types of bankruptcy procedure during which management is often removed, the firm is sold or reorganized and liability holders take ownership or are paid off at a discount. Notice that we do not call a bankruptcy procedure, nationalization, even though it typically occurs under the auspices of a government employed judge.
When it comes to the banks the issue is more complicated than with an ordinary firm because the major liability holders are depositors whom the government has guaranteed. As a result, the ultimate liability holder is the government. But now, as a thought experiment, imagine that we had private deposit insurance. What would a private insurance firm do in this situation? Would it pander to the current bank management and carry the zombie banks on its books, hoping and waiting for a miracle? Or would it step in, remove current management, pay off the depositors, reorganize and then sell the banks to recoup its losses? I believe a private insurer would follow the second path, the fact that the government is not yet ready to do this indicates how powerful bankers are in Washington. Thus, given deposit insurance the procedure most consistent with free market principles is bankruptcy, preferably a speed bankruptcy procedure under the auspices of the FDIC which has significant expertise in this field.
A speed bankruptcy; 1) punishes current management reducing moral hazard, 2) will be less politicized if done under the auspices of the FDIC than if done piecemeal with congressional involvement and 3) will get the banks working again as soon as possible.
Notice how the term nationalization confuses the issue. First, it suggests government ownership of the banks which would indeed be a disaster. People in favor of free markets will rightly want to avoid any such outcome but ironically it's the current situation of "wait and see," and "protect the banker," which is likely to lead to an anemic recovery and eventual government ownership. Second, it confuses people on the left who think that nationalization is a way to insure that taxpayers get something on the upside. That idea is a joke – there is no upside. Taxpayers are going to have to pay through the nose but the critical point is that the taxpayers must pay the depositors whom they have guaranteed not the banks.
The debate so far has been framed between a "bailout" and "nationalization." But the public rightly sees the bailout as a way to protect bankers and thus we get pressure for government ownership, which has already happened in part through government control over banker wages. Bankruptcy in contrast is a normal free market procedure, it emphasizes that the firm has failed and current management should be removed. Framing the issue in this way, for example, makes it clear that only the depositors should be protected and under reorganization there should be no control over wages on future management (wages are going to have to be high to get anyone to take on the task). Finally the idea of bankruptcy makes it clear that the goal is to get banks solvent, under new management, and back under private control as quickly as possible.
Addendum: Garett Jones nicely lays out the case for doing the normal thing.
Funny beliefs
Mark Thoma makes fun of Judd Gregg for thinking that tax cuts pay for themselves. Mark is right to make fun. What a ridiculous thing to believe. All the good economists know that it is spending increases that more than pay for themselves.
Markets in everything, Australian style
John Hoehn, a loyal MR reader, directs my attention to the following:
Other duties may include (but are not limited to):
Feed the fish – There are over 1,500 species of fish living in the Great Barrier Reef. Don’t worry – you won’t need to feed them all.
Clean the pool – The pool has an automatic filter, but if you happen to see a stray leaf floating on the surface it’s a great excuse to dive in and enjoy a few laps.
Collect the mail – During your explorations, why not join the aerial postal service for a day? It’s a great opportunity to get a bird’s eye view of the reef and islands.
The funny thing is, my job is better than that.
Axel Leijonhufvud on fiscal stimulus
Here is one bit from a generally interesting article:
Fiscal stimulus will not have much effect as long as the financial system is
deleveraging. Even if that problem were to be more or less solved, the
government deficit would have to offset both the decline in industry investment
and the rise in household saving – a gap that is rising as the recession
deepens. Here, too, the public is sceptical and prone to conclude that a program
that only slows or stops the decline but fails to “jump start” the economy must
have been a waste of tax payers’ money. The most effective composition of such a
program is also a problem.
It is worth noting that Leijonhufvud is generally considered a Keynesian, not a rational expectations theorist. In my opinion the sophisticated Keynesian view is still that the stimulus won’t work.
Jon Chait defends waste in the stimulus package
Read him here, commentary from Matt Yglesias. I know all about Keynesian ditch-digging but we should keep a few points in mind:
1. Some of these expenditures will end up being permanent or at least long-term.
2. Government expenditure does increase monetary velocity in a way that boosts aggregate nominal demand. But these higher velocity effects may not last for more than a single round of spending, which is to say they won't last long at all.
3. The second- and third-round stimulative effects of productive investments are much greater. Production begets further production through the complementarity of the capital structure and through its ability to create profitable, sustainable jobs.
4. A lot of the stimulus will shift people from one job to another, rather than simply employing the current unemployed. We really don't want to take people from producing something useful to producing something wasteful.
5. Many on the left are boasting that the U.S. government could borrow lots more (look at the current T-Bill rate), forgetting they used to warn us that international capital flows, as amplified through noise traders and speculators, mean that crises can arrive in a single, whiplash moment, bringing countries from riches to rags virtually overnight. Somehow those old narratives are being forgotten, I wonder why.
Buy a House, Get a Visa
Add Thomas Friedman to Tyler, myself, Lee Ohanian and others suggesting immigration as a way to alleviate the recession:
Leave it to a brainy Indian to come up with the cheapest and surest way to stimulate our economy: immigration.
Koreans,” said Shekhar Gupta, editor of The Indian Express newspaper.
“We will buy up all the subprime homes. We will work 18 hours a day to
pay for them. We will immediately improve your savings rate – no Indian
bank today has more than 2 percent nonperforming loans because not
paying your mortgage is considered shameful here. And we will start new
companies to create our own jobs and jobs for more Americans.”
Note that the multiplier on the “buy a house, get a visa” strategy would be much larger than any possible domestic multiplier since the money would come from outside the economy (and efficiency would improve as well.)
I think there would be considerable support among economists that immigration (buy a house, get a visa), a payroll tax cut and maintaining state and local funding would be reasonably good policies in this recession (albeit not necessarily sufficient) yet these policies seem to be the ones that the political system rejects out of hand. (See also Matt Yglesias here and here). Now, I can understand rejecting these policies as compared to doing nothing, ala a precautionary principle, but why these policies are rejected compared to taking a trillion dollar gamble is puzzling even to someone like myself schooled in public choice.
Krugman and Barro respond to Clive Crook
Via Megan McArdle, lots of back and forth, definitely worth a read, you decide.