Category: Law
Why the housing market imploded
In a recent paper, Christopher L. Foote, Kristopher S. Gerardi, and Paul S. Willen report (pdf):
This paper presents 12 facts about the mortgage market. The authors argue that the facts refute the popular story that the crisis resulted from financial industry insiders deceiving uninformed mortgage borrowers and investors. Instead, they argue that borrowers and investors made decisions that were rational and logical given their ex post overly optimistic beliefs about house prices. The authors then show that neither institutional features of the mortgage market nor financial innovations are any more likely to explain those distorted beliefs than they are to explain the Dutch tulip bubble 400 years ago. Economists should acknowledge the limits of our understanding of asset price bubbles and design policies accordingly.
Scott Sumner summarizes the twelve points here:
Fact 1: Resets of adjustable rate mortgages did not cause the foreclosure crisis.
Fact 2: No mortgage was “designed to fail.”
Fact 3: There was little innovation in mortgage markets in the 2000s.
Fact 4: Government policy toward the mortgage market did not change much from 1990 to 2005.
Fact 5: The originate-to-distribute model was not new.
Fact 6: MBSs, CDOs, and other “complex financial products” had been widely used for decades.
Fact 7: Mortgage investors had lots of information.
Fact 8: Investors understood the risks.
Fact 9: Investors were optimistic about home prices.
Fact 10: Mortgage market insiders were the biggest losers.
Fact 11: Mortgage market outsiders were the biggest winners.
Fact 12: Top-rated bonds backed by mortgages did not turn out to be “toxic.” Top-rated bonds in collateralized debt obligations (CDOs) did.
Addendum: There was earlier Boston Globe coverage here.
Why so little demand for protectionism?
Paul Krugman asks a very good question, namely why the political pressures for protectionism in the midst of recessions and depressions have been so weak. While I do not disagree with his points (which cite institutions such as the WTO and EU), I am surprised by what he leaves out. Here is a summary of Spence and Hlatshwayo on U.S. labor markets:
Looking back on the period from 1990 to 2008, the co-authors found that 97 percent of the 27.3 million U.S. jobs created were in the non-tradable sector. (The five largest non-tradable sectors, mentioned above, contributed 65 percent of the 1990-2008 jobs growth.) “The employment creation occurred mostly in non-tradable sectors — where we don’t have international competition,” Spence said.
In other words, with more jobs in the service sector, we are practicing increased “protectionism by any other name,” often with the law and with regulation but in many cases cultural barriers and lack of trade networks will suffice. Trade costs for many services are in any case high and thus the constituency for protectionism or further protectionism is not quite there. The workers who might have supported tariff-based or quota-based protectionism thirty-five years ago already have lost their jobs to foreign trade and they or their descendents have moved to more heavily protected service sectors. As we should recall from the literature on the gravity equation, explicit tariffs are only a small part of the actual barriers to trade.
A second issue is the where the actual burden of foreign competition is falling, given a much higher degree of globalization. The Mexicans are worried about Chinese competition, but they are not mainly worried about Chinese competition pulling Mexican consumers away from Mexican products (chili peppers are one exception here). Mostly they are worried that Chinese competition has taken away many of Mexico’s export markets elsewhere, and putting tariffs on Chinese goods coming into Mexico won’t stop that.
The politics of infrastructure in India
Tapan Kumar Chowdhury, 62, a retiree now working as an activist in the colony, said legalized status would be likely to improve sanitation and local health standards through installation of a true sewage system. But he remained skeptical about whether the election-year promises would be carried out, noting that politicians preferred to keep colonies vulnerable so that residents remained more beholden to them for even incremental improvements. “They have a vested interest in keeping us illegal and unauthorized,” he said, “so they can use us as a vote bank.”
Here is more.
Judge Trims Patent Thicket
In Launching the Innovation Renaissance I wrote:
In the software, semiconductor and biotech sectors, for example, a new product can require the use of hundreds or even thousands of previous patents, giving each patent owner veto-power over innovation. Most of the owners don’t want to actually stop innovation of course, they want to use their veto-power to grab a share of the profits. So in theory patent owners could agree to a system of licenses from which everyone would benefit. In practice, however, licensing is costly, time-consuming and less likely to work the more parties are involved. It’s easy for a bargain to break down when five owners each want 25 percent of the profits. It’s almost impossible for a bargain to work when hundreds of owners each want 10 percent of the profits.
The just decided Microsoft v. Motorola decision illustrates the problem and what judges can do to help resolve the problem. The case concerned two standards-essential patents (SEPs) which must be licensed to other parties at a reasonable and non-discriminatory (RAND) rates. Motorola, however, was claiming that a reasonable fee required Microsoft to pay over $4 billion annually. The court decided, however, that a truly reasonable free was about $1.8 million a year. Quite the discount. The decision by US District Judge James Robart is admirably clear:
When the standard becomes widely used, the holder of SEPs obtain substantial leverage to demand more than the value of their specific patented technology. This is so even if there were equally good alternatives to that technology available when the original standard was adoped. After the standard is widely implemented, switching to those alternatives is either no longer viable or would be very costly….The ability of a holder of an SEP to demand more than the value of its patented technology and to attempt to capture the value of the standard itself is referred to as patent “hold-up.”…Hold-up can threaten the diffusion of valuable standards and undermine the standard-setting process.
…In the context of standards having many SEPs and products that comply with multiple standards, the risk of the use of post-adoption leverage to exact excessive royalties is compounded by the number of potential licensors and can result in cumulative royalty payments that can undermine the standards…The payment of excessive royalty to many different holders of SEPs is referred to as “royalty stacking.”…a proper methodology for determining a RAND royalty should address the risk of royalty stacking by considering the aggregate royalties that would apply if other SEP holders made royalty demands of the implementer.
Judges made patent law what it is today and they are beginning to remake it. The decision impacts not just Microsoft and Motorola but the value of future patents and the value of future patent litigation.
Cousin Marriage and Democracy
In the United States consanguineous marriage (marriage between close relatives, often cousins) is frowned upon and in many states banned but it is common elsewhere in the world. Approximately 0.2% of all marriages are consanguineous in the United States but in India 26.6% marriages are consanguineous, in Saudi Arabia the figure is 38.4% and in Niger, Pakistan and Sudan a majority of marriages are consanguineous. Cousin marriage used 
to be more common in the West and was particularly common among royal families which gives some hints as to why it may sometimes be useful. Among families with titles or estates, cousin marriage will tend to keep the wealth intact–literally within the family–whereas wealth becomes more dilute more quickly with outside marriage. Cousin marriage may also increase cooperation within the extended family and help to fight off parasites.
A recent paper finds that consangunuity is strongly negatively correlated with democracy:
How might consanguinity affect democracy? Cousin marriages create extended families that
are much more closely related than is the case where such marriages are not practiced. To illustrate,
if a man’s daughter marries his brother’s son, the latter is then not only his nephew but also
his son-in-law, and any children born of that union are more genetically similar to the two grandfathers
than would be the case with non-consanguineous marriages. Following the principles of
kin selection (Hamilton, 1964) and genetic similarity theory (Rushton, 1989, 2005), the high
level of genetic similarity creates extended families with exceptionally close bonds. Kurtz succinctly
illustrates this idea in his description of Middle Eastern educational practices:If, for example, a child shows a special aptitude in school, his siblings might willingly
sacrifice their personal chances for advancement simply to support his education. Yet once
that child becomes a professional, his income will help to support his siblings, while his
prestige will enhance their marriage prospects. (Kurtz, 2002, p. 37).Such kin groupings may be extremely nepotistic and distrusting of non-family members in the
larger society. In this context, non-democratic regimes emerge as a consequence of individuals turning to reliable kinship groupings for support rather than to the state or the free market. It has
been found, for example, that societies having high levels of familism tend to have low levels of
generalized trust and civic engagement (Realo, Allik, & Greenfield, 2008), two important correlates
of democracy. Moreover, to people in closely related kin groups, individualism and the
recognition of individual rights, which are part of the cultural idiom of democracy, are perceived
as strange and counterintuitive ideological abstractions (Sailer, 2004).
By the way, cousin marriage results in an elevated risk of birth defects but on the same order as a 40 year old woman having children as opposed to a 30 year old. In other words, the risks are small relative to other accepted risks. Results do get worse when cousin marriage is prevalent over many generations.
Hat tip to Chris Blattman and Joshua Keating. FYI, Steve Sailer wrote an interesting piece on this issue.
Paul Collier’s *Exodus: How Migration is Changing Our World*
It comes out October 1, and here is from the back cover:
…bestselling author Paul Collier makes a powerful case for the ethical legitimacy of restricting migration in the interests of both sending and receiving societies. Drawing on original research and numerous case studies, Collier explores this volatile issue from three unique perspectives: the migrants themselves, the people they leave behind, and the host societies where they relocate. As Collier shows, those who migrate from the poorest countries, primarily though not exclusive the young, tend to be the best educated and most energetic in their cultures. And while migrants often benefit economically, the larger impacts of mass migrations remain unsettling. The danger is that both host countries and sending societies may lose their national identities– an outcome that Collier suggests would be disastrous as national identity is a powerful force for equity. Collier asserts that migration must be restricted to ensure that it helps those who remain in sending countries and also benefits host societies that make the investment on which migrant gains rely.
The comment section is open, but I’m not going to read them.
Will Congress exempt itself from ACA exchange provisions?
Congressional leaders in both parties are engaged in high-level, confidential talks about exempting lawmakers and Capitol Hill aides from the insurance exchanges they are mandated to join as part of President Barack Obama’s health care overhaul, sources in both parties said…
There is concern in some quarters that the provision requiring lawmakers and staffers to join the exchanges, if it isn’t revised, could lead to a “brain drain” on Capitol Hill, as several sources close to the talks put it.
The problem stems from whether members and aides set to enter the exchanges would have their health insurance premiums subsidized by their employer — in this case, the federal government. If not, aides and lawmakers in both parties fear that staffers — especially low-paid junior aides — could be hit with thousands of dollars in new health care costs, prompting them to seek jobs elsewhere. Older, more senior staffers could also retire or jump to the private sector rather than face a big financial penalty.
Plus, lawmakers — especially those with long careers in public service and smaller bank accounts — are also concerned about the hit to their own wallets.
Here is more, via these guys.
Addendum: Here is a response from Ezra Klein to the Politico story, but I don’t see that it counters the basic point, as reflected by this brouhaha, that the exchanges are not necessarily such a wonderful place to be, especially for low wage workers. Megan McArdle also comments.
Markets in everything
I heard reports of inmates checking out popular books like The Da Vinci Code, then auctioning off reading rights to fellow inmates.
That is from Avi Steinberg’s Running the Books: The Adventures of an Accidental Prison Librarian, which is often annoying, intermittently very interesting.
Toward a parallel market in Cypriot euros
Some people are trying to get this off the ground, although the legal issues appear to be murky:
Is your cash stuck in a Cypriot bank? Someone might be willing to take it off your hands.
Distressed-debt investors and brokers are circling Cyprus, the Mediterranean island that last month plunged its two main banks into an emergency restructuring and blocked thousands of depositors from touching all their money.
The idea: investors buy frozen bank deposits, at a discount. Depositors who need access to their money get a payoff immediately, instead of waiting months or years for the bank restructuring to be completed. Investors get a shot at a big payoff down the line.
The article is here, and hat tip goes to @RobinWigg.
Sentences to ponder
Indeed, for customer-support calls, people with a criminal background actually perform a bit better.
I do not think that result is subject to all of the ideal statistical adjustments, although it is based on some “Big Data” correlations.
The longer story is here, and for the pointer I thank DW.
Substitutes for the Second Amendment
One of the purposes of the 2nd Amendment was to protect the people from government tyranny. The most important aspect of this was probably not to arm the public per se but rather to minimize the necessity and use of a standing army. Unfortunately, Americans have long gone from fearing standing armies to loving them. So isn’t it time for an additional or substitute amendment? Given the immense changes since the founding what amendments would best protect the people from tyranny today? Here are some possibilities:
- The right of the people not to bear arms shall not be infringed (i.e. no conscription. Requiring someone to bear arms, thus taking all of their freedom, is a far worse example of tyranny than preventing them from bearing arms.)
- If 1/3rd or more of the Supreme Court rule that a law is unconstitutional it shall be unconstitutional. (Greater protection of minority rights).
- Congress shall pass no law abridging the right of the people to encrypt their documents and effects. (Modern supplement to the fourth amendment.)
Other ideas?
The 2nd Amendment does have an important (unique?) advantage in protecting against tyranny namely that the right is self-enforcing, it creates the conditions, an armed public, which make the right difficult to abrogate. To some extent, free speech works in a similar way but “you’ll have to take my gun from my cold, dead hands” is a bigger threat than “you’ll have to take my free speech over my objections.” Are there are other self-enforcing amendments?
Hat tip for discussion to Bryan Caplan.
German markets in everything
Responding to an order from above, a Munich court has reopened the media accreditation process for reporters covering the biggest neo-Nazi trial in German history. Seats will now be allotted by raffle, with several being reserved for the Turkish, Greek and other foreign press.
Here is more, note there are several reserved for Persian, Greek, and Turkish media.
Sentences to ponder
Irish homeowners applying for debt writedowns will have to give up satellite television, foreign holidays and private school educations for their children under a strict new insolvency law introduced to tackle the country’s debt crisis.
On Thursday Ireland’s Insolvency Service set out monthly spending limits for people seeking debt deals from their creditors, highlighting the impact austerity is having on Irish spending habits. A single person will be allowed just €247.04 a month for food, €57.31 for heating and €125.97 for “social inclusion and participation”, an expenses category that includes tickets for sporting events and the cinema.
…In most cases, people seeking debt deals will also have to give up private health insurance and their cars, although they will be able to keep their vehicles if they do not have access to public transportion.
From the FT, here is more. The Irish Times has an ungated version.
The idea of wealth taxes is only getting started
Two top advisers to German Chancellor Angela Merkel have called for a tax on private wealth and property in eurozone debtor states to force the rich to fund rescue costs, marking a radical new departure for EMU crisis strategy.
Here is more. I tell you again, this will be a major issue for the next twenty years and not just in the eurozone. Take a look at all those state and local U.S. pension funds expecting seven percent rates of return.
Notice of the article is from @LindaYueh.
The culture that is Washington
The Senate has severely scaled back the Stock Act, the law to stop members of Congress and their staff from trading on insider information, in an under-the-radar vote that has been sharply criticised by advocates of political transparency.
The changes, if they become law, will exclude Congressional and White House staff members from having to post details of their shareholdings online. They will also make online filing optional for the president, vice-president, members of Congress and congressional candidates.
The House was expected to pass a similar bill on Friday.
Here is the FT article, here are other sources. Some officials suggested that transparency “could threaten national security,” more detail on that here. Here are some further interesting details.