Results for “housing”
704 found

Why are Canadian banks left unscathed?

Here is one MR reader request, from RW Rogers:

Is it true that Canadian financial institutions have been relatively unscathed by the recent worldwide economic turmoil and that they were relatively unscathed during the Great Depression? If yes, why?

The Great Depression is a straightforward story, here is an excerpt from Paul Kedrosky:

Despite being adjacent geographically and tightly connected economically, banks failed in Canada and the U.S. at very different rates. Specifically, no Canadian banks failed in the period, while more than 8,000 U.S. banks failed.

Why? Among other reasons is the different structure of the systems, with Canadian banks having a branch banking structuring, making them less tied to any specific region or customer. For their part U.S. banks in the period were larger in number but smaller in assets, with far more single-branch banks in the U.S. than in Canada (where there were virtually none). The larger branch network created resilience, not just in terms of assets but in terms of markets.

What about the noughties?  Nick Rowe makes some relevant points: Canada has fewer major banks and they are more tightly regulated, hold more capital, and housing is not encouraged so much by law.  It is harder to walk away from an underwater mortgage.  Here is Megan McArdle on Canada.  Simon Johnson explains why the Canadian model cannot work for the US.  Most significantly, the U.S. banking system is in part the Canadian banking system, not so much for deposits but for high-risk activities.  That makes Canadian banking look safer, but of course Canada as a country bears a lot of risk from when the U.S. banking system goes bad.

America tornado fact of the day

“People are 10 times more likely to die in a mobile home than if the same tornado hit a regular home,” says book co-author Kevin Simmons, an economist at Austin College in Sherman, Texas.

Simmons says mobile homes constitute only 7% of the USA’s housing stock, but his research found that 43% of all tornado deaths are to people in mobile homes, which can be no match for a tornado’s violent winds, clocked as high as 300 mph.

Here is more, and the data are taken from this new book by Simmons and Daniel Sutter, on the economics of tornadoes, the book’s home page is here.

*Understanding Cairo*

The author is David Sims and the subtitle is The Logic of a City Out of Control.  It is interesting throughout for anyone studying urban density or informal land titles or urban sprawl or Third World mega-cities.  This passage is off the central topics of the book, but I found it an interesting corrective to the usual picture:

There is a misconception held by many Egyptian professionals, especially engineers, that informal housing is haphazardly constructed and liable to collapse.  However, such precarious housing is almost unknown in informal areas.  Since informal housing is overwhelmingly owner-built without use of formal contractors, it is in the owner’s own best interest to ensure that care is taken in construction.  In fact, one of the main features of informal housing construction is its high structural quality, reflecting the substantial financial resources and tremendous efforts that owners devote to these buildings.  It is worth noting that in the 1992 earthquake in Cairo, practically all building collapses and the resulting fatalities occurred not in informal areas, but either in dilapidated historic parts of the city or informal areas…where apartment blocks had been constructed by (sometimes) unscrupulous developers and contractors.

How bad is the state pension funding mess?

Dean Baker says not so bad; Kevin Drum, Paul Krugman, and others seem to take his side.  Josh Barro says it's bad.  I side with Barro.  Here is one Baker passage:

The total shortfall for the pension funds is less than 0.2 percent of projected gross state product over the next 30 years for most states. Even in the cases of the states with the largest shortfalls, the gap is less than 0.5 percent of projected state product.

Beware of the 30-year comparison I say.  A lot of sums look small compared to thirty years' worth of output.  I worry when I read sentences such as this:

The major reason that shortfalls exist at all was the downturn in the stock market following the collapse of the housing bubble, not inadequate contributions to pension funds.

In my house, that's what inadequate means.  I also see Baker relying on a dangerous version of an equity premium argument, when I'd rather see a probability distribution of scenarios.  I don't see Baker — not once — analyzing the public choice considerations of how state governments actually behave and treat their finances.  Or how about how state voters hate tax increases, reasonably or not, and think their governments should be forced to actually solve their mismanagement problems?  A crisis usually is an institutional crisis.

Here is a typical passage from the Barro piece:

New York taxpayers have learned about these dangers the hard way. There is a reason that the pension fixes enacted in 2009 were called “Tier V” and not “Tier II”: There had been three previous attempts to rein in the excessive cost of New York’s public-employee pensions by creating less generous pension “tiers” for newly hired employees. These reforms date back to the fiscal crisis of the 1970s, when unsustainably generous contracts with public-employee unions threatened to throw New York City into bankruptcy. Since then, though, New York’s public-worker unions have been highly successful in unwinding previously enacted pension reforms. The new Tier V is nearly identical to what Tier IV was at the time of its enactment in 1983–but Tier IV has been repeatedly, and retroactively, sweetened through increases in benefit formulas, cuts to employee contributions, and reductions in the retirement age. Similarly, by the time substantial numbers of workers actually start retiring under Tier V around 2040, this plan, too, will probably bear little resemblance to its current form.

Most of Barro's piece focuses on public choice considerations — of how state and local government institutions actually work — and thus it is the better analysis.  Here is a related piece by Eileen Norcross, closer to Barro than to Baker.

A new mortgage plan?

I am not sure whether this article is describing progress, or lack of progress, but here was one interesting bit:

One potential compromise described in current drafts of the administration’s proposal would reduce the government’s role to a last line of defense for the mortgage market. A version of this idea has been advocated by David S. Scharfstein, a finance professor at Harvard who previously worked as an adviser to Mr. Geithner.

The core of Mr. Scharfstein’s proposal is to create a new government-owned corporation for the sole purpose of providing guarantees to mortgage investors. During normal times, the insurer would guarantee no more than 10 percent of mortgages, but in times of crisis, the government could raise that cap, offering guarantees to a broader range of investors so that money continues to flow into the mortgage market and credit remains available.

This plan is a good example of why public choice analysis remains an underrated field in economics.  How are these restrictions self-enforcing in light of special interest and electoral pressures?  Along related lines, Arnold Kling has interesting comments on Peter Wallison.

New issue of Econ Journal Watch

In the new issue: 

Channeling Robert Higgs: Steven Horwitz replies to Gauti Eggertsson on the Great Depression.
 
Advanced Placement ® Economics: What Kind of Economics Do High Schoolers Get? Tawni Ferrarini, James Gwartney, and John Morton investigate.
 
Housing Supply Constraints, Natural and Regulatory, by Wendell Cox; with a Reply by Haifang Huang and Yao Tang
 
Troubling Research on Troubled Assets – Linus Wilson reports.
 
Growth Accelerations Revisited: With errors corrected and data extended, previous results prove fragile – Guo Xu reports.
 
The Ideological Profile of Harvard University Press: David Gordon categorizes 494 book published 2000-2010.
 
The Never to Be Forgotten Hutcheson: Excerpts from W.R Scott (1900)
 
 
EJW Audio:Advance Placement ® Economics: Tawni Ferrarini discusses the importance of AP Economics and unsatisfactory aspects of its content.
 
EJW Audio: The Role of Economists in Ending the Draft. Noble efforts recounted by David R. Henderson.

*The Return*

The author is Daniel Treisman and the subtitle is Russia's Journey from Gorbachev to Medvedev.  Is this the first non-fiction book to be making my "Best of 2011" list?  Most of all, it argues persuasively that, rather than botching the transition away from communism, the Russians/Soviets did a remarkably good job, relative to what could have been expected.  It's also the best all-round book-length treatment of what the subtitle indicates and it is readable as well.  Excerpt:

But [under Putin] did the bureaucracy become more effective and the population safer?  The state certainly grew.  In Putin's eight years as president, about 363,000 additional bureaucrats were hired, mostly federal agents stationed in the regions.  Law enforcement mushroomed.  In the United States, there are two judges and prosecutorial employees per 10,000 residents.  When Putin took over, Russia had eight; when he left, it had fourteen.  Federal spending on law enforcement and national security rose from $4 billion in 1998 to $26 billion in 2007.

Despite this influx of resources, most indicators suggest the state became less, not more, effective.  It built less housing, paved fewer roads, and laid fewer water mains and gas lines per year than under Yeltsin.  The number of public schools and buses in service fell faster than before.  Reforms of the education and health systems were repeatedly postponed…As for keeping citizens safe, few saw any improvement.

Here is a recent review of the book from the WSJ; I liked the book more than he did.

Words of wisdom, from Kevin Drum

I agree with this:

It's not practical to micromanage risk-taking in the financial sector, nor is it feasible to eliminate bubbles and bank crises entirely. But I really do believe that we could very substantially reduce the risk of bank crises without affecting the efficiency of legitimate banking operations. The way to do it is with very simple, very blunt leverage restrictions that apply to all financial actors over a certain size: banks, insurance companies, hedge funds, private equity, you name it. If you have assets over, say, $10 billion, then the rules kick in. Strict leverage limits (say, 10:1 or maybe 15:1) based on conservative notions of both assets and capital would be a pretty effective bulwark against excessive risk taking but wouldn't seriously interfere with the basic asset allocation function of the financial industry.

It wouldn't be perfect. Nothing is perfect. But if we got obsessed with leverage the same way that, say, the Fed is obsessed with inflation, we could all sleep a lot easier at night.

I would add, however, that obsessing over leverage is likely to prove an electoral disaster.  It means limiting credit growth, money supply growth, raising the cost of consumer borrowing, and putting the housing market at a further disadvantage.  It also means staring down financial interest groups.

Insert obligatory St. Augustine quotation here.

The Ethics of Random Clinical Trials

In New York City a random clinical trial over a housing program has many people upset (as Tyler noted earlier):

…some public officials and legal aid groups have denounced the study as unethical and cruel, and have called on the city to stop the study and to grant help to all the test subjects who had been denied assistance.

“They should immediately stop this experiment,” said the Manhattan borough president, Scott M. Stringer. “The city shouldn’t be making guinea pigs out of its most vulnerable.”

The controversy brought to my mind this story from Dr. E. E. Peacock:

One day when I was a junior medical student, a very important Boston surgeon visited the school and delivered a great treatise on a large number of patients who had undergone successful operations for vascular reconstruction.

At the end of the lecture, a young student at the back of the room timidly asked, “Do you have any controls?” Well, the great surgeon drew himself up to his full height, hit the desk, and said, “Do you mean did I not operate on half the patients?” The hall grew very quiet then. The voice at the back of the room very hesitantly replied, “Yes, that’s what I had in mind.” Then the visitor’s fist really came down as he thundered, “Of course not. That would have doomed half of them to their death.”

God, it was quiet then, and one could scarcely hear the small voice ask, “Which half?”

Dr. E. E. Peacock, Jr., quoted in Medical World News (September 1, 1972), p. 45, as quoted in Tufte's 1974 book Data Analysis for Politics and Policy.

Hat tip for the quote source to Raw Meat.

Why is New Zealand different (from Greece and Ireland)?

It's not just the Kiwi fruit.  Via Eric Crampton, Matt Nolan informs us:

On the surface there appears to be a lot in common with the Irish, Greek, and NZ economies.  All three have high net foreign liability positions, liabilities are highly concentrated through banks who are borrowing overseas, all three have experienced some form of housing boom and lift in consumption, and finally all three appeared to have a relatively strong fiscal position before the GFC before moving into fiscal deficits after the shock.  And yet (so far) while the Irish and Greek economies and banking systems have collapsed, New Zealand’s has been fine.

There are two major differences that have helped reduce the implied risk on our debt, making New Zealand much less likely to experience a bank run:

  1. Our banking system is primarily foreign owned (Eric Crampton expands on why this is a good thing),
  2. We have a freely floating exchange rate – combined with having much of our debt denominated in NZ$ this is useful.

Addendum: Matt Yglesias offers relevant comment.

Profile of Morgan Kelly

He is the Irish economist and sage who predicted the decline in property prices and also predicts future political chaos in Ireland.  The profile, unnecessarily snarky at points, is here.  We again see that economists who have studied economic history are proving especially wise during difficult times:

He was described by the Herald Tribune as "a specialist in medieval demographics"… "whose eyes burn with the passionate intensity of his prophesy".

Here is Kelly on TV.  His current prediction?:

Now he is forecasting mass mortgage defaults and an ugly popular uprising. The first stirrings are already visible, he says, with "anxiety giving way to the first upwellings of an inchoate rage and despair that will transform Irish politics along the lines of the Tea Party in America", giving rise to a new "hard-right, anti-Europe, anti-traveller party".

I've already linked to this first-rate Kelly piece on the coming collapse in the Irish housing market.  He does not follow every current academic fashion, but here are his (consistently interesting) academic papers.  I find this one, about the Industrial Revolution, to be of special import.  Here is his potentially important but hard for me to assess paper on the economic impact of the Little Ice Age in European history (or ungated here).

File under "Underappreciated and indeed Hated Economist!"

Don’t flip out over QEII (repeating myself)

I'm not sure it will work, because it won't fix the housing market, may not restore the demands for wealth-elastic goods in a sustainable manner, may not restore the normal flow of credit to small businesses, may not lower subjective estimated risk premia, and may not fix the general disconnect between expectations and reality.  The effects on long-term interest rates are murky.  No one — and I mean no one — has a coherent story about how nominal stickiness of wages lies at the heart of our current dilemma.

Still, QEII may do some good.  Money matters, even if we don't always understand how or why, and excessively tight money has never done market-oriented economics any favors.  Think of QEII as a make-up for some earlier monetary policy mistakes.  Some of the relevant alternatives include a trade war with China or direct government employment of the unemployed and with what endgame?  QEII is not some terrifying burst of potential hyperinflation.  The TIPS market is forecasting in the range of two percent inflation and it's gone up — what — sixty basis points since August?  That's hardly the end of the Republic.  During the Reagan recovery, inflation never fell below four percent.  I've thought through "trigger models" of rapidly escalating inflation, but they don't scare me much.  The Fed simply needs to be ready to unload its heavy balance sheet without delay.

I do take seriously some of the more speculative criticisms, namely that QEII may set off bubbles in some emerging markets, or that it may break the euro (and that the euro would not otherwise break of its own accord).  Still, those hypotheses are far from established and it is difficult to believe that say three percent U.S. price inflation should bring international doom.  These factors also need to be weighed against the international and political economy costs of continued American economic stagnation.

I'm unhappy with claims that "we're not doing enough" and that therefore this is no test of the idea of monetary stimulus.  This is what QEII looks like, filtered through the American system of political checks and balances.  And if it looks small, compared to the size of our problems, well, monetary policy almost always looks small compared to its potential effects.  I'm willing to consider this a dispositive test and I am very curious to see the results.

The Luck of the Irish

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.

Haitian rents

Some fell. The prices on those that survived defy belief. One senator put up his three-bedroom with panoramic views for $15,000 a month. (Its nine Rottweiler guard dogs are free.) Finding anything similar for less than $5,000 is a steal. Want to buy? A three-bedroom with guest apartment lists for $900,000.

Here is more.  The supply curve did shift back:

"I find it more expensive to rent a place in Haiti than in Brooklyn, and it's not just housing. The entire cost of living is very, very high now," said the group's head, Mario Augustaze.

In Haiti there still may be up to two million homeless people since the earthquake.

A Prize for Unemployment

The 2010 Nobel Prize awarded to Peter A. Diamond, Dale T. Mortensen, Christopher A. Pissarides can be thought of as a prize for unemployment theory.

A key breakthrough was to realize that the problem was not how to explain unemployment per se but rather how to explain hiring, firing, quits, vacancies and job search and to think of unemployment as the result of all of this underlying microeconomic behavior.  Notice that the underlying behavior involves not just workers looking for jobs but also employers looking for workers so explaining unemployment would require a theory of job search, worker search and matching and each aspect of the theory would have to be consistent with every other aspect; i.e. how much workers search depends on how much employers are searching (e.g. advertising) and vice-versa and also on the quality of matching and all of these considerations need to be addressed together.  It was Mortensen and Pissarides in particular, building on work by Diamond, who built just such a consistent model.

A very surprising empirical fact helped to motivate this perspective: even in a recession millions of jobs are being created every month.  The figures we usually hear about the number of jobs created is the net figure but in the United States in August, for example, there were 4.1 million hires (and 4.2 million separations).  Thus, as noted above, understanding unemployment requires understanding these much larger flows of job creation and destruction.

Calibrating the (Diamond)-Mortensen-Pissarides model and embedding it in a dynamic real business cycle model to see if it can match the facts has been a key aim of recent work (see also here and Robert Shimer's work).

Search theory has been applied extensively to the labor market but the same type of theory can be used to understand any issue in which matching is important such as marriage markets and the housing market.  

See Tyler for many more details on Diamond, Mortensen and Pissarides.