Sabtu, 31 Juli 2010

Chinese Highways

China now has about 65,000 kilometers of freeway criss-crossing the country. In 1989, the number of kilometers was zero. To get a sense of the magnitude of this achievement, the Interstate Highway system is about 75,000 kilometers long and took about 40 years to complete.

This does not mean the US should go on a freeway building spree (the marginal productivity of length almost surely decreases in length); it is just one measure of explaining how China has developed so rapidly.

Jumat, 30 Juli 2010

There they go again

I enjoy David Brooks. From everything I can tell, he is smart and has a good heart. I would guess he is a terrific dinner companion. So I was disappointed when I read in his column this morning:

What we have is not just a cycle but a condition. We could look back on the period between 1980 and 2006 as the long boom ...

Sorry, David, but 1980 to 2006 was not a long boom. Consult the National Income and Product Accounts tables, and you will find that real GDP over that time grew about 3.1 percent per year. In the "awful" Nixon-Ford-Carter 1970s, growth was 3.2 percent per year; in the 60s 4.2 percent; in the 50s 3.5 percent, and in the 40s 5.6 percent.

It is not that 1980-2006 was bad, just hardly a boom relative to the previous 40 years.

Kamis, 29 Juli 2010

Steve Malpezzi is not happy

He blogs:

When I first heard of HAUP, I was excited, but my excitement quickly turned to disappointment. Among other problems, it requires that unemployed homeowners go through a fairly bureaucratic procedure to apply for what is (more or less) three months forbearance. And that' s merely the application; forbearance may or may not be granted for the 3 months. Remember, at the present time, the AVERAGE duration of unemployment is 9 months and rising.

(The fine print says you can extend beyond 3 months, but it's not clear that will happen, and will certainly not be clear to potential applicants).

The website's FAQs does not even tell people if the differences between the original payments and the reduced payments, are forgiven, or wrapped into the loan. (When I inquired of the experts in Washington, it turns out part of the loan is forborne, adding to the loan amount, but it’s amazing that they ask people to apply without clearly explaining such a key element of the program!)

What if your unemployment lasts more than three months (which is true for most unemployed today?) After two months you are given an application for HAMP, the dog that won't hunt. As far as I can tell, most unemployed will still not qualify for HAMP after they fill out this application.

There are other details that limit the program’s scope, and hence its effectiveness at halting the skid in housing prices. Homeowners can't get relief on the second liens. And if I read it right, HAUP does nothing for the unemployed not receiving unemployment insurance.

My bottom line: Treasury is still spitting on the fire and leaving the hoses coiled up.

Rabu, 28 Juli 2010

David Leonhardt writes that Kindergarten matters

From the encouraging article:

On Tuesday, Mr. Chetty presented the findings — not yet peer-reviewed — at an academic conference in Cambridge, Mass. They’re fairly explosive.

Just as in other studies, the Tennessee experiment found that some teachers were able to help students learn vastly more than other teachers. And just as in other studies, the effect largely disappeared by junior high, based on test scores. Yet when Mr. Chetty and his colleagues took another look at the students in adulthood, they discovered that the legacy of kindergarten had re-emerged.

Students who had learned much more in kindergarten were more likely to go to college than students with otherwise similar backgrounds. Students who learned more were also less likely to become single parents. As adults, they were more likely to be saving for retirement. Perhaps most striking, they were earning more.

All else equal, they were making about an extra $100 a year at age 27 for every percentile they had moved up the test-score distribution over the course of kindergarten. A student who went from average to the 60th percentile — a typical jump for a 5-year-old with a good teacher — could expect to make about $1,000 more a year at age 27 than a student who remained at the average. Over time, the effect seems to grow, too.

The economists don’t pretend to know the exact causes. But it’s not hard to come up with plausible guesses. Good early education can impart skills that last a lifetime — patience, discipline, manners, perseverance. The tests that 5-year-olds take may pick up these skills, even if later multiple-choice tests do not.

Two really important points here: (1) early education does seem to matter; (2) the multiple choice tests we give older students may be deeply flawed. This is particularly problematic if these later tests are the foundation for evaluating our educational system.

The Hidden Leverage of Mortgage Securitization

Ed Glaeser has a nice piece about the debate over whether securitization should get the blame for the subprime mess. But it doesn't address one of the problems created by securitization: hidden leverage.

When banks (commercial and investment) sold off mortgage backed securities, they got them off their balance sheets, and so there was a pretense that they were no longer liabilities. But in order to sell the MBS, the lenders had to offer repurchase agreements, which said that if there was something materially wrong with the loan underwriting, the investor could return the mortgage backed security to the lender at par. Lenders also often kept residual positions of mortgage backed securities, meaning that to reassure investors, the lenders (i.e., the sellers of the securities) would take first loss positions.

Both repurchase agreements and residuals effectively increased the leverage taken on by lenders. Let me illustrate: suppose a lender has an whole asset and capital of ten percent, and the asset loses one percent of its value. The lender takes a ten percent hit against capital, because it is levered at 10 to one. But now suppose it takes a first loss position of ten percent on residuals, and the mortgage underlying the residuals lose one percent of value. The residual loses ten percent of its value, which means it wipes out the capital that is implicitly backing it. The combination of ten percent capital and a ten percent first loss position implies actual leverage of [updated: 100 to 1].

Ironically, the fact that financial institutions ate some of their own cooking--something that should have mitigated moral hazard--made them more vulnerable.

Jumat, 23 Juli 2010

Raphael Bostic on housing tenure policy

From Newsweek:


Another senior HUD official was more direct in an interview with the Washington Post recently: "In previous eras, we haven't seen people question whether homeownership was the right decision. It was just assumed that's where you want to go. You're not going to hear us say that."

That official was Raphael Bostic, a leading scholar on home finance [rg note: and USC professor] and key policy adviser. An NPR report on Thursday morning said senior officials have acknowledged that their HAMP plan was largely a failure, and were leaning toward policy goals that promoted renting rather than buying. As a result, the report said, Fannie and Freddie might be entirely liquidated.

Kamis, 22 Juli 2010

No people with memory loss in my back yard

In the midst of doing research on how NIMBYs fight facility for housing the elderly, I came across this story from last March in the Minneapolis Star Tribune:

When a released sex offender plans to move in next door, or a drug-treatment center is scoping sites for a new halfway house, a neighborhood's red flags invariably follow.

Now, the list of objectionable neighbors is growing.

In the face of overwhelming opposition from residents in an upscale community called Stonemill Farms in eastern Woodbury, plans for a 45-unit assisted-living facility for people with Alzheimer's disease and other forms of dementia have been put on hold.

The Alzheimer's facility is the latest in a growing list of projects across the metro that are meeting resistance from neighbors who perceive a threat to their communities or fear their property values will erode.

A decision on whether to recommend the Woodbury project for approval was to go before the city's Planning Commission on April 5, but the developer on Wednesday asked for more time to address issues, including concerns raised by neighbors, said Eric Searles, associate planner for Woodbury.

The move follows nearly a month of intensive protests and petitions by neighbors who mainly object to locating the facility in a failed retail site near a day care center and across the street from an elementary school. Many have also expressed a sense of betrayal that the original plans for the community never envisioned an assisted-living facility.

The facility would go into a dead retail center: turning vacant space into useful space usually improves neighborhoods. The idea that Alzheimer's patients pose a risk to children is beyond preposterous. I understand having land use controls so that property owners don't have to deal with genuine nuisances, such as oil refineries. But what kind of people seek to deny the infirm a decent place to live? One hopes that once these neighbors are stricken with Alzheimer's, they retain enough of their long term memory to remember how badly they behaved.

Selasa, 20 Juli 2010

As I read the Washington Post "Top Secret America" series...

...I can't help but wonder how much deadweight loss this is all creating. The theatrics one encounters in airports also seems like it creates frictions that must have an impact on the economy--the ability to travel freely matters to economic productivity, and we travel less freely than we did ten years ago.

Fans of Ronald Reagan maintain that he got the Soviets to destroy themselves by making them spend so much on their defense (I think containment might have also had something to do with it). While as a fraction of GDP, our defense, security and intelligence spending is much smaller than the Soviet defense apparatus, the "invisible" impact of this stuff on the economy must be material. I some days wonder if we are doing exactly what Osama bin Laden wants us to do.

Sabtu, 17 Juli 2010

How Economics is better than Nassim Taleb says it is

The Black Swan is a great book, and deserves the hype it has received. It also features lots of nasty comments about economics, most of which the profession deserves.

But economics training (or at least my Wisconsin economics training) teaches empirical skepticism (something Taleb advocates) all the time. We worry about mis-measurement of variables, omitted variables, selection, reverse causality, and distributions all the time. We think hard about things we don't observe--in my context, when I think about measuring house prices, I worry about the fact that we only observe houses that actually sell. We do non-parametric statistics, and we reject the assumption of normality on a regular basis.

As a result of all this, economics has actually helped us understand certain things better, at least within the realm of applied microeconomics. One a lighter note, let me state an untestable hypothesis--of all the "silent" music that has been written, none has been better than J.S. Bach's.

Jumat, 16 Juli 2010

What I would have told the BBC about the Apple iPhone antenna, if they'd actually wanted to hear it

I got an email this morning from BBC World Service radio, asking if I'd like to participate in a debate to "discuss whether the Apple bandwagon is grinding to a halt" in the wake of the iPhone antenna problem. I said sure, and they asked a couple of questions about my views.

Unfortunately, when they saw my reply, they decided that my opinions were too similar to those of Computerworld columnist Mitch Wagner (link), who was also appearing on the program. It wouldn't lead to a good debate. They were very polite about it, and there are no hard feelings on my part.

(By the way, Mitch pointed out the most interesting line I've seen so far on the antenna issue -- Microsoft COO Kevin Turner compared the iPhone 4 to Windows Vista. "It looks like the iPhone 4 might be their Vista, and I'm okay with that." (link) That single sentence summarizes so much of what's wrong with Microsoft today: grasping at straws, in denial, not focused on what they must do to win, and a tin ear to what their comments sound like in public. The scariest thing is, I think they might actually believe the stuff they say.)

Anyway, back to Apple. I thought it would be good to share my thoughts that were too boring for the BBC. If they'd put me on the air, it would have gone something like this:


Q. On a scale of 1 to 10, how bad is this for Apple?

A. About a 1.5, with 1 being utterly meaningless in the long term. Unless there is some huge, hidden problem that Apple still isn't telling us about, the story is now over.


Q. One newspaper headline here goes 'Apple has lost its touch.' Is that fair?

A. It goes beyond unfair, it's utterly ludicrous. Apple just shipped the iPad, a major new category device, and it's selling far better than most people (including me) expected. For comparison, the Apple Macintosh, which we all cite as a huge success today, sold about 70,000 units in its first hundred days of availability (link). The iPad sold 70,000 units in the first four hours (link).

Most companies would kill to lose their touch that way.

If you want to look at a company that has lost its touch, check out BP. Or Toyota. Or Dell, which allegedly shipped twelve million computers that it knew were destined to fail (link). But even that sort of huge mistake isn't usually enough to kill a company. Remember when Intel knowingly shipped millions of Pentium processors that couldn't do math properly (link)? No, you don't remember? I rest my case.

If you want to know what Apple would look like if it lost its way, go back in time and look at the company in about 1997.

But Apple today? They made a mistake, and they handled it poorly. Hopefully they've learned from it. Giving everyone a free case is a reasonable solution. The cost of the cases is less than the cost of the accumulated bad PR (not to mention the cost of the class action lawsuits, which were the next step).

The average customer pays almost no attention to this sort of inside-the-beltway news. A company has to screw up repeatedly over a long period of time, or do something flagrant like killing people, in order to really damage its image. As long as there isn't any other big problem hidden in Apple's products, I think this story will be forgotten in a few months.


That's not to say everything is going great for Apple...
-Google Android is gaining momentum.
-Many mobile developers would love to have a better alternative to the App Store.
-Various governments might decide its walled garden approach to computing violates the law.
-At some point, I still believe the web is going to make proprietary platforms like Apple's less relevant.
-Apple is getting so big that I wonder how long it can continue to grow at the same rate.

And maybe most importantly, Apple is gradually learning that the rules of behavior for a successful industry leader are different than the rules for a scrappy upstart. Aggressiveness that's cute in a five-year-old kid will get a 25-year-old football player arrested.

Compounding Apple's challenge, its very effective marketing and design has set a higher standard for its products than the one applied to most other companies. Apple needs to learn that standing in the spotlight shows off your scars as well as your beauty marks.

One step in that process if for Apple to be humbler and more open. I think that's a lesson they started to learn this week.

(PS: I listened to BBC World's coverage of the iPhone this evening (link). One report called the antenna "the biggest PR disaster in Apple's history," which shows that BBC reporters have very short memories. As for what Mitch said, yeah it would have been a boring debate.)

FOUR LESSONS FROM FAILED BRANDS

For today’s marketers, new brand failures imply burning shame. But many in the past have learnt lessons and succeeded after the great tumble; the failures were worth it!

A whole generation of thoroughbreds has been evangelised to practice perfection. Getting it right, every time, has become a religion. Amelioration is the word for the present. It’s really not an age for failures – not for men, not for companies, and worse, not even for the most generic of brands. For marketers, failure of a brand means nothing less than blasphemy! But do such outcomes call for unforgivable sentences for the makers of brands? Granted, no brand failure is praiseworthy, but lessons on “how to succeed” that can be learnt from most brand failure tales are worth a read.

LESSON #1: Don’t kill an established brand simply to introduce a new one; brands take years to build and are invaluable.
The most classic example when it comes to failure of a brand is the case of the New Coke in 1985, which is quoted by some as the biggest brand collapse of all times. 100 years after Coke was launched, things had changed; competition had. There was Pepsi-Cola willing to fight Coke. By the time Roberto Goizueta became the CEO in 1981, Coke’s numero uno status had started appearing vulnerable. Coke was fast slipping and the prime reason was Pepsi- Cola. Pepsi had already proven to the world in the 1970s with its Pepsi Challenge, how blindfolded drinkers preferred the sweeter Pepsi-cola over Coke. It was only Coke’s superior distribution network that was keeping it ahead (for instance, there were still more Coke vending machines in US than Pepsi-Cola’s). Goizueta deciphered the problem to be the ‘product’ itself. He assumed that Coke would lose out to Pepsi soon because of its taste. That was 1984. A year later, the Atlanta-based giant decided to give to the world the ‘New Coke’, which was sweeter and closer to Pepsi- Cola in taste. Coca-cola conducted 200,000 taste tests in the pilot testing stage. The results made Goizueta smile. The research had proven how the New Coke was preferred over Pepsi-cola. Goizueta, drunk on the forecasted success of the New Coke, even decided to halt the production of the old Coke. Following the April 23, 1985, launch, a large percentage of Coke-drinkers in US decided to boycott the new product. A few days later, when the production of the old Coke was halted, this further angered the masses – a double blow! New Coke didn’t sell, and Goizueta was forced to get the old version back. “We have heard you,” confessed Goizueta on July 11, 1985. Even Donald Keough, the-then COO of Coca- Cola, publicly said, “All the time and money and skill poured into consumer research on the new Coca-Cola could not measure or reveal the deep and abiding emotional attachment to the original Coca-Cola felt by so many people.”

So, what was wrong with the New Coke? To begin with, the 101 year-old ‘Old’ Coke defined American glory and the passion for it was what had kept the brand on its wheels despite its taste being inferior to its rival’s. Coca Cola’s top brass forgot in one instant that it takes eons to build a brand; and dramatic one-trick-ponies, like the New Coke, stood no chance in front of the Old Coke due to this outstanding brand value. Coca Cola in reality should have concentrated on the original brand’s perception and simply delivered what the consumers needed without trying to over-innovate. They should have not looked around for problems with the product when it didn’t have any – having an inferior taste is not an issue, having an inferior perception is; as Jack Trout, author of Differentiate or Die, writes, “Marketing is a battle of perceptions, not products.” Any attempt to foolhardily copy rivals is wrong. With New Coke, the company was simply trying to clone Pepsi-Cola. But what Goizueta got right is that he showed fearlessness when it came to reverting to the classic Coke. That helped establish a “New” bond between the brand and its consumers. Today, Coca-cola is the most valued brand on the planet, valued at $64.9 billion by Interbrand (as of 2009).

LESSON #2: Don’t over-innovate and provide to consumers features they do not desire.
The legendary Ford Motors also went through an expensive embarrassment, known to be the most hyped-up failure in the auto industry till date. ‘There has never been a car like the Edsel’ is what Ford promised through its ads. The publicity began an year before the Edsel was launched (in September 1957). To increase crowd curiousness, even dealers were strictly warned to keep the cars “under covers” till the time they were given the permission. Expectations were high. The pre-publicity initially showed promise and people rushed into Ford’s showrooms on the date of launch to catch a glimpse of the new model from Ford, which was supposed to be revolutionary – the footfalls touched 3 million in US, in just the first seven days post-launch! The model was supposedly an example of innovation in the car industry. It had a number of new features which were the first in the industry – a rather “different” front-end grille, self-adjusting brakes, an electronic hood release and an extremely advanced and powerful engine for a mid-segment car. It was meant to be a treat for auto-lovers.

The market however didn’t want the “new” features. The car disappointed the potential buyers, who in turn disappointed Ford. Edsel sold just 64,000 vehicles within a year of its launch, which spelled a big failure for the brand (as opposed to a sales target of 200,000 units). Henry Ford II tried harder, made more changes, innovated the model further and launched two new versions of the Edsel in 1959 and 1960. Result: sales fell further (the Edsel 1959 version sold 44,891 units, while the 1960 model sold a shameful 2,846 units). The Edsel had to be relegated to the grave. The last advertisement of the model was seen in November 1959, post which, Edsel was scrapped.

So what were the mistakes? With the new model, Ford offered too much to buyers, which automatically resulted in Edsel’s price tag shooting northwards – unreasonable for the sceptic buyers. There was inadequate market research conducted and Ford failed to understand what the customers really desired. Surprisingly, the company spent millions of dollars on collecting possible names for the new car before coming up with a ghastly pale one like Edsel (which was the name of Henry Ford II’s father!). Secondly, the company created a hype around an ‘untested’ product. Gayle Warnock, PR Director for the Edsel launch, said thus in a confession much later: “I learned that a company should never allow its spokespersons to build up enthusiasm for an unseen, unproven product.” Edsel also fell fl at on the “Style” differentiation front, and ignored visual appeal completely – a huge mistake, especially when we talk about cars. However, Ford learnt its lesson soon and made no mistake with the Mustang, which became one of the legendary trademarks of Ford. It was launched in 1964, and sold 500,000 units in just the fi rst year of its rollout. A better name, less experimentation with innovation, better looking (rather simple looking), and most importantly, it was affordable for the technology and style it offered.

LESSON #3: Providing the best quality product in the industry will get you nowhere, unless you remember Kotler’s basic ‘P’remises and accept that the ‘product’ makes up only one of the Ps in the marketing mix!
For this, a brilliant failure has been in the consumer electronics domain. In 1975, Sony developed a home video recording equipment for consumers, which ran on Betamax technology. It sold 30,000 units in US in the first year. Over the next two years, five companies, which were Sony’s rivals, released the Video Home System (VHS, initially patented by JVC). The sound and video quality of the VHS launched were inferior to that of the Betamax, but the convenience of use and wide availability made it a more attractive buy for the consumers. By 1987, VHS had captured 95% share of the US market. Sony finally withdrew the Betamax and announced plans to get into the VHS market in January 1988. The mistake that Sony made was that not only did it refuse to associate with any other electronic major (while JVC shared its VHS technology with others), it also refused to look beyond its product quality. Kotler didn’t make his millions for nothing. He proved long back that the product only accounts for that much. There are many more Ps that play significantly greater roles, if not more, than the quality of the product.

LESSON #4: Diversify yes, but with some transferred competencies; doing otherwise would be a sure shot failure.
McDonald’s learnt a lesson with the failure of its Arch Deluxe burger (which it marketed as the ‘Burger with the Grown-up Taste’) in 2001. The core concept was to bring-in “sophistication” into the brand, so that it could provide a burger which was not linked to kids. Even the ads showed children ignoring the product. Did McDonald’s succeed? Surely not. The exercise was one of the biggest disaster launches of Mc- Donald’s. And clearly because the global giant forgot to transfer competent strengths in their attempts to diversify. A saying goes that you can sell new products to your old target group, you can sell old products to your new target groups, but you simply cannot sell new products to new target groups that easily. McDonald’s forgot that its brand offerings stood for “simplicity and convenience” and not “sophistication”, and especially when for ages they had developed their competence in understanding the buying behaviour of kids. As I mentioned, diversification is great, provided there is some sense to it – in other words, a leveraged competence.

All the above examples were failures, but surely, lessons learnt. It doesn’t matter if any of your brands have failed. It’s not some hazard that has struck an adventure-seeking corporation for the first time. Your shareholders and employees know that there is as much chance for your new product to fail, as there is for a snowfall on a cold Christmas night in the Alps. Remember, Thomas Edison conducted over 10,000 experiments before he managed to invent the light bulb, which brought him much fame and wealth. It was also his first success, which ultimately led to what we know as the fourth-most valued brand on Earth today - GE (valued at $47.8 billion in 2009 as per Interbrand). Experiment. Fail. Learn. Experiment again. Don’t repeat your failure. Succeed! It’s that simple with a brand.

Jumat, 09 Juli 2010

Yves Smith on the Default of the Rich

She writes about this morning's story in the New York Times:


Another message here is that high income borrowers aren’t taking the Freddie/Fannie/bank bluster about strategic defaults seriously. Recall that the latest threat was that they would pursue deficiency judgments, as in sue borrowers who defaulted where the proceeds from the sale of the home, net of expenses, did not cover the mortgage debt. Now in some states that is not permitted (purchase money mortgages in many states are non-recourse, but refis never are). But independent of that, it is expensive to pursue defaulting borrowers, and if the borrower really is broke (say he had medical emergency, a business failure, or a costly divorce) litigation is just a costly wild goose chase. The most obvious group to pursue, nevertheless, would be defaulted owners of big ticket homes in affluent areas. They clearly regard the odds of legal action as low.

She slips in an important sentence--that refinanced mortgages lose their non-recourse status. Refinancings swamped purchase money mortgages in 2004 and were a substantial share of the market in 2005-2006. It would be interesting to see an estimate of the share of mortgage debt outstanding in "non-recourse" states that actually now come with recourse--I would imagine it is well over 50 percent. One might think that "sophisticated" investors are more likely to refinance than the general public (I did a paper with Lacour-Little some time ago that suggested that this was true), and so that "strategic" default could be particularly costly for this group. Certainly, if I were a lender and observed a borrower with a $1 million plus loan with recourse, I would go after the borrower for a deficiency judgment.

There is a broader point here as well. I have been reading arguments that America got itself into trouble because it is too borrower friendly, and that countries that avoided trouble, such as Canada and Germany, did so because of recourse. But the fact is that for all intents and purposes, the US is a recourse country too.

Kamis, 08 Juli 2010

Two more thoughts about The Big Short

(1) One of Hayek's most compelling arguments for the virtues of markets over government is that markets (via prices) reflect the constantly shifting preferences of millions of agents, and as such are both efficient and democratic. But the market for Collateralized Debt Obligations and Credit Default Swaps did not reflect the preferences of millions--they reflected the views of a very small number of people, some of whom had enormous market power (for awhile, anyway). A takeaway from the book is how large institutions could rig prices of over-the-counter investments for long enough periods to do substantial damage.

(2) While I loved the book, and will indeed use it in class, it may suffer a bit from ex-post thinking. The heroes of the book, Michael Burry, Steve Eisman, Greg Lippman, bet early and often against subprime mortgages, and made lots of money as a result. Ex post, their bets seem obvious, and perhaps ex ante, they should have seemed obvious. My strong suspicion is that Burry--who went to the bother of actually reading and analyzing offering circulars--really did know that he had a positive NPV bet ex ante. And loan originators surely knew they were underwriting junk, because documentation was so week. But perhaps not even Burry knew how big his pay-off would actually be.

Jumat, 02 Juli 2010

Steve Malpezzi's Reading for Life

It is on the Wisconsin Real Estate blog:

13. Ahamed, Liaquat. Lords of Finance: The Bankers Who Broke the World. Penguin Press, 2009.

12. Akerlof, George A. and Robert J. Shiller. Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism. Princeton Unversity Press, 2009.

11. Bartik, Timothy J. Who Benefits from State and Local Economic Development Policies? Kalamazoo: W.E. Upjohn Institute for Employment Research, 1991.

10. Cronon, William. Nature's Metropolis: Chicago and the Great West. W.W. Norton, 1991.

9. Gomez-Ibanez, Jose A., William B. Tye and Clifford Winston (eds.). Essays in Transportation Economics and Policy: A Handbook in Honor of John R. Meyer. Brookings, 1999.

8. Green, Richard and Stephen Malpezzi, A Primer on U.S. Housing Markets and Policy. The Urban Institute Press for the American Real Estate and Urban Economics Association, 2003.

7. Hulme, Mike. Why We Disagree About Climate Change: Understanding Controversy, Inaction and Opportunity. Cambridge University Press, 2009.

6. Lewis, Michael. The Big Short: Inside the Doomsday Machine. W.W. Norton, 2010.

5. Reinhardt, Carmen M. and Kenneth S. Rogoff. This Time Is Different: A Panoramic View of Eight Centuries of Financial Crises. Princeton University Press, 2009.

4. Slemrod, Joel and Jon Bakija. Taxing Ourselves: A Citizen's Guide to the Debate over Taxes. MIT Press, 2008.

3. Tufte, Edward R. The Visual Display of Quantitative Information. Chesire, Connecticut: Graphics Press, 1983.

2. Wessel, David. In Fed We Trust: Ben Bernanke's War on the Great Panic. Crown Business, 2009.

1. http://wisconsinviewpoint.blogspot.com/

Ken Rogoff thinks the BP spill might produce a groundswell for a carbon tax...

...but Mark Thoma is not so sure [Rogoff's take is here].

I am actually more inclined to agree with Rogoff on this one. When environmental problems are easily visible, they seem to generate political consensus for action. The air quality in Los Angeles, which was obviously awful 30 years ago, is much better currently--the vast majority of days are quite clear now(although we still have the problem of invisible small particulates). The 1952 smog disaster led to major policy changes in the UK. The BP disaster could similarly mobilize policy.

Mark could still be right about this--I just hope he is not.

Kamis, 01 Juli 2010

I am putting Michael Lewis' The Big Short on my FBE 589 reading list for this fall

So many great lines. Perhaps my favorite (from pp 151-152):

The only interested parties missing from the conference were the ultimate borrowers, the American home buyers, but even they, in a way, were on hand, serving drinks, spinning wheels, and rolling dice. "Vegas was booming," said Danny. "The homeowners were at the f**king tables."

A couple of thoughts. First, I would bet (forgive the word) that gambling habits would be a good underwriting variable for predicting mortgage default. If lenders could know whether someone gambled more than one percent of their annual income in casinos, at the race track, or on lottery tickets, it might say something about propensity to repay a mortgage [full disclosure, I bet $18 once or twice a year at Santa Anita].

Second, I do remember being mystified at what happened to house prices on my street in Bethesda, Maryland. When my wife and I moved there in 2002, we thought it was awfully expensive, but decided that the schools and proximity to metro made it worth while. We swallowed hard and got a mortgage where our mortgage payments + property taxes were about 20 percent of our gross income. My wife was an attending physician at a large medical center, and I was a finance professor at George Washington.

By 2005 or so, the price of houses on our street had increased by about 2/3 (because all houses were 30s vintage colonials, every sale we observed was a good comp). The mysterious part was the buyers were young one-earner households. I wondered how on earth they were "affording" their houses. Now we know.

I don't blame Goldman Sachs for taking 100 cents on the dollar of its Credit Default Swaps from AIG....

....I blame the government for offering it. I understand that there was a need to keep Goldman stable, but jeez.