Soon-take Chang Describes South Korea's Countercyclical Housing Finance Policy

His paper is very interesting.  Section 3 begins:

Macroeconomic instability greatly affected the financial crisis in Korea at the end of 1997. The need for macroprudential supervision in Korea was highlighted by the bursting of the credit card bubble in 2003.

During the credit card lending boom, the supervisory authority did not respond adequately to the growth of household delinquencies stemming from the reckless behavior of credit card issuers.

The authority was not sensitive to systemic distress originating from households because its prudential oversight was primarily focused on the soundness of individual financial institutions (Lee, 2006). This case underlined the importance of placing greater emphasis on detecting early warning signs before the build-up of excessive imbalances continued for too long (Kang and Ma, 2009).

After the credit card bubble burst, there was a new, widespread appreciation of macroprudential policy. Mortgage loans had increased sharply since 2000, which undermined the stability of the overall housing market. The supervisory authority has taken steps to prevent overheating in mortgage lending and to minimize the risk of loan default.

First, the supervisory authority raised the risk weighting for mortgage loans. The authority also raised the minimum loan loss reserve ratios for banks’ household and corporate loans that were classified as normal and precautionary in November 2002 and in December 2006.

Second, in 2002, the authority started to reduce the maximum LTV ratio for mortgage loans, from approximately 75 percent to 40 percent in the Seoul metropolitan area.

The authority imposed additional measures, such as a ceiling of 40 percent on the DTI ratio for certain types of borrowers, as well as other restrictions on granting mortgage loans and maturity extensions on existing mortgage loans for properties in the Seoul metropolitan area. These various restrictions on mortgage lending were imposed on both banks and non-banking financial institutions.

Note that Korea's loan terms were conservative by OECD standards even before the tightening.   But given how well Korea's economy has survived the downturn, they may be onto something.

From The New Yorker: Wisconsin: The Cronon Affair

Wisconsin: The Cronon Affair

I was especially taken with this:

Second, the Republicans seem remarkably fragile. A professor writing a blog post gives them the shivers. It’s a good thing they chose politics, and not the kind of career where the going can really get rough. Professors, for example, teach their hearts out to surly adolescents who call them boring in course evaluations and write their hearts out for colleagues who trash their books in snarky reviews. These Wisconsin Republicans may never have survived ordeals like that. Happily, Cronon has been toughened by decades of academic life. He’ll be blogging—and teaching and writing—long after Wisconsin voters have sent these Republicans back to obscurity.

There are days when I wonder if tenure is an anachronism. The Cronon affair strongly suggests to me that it is not.

Shani Hilton on Gentrification in DC

Worth reading....

Confessions of a Black D.C. Gentrifier

The Census estimate for the US for 2009 was less than the Count for 2010

The estimate, at 307,006,550, was .6 percent less than the count of 308,745,538.  Yet for the ten largest cities, the estimate was 4 percent higher than the count.  Again, it would be nice no know whether cities were overestimated in 2009 or undercounted in 2010. 

To finish the previous post's thought.

The 2009 population estimate for Detroit was 821,792.  The 2010 count was 713,777.

Overestimates or Undercounts? Does this mean Detroit didn't lose quite so many people?

When the 2010 census count for New York City came out today, it struck me as a little light.  So I decided to compare the 2009 population estimates for the ten largest cities in the country againt that 2010 counts.  In all cases expect San Diego, the census count was lower than the 2009 estimate.  The average difference was four percent, which is four years of population growth at the national growth rate.  Here are the numbers: the first column of numbers is the 2009 estimate; the second is the 2010 count.  What is going on here?

New York City	8,391,881	8,175,133
Los Angeles	3,831,868	3,792,621
Chicago	2,851,268	2,695,598
Houston	2,257,926	2,099,451
Phoenix	1,593,659	1,445,632
Philadelphia	1,547,297	1,526,006
San Antonio	1,373,668	1,327,407
San Diego	1,306,300	1,307,402
Dallas	1,299,542	1,197,816
San Jose	964,695	945,942

Is Inside Job correct about the corrupting influence of money on the economics profession?

I think it may be, but not in the way implied by the movie.  Charles Ferguson makes a big deal out of the fact that Glenn Hubbard, Frederic Mishkin, Larry Summers and Martin Feldstein were paid well by financial institutions and governments who wound up becoming major contributors to the crisis.  HIs implication is that all of these well-known economists ignored the danger signals arising from financial deregulation because they were well paid to do so.

I really doubt this is true.  I say this because I remember thinking at the time it was passed that Gramm-Leach-Bliley was on net good policy, because is was (1) necessary in order to allow New York to compete with London and (2) I thought people at places like Goldman Sachs (especially Goldman Sachs) were smart and competent and would protect their franchise.  I was, at the time, very impressed with Alan Greenspan and Robert Rubin.    I had no financial stake at all in any of these beliefs, other than the fact that I wanted my kids' college fund and my wife and my retirement fund to do well.

And by all indications, the economy was doing well.  Unemployment fell to historically low levels, the employment to adult population ratio hit its zenith, and low wage workers were seeing increases in income.  I even remember walking to work in Madison in 1999 or so, and thinking to myself, "could the economy get any better than it is?"  I am thus in no position at call to complain about others having the same view.  All this said, Ferguson was spot on when he called for economists to disclose financial interests that might in any way be related to their research.

But the problem, I think, is far more insidious.  For people who are both successful and reflective, there must often be an undercurrent of doubt as to whether the success is "deserved:" is it a product of virtue or of luck. The neoclassical paradigm allows successful people to feel good about themselves.  It is not much of a leap to infer from it the proposition that people in a neoclassical world can make their own choices, and that when they make "good"choices, they are rewarded, and when they make "bad" choices, they are not.  The number of important choices available to us are, however, limited.  I try to remember that I did not get to choose the country where I was born, I did not get to choose that I had loving, well-educated parents, I did not get to choose that I grew up in a safe community, and I did not get to choose that I have never been seriously ill.  The problem with economics, I think, is not the money people take from various countries and companies, but a broader lack of reflection on the circumstances that produce outcomes.

To me the most disturbing aspect of Inside Job is not the revelation of consulting relationships, but the fact that the economists interviewed by Ferguson seem not to have changed their view of the world even a little.      Feldstein's statement that he had "no regrets" about AIG was the ultimate expression of this.    

Planes, Trains, Automobiles, George Will and Paul Krugman

I haven't blogged in awhile, so I am catching up a little....

Paul Krugman writes two blog posts about rail, one of which I like, and one of which I don't.

This one is, I think, correct:

Oh, boy — this George Will column (via Grist) is truly bizarre:

So why is America’s “win the future” administration so fixated on railroads, a technology that was the future two centuries ago? Because progressivism’s aim is the modification of (other people’s) behavior.

Forever seeking Archimedean levers for prying the world in directions they prefer, progressives say they embrace high-speed rail for many reasons—to improve the climate, increase competitiveness, enhance national security, reduce congestion, and rationalize land use. The length of the list of reasons, and the flimsiness of each, points to this conclusion: the real reason for progressives’ passion for trains is their goal of diminishing Americans’ individualism in order to make them more amenable to collectivism.


As Sarah Goodyear at Grist says, trains are a lot more empowering and individualistic than planes — and planes, not cars, are the main alternative to high-speed rail.

And there’s the bit about rail as an antiquated technology; try saying that after riding the Shanghai Maglev.


But anyway, it’s amazing to see Will — who is not a stupid man — embracing the sinister progressives-hate-your-freedom line, more or less right out of Atlas Shrugged; with the extra irony, of course, that John Galt’s significant other ran, well, a railroad.

Will nowadays seems to get the vapors over anything like a public good.  Air travel is indeed the alternative to rail, and it really is awful. The Acela in the Northeast is often prefrable to air travel, and my understanding is that it is profitable.  Perhaps similar quality service from, say, San Diego to Ventura County, along with a few other high density corridors, would work (I am skeptical about the ability of high speed rail to compete with Southwest Airlines, but let's leave that for another time).  Cars, moreover, do indeed produce environmental damage and congestion that is not priced properly,  European gas taxes and Singaporean congestion fees make lots of economic sense.  One could even use the revenue to hold low-income people harmless from the increased cost of auto transporation.

But in his next blog post, Krugman says:

And don’t get me started on how much more freedom of movement I feel in New York, with subways taking you almost everywhere, than in, say, LA, where you constantly have to worry about parking and traffic.

Well, trains take you almost everywhere on the West Side of Manhattan.  The trains are also mostly radial lines into Manhattan--try going from someplace in Queens to someplace in Brooklyn, and you will see that trains are not so wonderful.  Look, I think the New York City Subway System (and Metro North and the Long Island Rail Road and Path), are great things, but I am not sure how "liberating" it is to live in New York is you can't afford to live in Manhattan. My daughters lived in Brooklyn last summer, and getting around was not a walk in the park for them (except when they walked through a nearby park).

So I decided to look at American Community Survey Data (click on the spreadsheet) comparing the benighted among us who live in LA with those liberated New Yorkers.  The mean travel time for workers in Los Angeles County is 29 minutes.  In New York County it is 30 minutes.  In the four boroughs outside of Manhattan, it is 42 minutes in Kings, Queens, and Richmond Counties, and 41 minutes in Bronx County.  In metropolitan Los Angeles, 11 percent have a one-way commute of more than one hour; in metropolitan New York, almost 20 percent have such a long commute.  


[Update: in response to Minka's comment, I looked up the average one-way commute in metro San Francisco--it is the same as LA.  As for LA being a cultural wasteland, anyone who would say that after living here is willfully ignoring the music, theater and restaurant scene here.  LA is also far more diverse than San Francisco, which for me makes it a more interesting city.]

 


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Mike Lea and Tony Sanders diss the 30 year fixed rate mortgage

They do so in a paper.  I think Mike and Tony are smart guys.  But I think their reasoning is flawed here..

They basically argue that Fannie and Freddie were responsible for the 30-year fixed rate mortgage, and that they have been a catastrophe, and that therefore the 30-year fixed rate mortgage was a catastrophe.  But had FF done two things--stuck to prime 30-year fixed rate mortgages and matched the duration of their liabilities to the duration of their assets by using callable debt--they almost certainly would not have imploded.

FF imploded because they invested in AAA tranches of low quality mortgages (which were originated and securitized in the private sector) and Alt-A mortgages, and because they had to roll over too much short-term debt in 2008.

Lea and Sanders also argue that there is "nothing special about housing finance."  I am not sure I agree.  It is the one method households have to take on large amounts of leverage, and households are not in the position to hedge risk (not that our financial institutions proved to be particularly good at hedging).  

THE PAYCHECK SCANDAL

IT’S AN OFT-ASKED QUESTION. GUESS WHAT, I DECIDED TO ANSWER IT AGAIN. HOW MUCH SHOULD CEOS BE PAID? DO THE HIGHEST-EARNING CEOS DELIVER THE HIGHEST RETURNS TO SHAREHOLDERS? HERE’S A DUMMY’S GUIDE TO WHETHER THE BOARD SHOULD PROMISE FAT PAYCHECKS TO THE TOP MAN OR NOT.

Petty scandals are found aplenty in rich nations. It is no different in business; the synonymity is ironically nostalgic. The correlation is much the same with big scandals too. And much like activists raise their voices against one such prevalent scandal in politics – the fat perks doled out to politicians – there is a group that feels no different about CEOs of multi-billion corporations. They are right. Despite criticism about lack of corporate governance for years, by large, CEOs are swept into offices with a seven to eight figure sign-up membership. Only problem is – before their disappointing terms are over, the boardrooms are filled with the noise of who “could” be presiding over the next company dinner. The failed CEO departs, having stripped shareholders to the bone, and having collected millions (or billions) in fat paychecks & belly-bloating perks!

There are many names which surface in this debate of a mismatch between executive compensation and performance in the modern world. The fourth largest US corporation (in terms of revenues for 2009), General Electric, is one. When Jeffrey Immelt took over as CEO on September 7, 2001, everyone was hopeful. He was handpicked by Jack Welch, to lead GE into becoming the new global powerhouse conglomerte of the new millennium. GE was then valued at $415 billion, and was comfortably ahead of the #2 Microsoft (which stood at $335 billion). The company’s stock was trading at $42 a share on the NYSE. Under Immelt, the company has lost half its value (m-cap of $216.4 billion - a fall of 47.9%), and its share trades at just 48.5% of the level at which it did a day before he assumed office. The mistakes he made could be described as “basic” as far as Welch was concerned. Welch had made it clear that a GE CEO had only two tasks – allocate the right amount of capital in the right places, and choose the right people. Talk to GE trackers, and they point to two critical mistakes that Immelt has made all through his term. Those very two.

When Immelt took over, GE had $42 billion of capital invested in it. By 2009, this had increased to more than $163 billion. The problem was: GE Capital (GEC – which was Immelt’s top bet) had also borrowed hundreds of billions separately. What spoiled the party was that, with GE Capital under-performing, the return fell much below the cost. And the value destroyed is there for the world to see. Immelt had bet too big on making GE a “diversified financial entity”. After many wrong acquisitions and untimely investments on businesses of the future (like green energy), today, GE carries a debt load of half-a-trillion dollars – 232.9% more than its FY2010 topline. So how does GE reward Immelt? Actually, he has earned quite a gunny bagful.

In the past nine years, Immelt has taken home $179.68 million as compensation, making him one of the most overpaid bosses in corporate America. Translation: for every $1 he earned during his tenure, he destroyed GE’s m-cap by $1,105.29¢.

As per the 2010 Forbes’ Special Report on CEO Compensation (a study of the top 500 firms on the S&P, ranked according to CEOs’ efficiency towards returns to shareholders’ wealth), despite earning millions, Immelt was ranked ‘secondlast’ on the “Efficiency” parameter. Question is – did he deserve the pay he received? [Apparently, a combination of poor performance and high pay also makes you a favourite in the Obama camp. Despite better CEOs around, it was announced on January 21, 2011, that Immelt would head the economic advisory council, The President’s Council on Jobs and Competitiveness, a board earlier lead by former Fed Chairman Paul Volcker.]

Immelt is not the only one living his well-cushioned dreams in the boardroom of America Inc. at the cost of his investors’ dimes. My favourite punching bag is billionaire Steven Ballmer, CEO of Microsoft Corporation, who became the only non-owner employee (after Coca- Cola’s Roberto Goizueta) to become a billionaire based on stock options. He is currently ranked at #33 on the 2010 Forbes’ World’s Richest People list, with an estimated wealth of $13.1 billion. Ballmer, who has taken home more than $35 million in direct annual compensation since he took over in January 2000, has seen Microsoft’s m-cap reduce by 61.2% - from $556.8 billion to $216.1 billion, as of March 8, 2011. Similarly, Howard Schultz, CEO of Starbucks Corp., took home $127.99 million in the past 3 years, but during this period, the company lost 13.94% in m-cap. Michael Dell, who made $61 million during the past 5 years (besides the $4.03 billion in stock holdings), ensured that his shareholders got slimmer by 58.9% (Dell’s m-cap today stands at just $29.61 billion). Dell was once the world beater in selling PCs (it was #1 till early 2006). No more.


There are some CEOs, like Aubrey McClendon of Chesapeake Energy, who despite not having given their shareholders poison to drink, have definitely served bitter syrups to gulp (by not giving them enough value appreciation). Iven G. Siedenberg, CEO of Verizon Communications, managed such a peanut trick – he made $112.8 million in six years and managed to increase the company’s mcap by just 0.089% ($0.9 billion, to touch $101.8 billion) during the period. Therefore, for every dollar that he earned, he increased Verizon’s market value by $7,979 – only a fraction of Verizon’s revenue per average employee figure of $0.55 million for FY2010!

The classic list of failed chief executives leading billion-dollar corporations, is long. John C. Martin of Gilead Sciences (made $60.4 million in 2009 & reduced his company’s m-cap by 25.5%), Sol J. Barer of Celgene (made $8.7 million; m-cap fall of 9.5% in 2009), William H. Swanson of Raytheon Company (earned $18.6 million; m-cap fall of 15.7%), and many more adorn the list.

So, from the enterprise point of view, arises a question – how should the boards of companies like Cisco (which has shed 81.9% in value since Mar 2000), Intel (lost 77.13% since Aug 2000), Nortel (lost 100% of value since Jul 2000, amounting to $283 billion, and was forced to close shop in Jan 2009), Lucent (lost 96.1% since Dec 1999, to fall to $11 billion, before it was acquired by Alcatel in 2006), AIG (lost 72.48% since Dec 2000), AOL (lost 99.07% since Dec 1999) et al, be paying their CEOs?

Actually, the question should be – how much should the CEOs pay back?!

If you look at the Forbes Report on CEO Compensation, there are some striking observations. None of the top 100 earning CEOs (vide total compensation for the past five years) figure in the top 10 spots on the “Efficiency” scale. Compare this to the iconic Steve Jobs, who was ranked “last” in the list of individual earnings of CEOs for FY2009. That’s because he actually took home $0! To talk about the most productive CEOs, none of the top 10 “Efficient” CEOs even managed to break into the top 130 odd ranks of FY2009 top-earners!

So what does research have to say about the pay-performance mismatch? That answer is pretty straightforward. Most CEOs who earn big bucks don’t really return the favour in the form of value creation. In a report by Booz Allen Hamilton titled Reining in the Overpaid (and Underperforming) Chief Executive, Corporate Governance expert Nell Minnow, while talking about the downturn, suggests that the Board of Directors of Citigroup, Merrill Lynch, and other financial institutions had contributed to their own downfall and loss in value by creating compensation packages for their CEOs that did not punish them for failure. “These CEOs were guaranteed outsized exit and separation packages, regardless of how their firms performed. All the CEOs who failed got paid very well. Because the CEOs were pushing much of the risk to shareholders, this is what you get,” she says. In a paper titled, Rising CEO Pay: What Directors Should Do, Prof. Jay Lorsch of Harvard states, “Criticisms of CEO pay have two related themes: It is too high, and not related to company performance. Ask any thoughtful corporate board member what they are most concerned about these days, and it is not Sarbanes-Oxley. It is CEO pay. Directors worry because shareholders continue to express outrage.”

This is a clear warning to boards who have forgotten that compensation committees should focus more on what the shareholders will accept. In the NYSE Euronext CEO Report 2010, the issue of compensation has also been discussed at large. Here are some quick conclusions: “Insufficient transparency about risk taking and insufficient Board oversight are the top concerns of shareholders today, with executive compensation frequently mentioned by US CEOs - 63% of US CEOs & 41% of European CEOs feel that Executive compensation is one of the biggest concerns to their shareholders.” Another work by Profs.Michael Jensen of HBS & K. Murphy of The Univ. of Rochester, after an analysis covering the paychecks of 2,505 CEOs in 1,400 companies over a 15 year-period, proved that “the compensation of top executives is virtually independent of performance.” With respect to paying for performance, the authors argue, CEO compensation is getting much worse. This problem is more prevalent amongst larger firms, as an August 2010 paper by Carola Frydman of Sloan School (MIT) Dirk Jenter (Stanford), titled, CEO Compensation, states, “Although executive pay has increased across the board, the growth has been much steeper in larger firms.”

A study by The Corporate Library (a governance analysis firm headquartered in Portland, Maine), titled, Pay for Failure: The Compensation Committees Responsible, concludes that between 2001- 2006, 11 publicly-listed companies doled out $865 million to their CEOs, who in turn eroded a total of $640 billion in shareholder value. The accused were AT&T, BellSouth, HP, Home Depot, Lucent, Merck, Pfizer, Safeway, Time Warner, Verizon and Walmart. Each of the companies
paid its CEO more than $15 million in 2005 & 2006, delivered a negative return to stockholders during the period, and underperformed industry peers. The boards claim innocence, but their ignorance is unacceptable.

Confirms Stanford’s Dr. Robert Daines, in his report titled, The Good, The Bad and The Lucky: CEO Pay & Skill, “Cases of excessive CEO pay reflect a systematic social problem of ‘fatcat’ CEOs skimming money at shareholders’ expense and therefore a systematic breakdown of governance.” After conducting an empirical, decade-long analysis, Prof. Lucian Bebchuk of Harvard Law and Prof. Yaniv Grinsten of Cornell, in their paper titled, The Growth of Executive Pay, conclude that, “Had the relationship of compensation to firmsize, CEO performance and industry classification remained the same in 2003 as it was in 1993, mean compensation in 2003 would have been only about half of its actual size.”

In their the book titled, Pay without Performance: The Unfulfilled Promise of Executive Compensation, Prof. Bebchuk & Prof. Jesse Fried (Univ. of Calif. Berkeley), argue that “Executive compensation is set by CEOs themselves rather than boards on behalf of shareholders...” This is unacceptable to the ordinary shareholder.

What however comes as good news is that the SEC has proposed to make the situation more friendly for investors. In July 2010, it proposed the addition of Sec. 14A (which required “companies to conduct a separate shareholder advisory vote to approve the compensation of executives”) in the Securities Exchange Act of 1934. But will such a move help balance the paranormal equation? It is not to be forgotten that the SEC had taken a similar stance more than four years back (on Jan 17, 2006), to protect shareholders (which forced companies to report compensations of all top executives, including all stock options, retirement and severance plans and perks worth over $10,000.) Five years later, and we still see the scandalmania of excessive pay for performance in vogue! Perhaps, the anomaly is here to stay, and till it does, there will always be losers on the stock markets and winners across boardrooms.

James Madison Harris 1915-2011

My father-in-law, James Madison Harris, died on Feb 26, 2011. As a young man in the Philippines, he was a cliff-diver. He played baseball and soccer professionally, and recorded 13 holes in one on the golf course. He was in the Army Signal Corp during World War II, and was a boilermaker on the Southern Pacific Railroad. He was in the railroad union and he played the violin. He was married to Flora Harris for 59 years. He was kind to everyone, and had a hell of a fine daughter.

Why aren't there more foreclosures in Europe?

Dwight Jaffee shows that mortgage foreclosures in Europe are still rare, even in distress countries such as Spain and the United Kingdom.  The question is why.  I have heard people in seminars suggest that it is because of recourse--it is ubiquitous in Europe.  But perhaps it is because the social safety net in Europe is stronger.   When Americans lose their jobs, it is hard for them to make mortgage payments.  When Europeans lose their jobs, it is still hard, but perhaps less so than in the US.  Just a thought....

Why I admire Mark Zandi

He work is speedy enough to be of use to the business community and policy debates; his work is rigorous enough to be credible.  He also doesn't take himself too seriously.  This short piece in Slate sums him up nicely.