Jeremy Stein for Fed Governor (reprise)

Personally, I am a big fan of Stein's work. The shortest way to explain why is to list the titles of his five most cited papers:

• Herd Behavior and Investment
• A Unified Theory of Underreaction, Momentum Trading and Overreaction in Asset Markets
• Rick Management: Coordinating Investment and Financing Policies
• Bad News Travels Slowly: Size, Analyst Coverage and the Profitability of Momentum Strategies
• Internal Capital Markets and the Competition for Corporate Resources.

Stein has spent his career trying to figure out how capital markets really work instead of pledging fealty to models that don't work very well.  I can't think of a better intellectual qualification for a Federal Reserve Board member.

Joe Nocera nails it

He writes:

...Peter Wallison, a resident scholar at the American Enterprise Institute, and a former member of the Financial Crisis Inquiry Commission, almost single-handedly created the myth that Fannie Mae and Freddie Mac caused the financial crisis. His partner in crime is another A.E.I. scholar, Edward Pinto, who a very long time ago was Fannie’s chief credit officer. Pinto claims that as of June 2008, 27 million “risky” mortgages had been issued — “and a lion’s share was on Fannie and Freddie’s books,” as Wallison wrote recently. Never mind that his definition of “risky” is so all-encompassing that it includes mortgages with extremely low default rates as well as those with default rates nearing 30 percent. These latter mortgages were the ones created by the unholy alliance between subprime lenders and Wall Street. Pinto’s numbers are the Big Lie’s primary data point.

Two things: First, Pinto and Wallison's definition of "subprime" is any loan that goes to a neighborhood they wouldn't live in or  to a person they wouldn't have lunch with.  According to the American Housing Survey, there were around 52 million mortgages outstanding in the US in 2009.  This means that according to Wallison and Pinto,  the median borrower is a subprime borrower.  I guess this means they think that that half of homeowners with mortgages should be renting in Potterville.

Second, Nocera should in his piece put quotes around the word "scholar."

Simon Johnson underlines a problem..that could point to a solution.

He writes:

Santa Claus came early this year for four former executives of Washington Mutual, which failed in 2008. The executives reached a settlement with the FDIC, which sued them for taking huge financial risks while “knowing that the real estate market was in a ‘bubble.’ ” The FDIC had sought to recover $900 million, but the executives have just settled for $64 million, almost all of which will be paid by their insurers; their out-of-pockets costs are estimated at just $400,000.
To be sure, the executives lost their jobs and now must drop claims for additional compensation. But, according to the FDIC, the four still earned more than $95 million from January 2005 through September 2008. This is what happens when financial executives are compensated for “return on equity” unadjusted for risk. The executives get the upside when things go well; when the downside risks materialize, they lose nothing (or close to it).

Just thinking aloud here, but if bank executives were compensated based on return on assets (i.e., the returns to both debt and equity), rather than return on equity, a lot of the misaligned incentives in their pay packages would go away.  Among other things, it would discourage races to the bottom.

Why Fannie and Freddie will likely last

I was talking with SF Chronicle columnist Kathleen Pender yesterday, and she shared a trenchant observation:  now that Congress has figured out a way to use the GSEs to raise revenue (via raising G-fees), it will always have an incentive to keep them.  Specifically, Congress has now tied itself to the GSEs, because it will take awhile for increased G-fees to repay the cost of the payroll tax cut.

Why to worry about Chinese house prices.

Getting good data from China is problematic, but it is pretty clear house prices there are falling (see here, here and here).  At first blush, this shouldn't cause too much worry, because the Chinese use far less leverage to buy houses than Americans, and so the probability of being upside down there remains pretty low.

The problem, however, is that municipalities in China have lots of debt.  The actual amount is controversial, but the fact that it is a lot is not.  Chinese municipalities service debt using land sales.  So if property values fall a lot.....

It is possible to hold the following two views at the same time

(1) The executives for Fannie Mae and Freddie Mac should be held to account for their contributions to the crisis; and

(2) Compared with banks, shadow and otherwise, Fannie and Freddie were pikers in their contributions to the crisis.

A New Survey on Information Management

I'd like to interrupt the usual programming here to ask you a favor.

The startup I'm working on will ship its first product in 2012.  As part of our development, we'd like to get some data on how people are affected by information overload.  We hope our product will help with that problem, but we need to understand better how people feel about the problem and what they're doing about it today.  So we're doing a survey.

I think that you, the folks who read Mobile Opportunity, are a very good cross-section of technology users, so I'd like to ask you to take the survey.  I know you have much better things to do with your time than fill out a survey, but we could really use your help.  It'll take about ten minutes, and it's almost all multiple choice.  I'll share the results here, so you can learn more about your fellow readers and how you compare to them.

To go to the survey, click here.  Note: The survey is now closed.  You can read about the results here.

Once our company gets closer to launching, I will start up a separate weblog to talk about the product.  I'll also keep on writing Mobile Opportunity, with its current focus.

Thanks in advance for your help.  I really appreciate it.  And I'll have a new post for you next week.  It's a pretty long one that I've been working on for a while.