The $389 Billion Third Rail of American Politics
The US Treasury Department convened a conference on the vexed issue of housing finance reform. Remarkably, even the New York Times saw straight through the politics of GSE reform in its reporting on proceedings:
The consensus was that neither Democrats nor Republicans wanted to touch an issue that would dredge up decisions made by both parties over the last decade that looked bad in light of the financial crisis. Fannie and Freddie was now the third rail of American politics.
‘Looked bad’ doesn’t even begin to cover what has been a catastrophic failure of America’s political institutions for which there has been little or no accountability.
The de facto nationalisation of US housing finance through its Congressional-mandated GSEs may have been a catastrophe for the US, yet for PIMCO’s Bill Gross, nothing succeeds like failure:
Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said the U.S. should consider “full nationalization” of the mortgage- finance system…
“To suggest that there’s a large place for private financing in the future of housing finance is unrealistic,” Gross said today at a U.S. Treasury Department conference in Washington. “Government is part of our future. We need a government balance sheet. To suggest that the private market come back in is simply impractical. It won’t work.”
Gross conveniently ignores the fact that the housing GSEs have effectively been on the books of the US government for their entire existence.
posted on 18 August 2010 by skirchner in Economics, Financial Markets
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What Did They Know and When Did They Know It: Ex-Ante Views on US Housing
Looking through all the after-the-fact wisdom and hand-wringing, a Boston Fed discussion paper examines the ex ante views of economists in relation to the US housing market:
From our review of the pre-crisis housing literature from the early-to-mid-2000s, it is apparent that well-trained and well-respected economists with the best of motives could and did look at the same data and come to vastly different conclusions about the future trajectory of U.S. housing prices. This is not such a surprising observation once one realizes that the state-of-the-art tools of economic science were not capable of predicting with any degree of certainty the collapse of U.S. house prices that started in 2006.
The paper has mostly fatal implications for the idea that the authorities can actively manage cycles in house prices.
posted on 17 August 2010 by skirchner in Economics, Financial Markets, House Prices
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Australian Equities: A Century of Outperformance
Australian equities offered the highest return and second lowest risk of 19 major markets between 1900 and 2009, according to Credit Suisse.
posted on 15 August 2010 by skirchner in Economics, Financial Markets
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The Making of Dick Smith’s Population Puzzle
In February this year, I was contacted by Dick Smith’s researcher Sarah Gilbert to provide some background for his anti-population growth documentary, Dick Smith’s Population Puzzle. She mentioned a column by Paul Sheehan, which had quoted me making the point that faster population growth required faster economic growth to maintain living standards. No doubt they saw this as a bad thing, but must have finally twigged that I thought it wasn’t, because I heard no more from them, even though Dick and the production crew were on campus a few weeks later and could have easily dropped in to see me. They did interview my UTS colleague Jock Collins, but they obviously didn’t like what he had to say either, because it was not included in the final cut.
Dick later wrote to me taking exception to an op-ed I had written for The Australian, in which I called some of his arguments absurd. I took the opportunity to try and steer Dick in the right direction by referring him to some books by Julian Simon, but he gave no indication he ever bothered to read them.
The documentary screened on the ABC last night. Dick gave significant air time to only one pro-growth advocate, Bernard Salt, but could not help impugning his expertise and motivation. There may be plenty of things wrong with Bernard Salt, but being a historian and working with KPMG are not among them. If Salt is as unqualified as Dick would have us believe, why include him in the documentary? Because Dick has a completely closed-mind on the issue and is uninterested in giving the other side of the argument a fair go.
posted on 13 August 2010 by skirchner in Economics, Population & Migration
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What’s Not to Love About Dutch Disease?
Judith Sloan wants to know. I make similar arguments here.
posted on 12 August 2010 by skirchner in Economics, Financial Markets, Fiscal Policy
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Teaching With Cowen and Tabarrok’s Modern Principles of Economics
I have been using Tyler Cowen and Alex Tabarrok’s Modern Principles of Economics to teach an introductory course in economics to MBA students. Many if not most students study economics as part of vocationally-oriented degrees, without any intention of working as economists or completing further study in economics. Unfortunately, most textbooks are not designed with this in mind. Robert Frank has argued that many courses in economics do the equivalent of teaching language students the pluperfect tense at the expense of basic conversational fluency. Students consequently come away from their economics subjects with the sense that it is an arcane discipline of little real-world relevance, damaging the standing of economics in the community.
By contrast, Cowen and Tabarrok’s textbook is well suited to students who may be studying economics not only for the first time, but also for the last time. It imparts the essential economic insights, without over-burdening students with derivation and optimisation. It is the only text I know of that gives students an appreciation of the coordinating role of markets. The macro part of the text emphasises the role of shocks and real factors in driving the business cycle. Aggregate demand is derived from quantity theory relations rather than aggregate expenditure concepts. It also stresses the limitations of macroeconomic policy instruments.
With the exception of the chapters on monetary and fiscal policy, the text avoids being overly US-centric, reflecting the cosmopolitan sensibility of its authors. The first chapter begins with an Australian example, which is a nice point of entry for Australian students.
Australian faculty can contact Helen Boyd at Palgrave Macmillan (Helen.Boyd [at] macmillan.com.au) for examination copies of the text.
posted on 09 August 2010 by skirchner in Economics
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Penny Dreadful Spec Stock of the Week
Day traders love Fannie Mae:
The big money has ceded the marketplace to individuals who are bold enough, or perhaps foolish enough, to gamble on these stocks for a few hours.
Just don’t hold Fannie Mae too long, Mr. George advised. He predicted the stock would eventually fall to zero. It is difficult to know what other analysts think, since Mr. George is just about the only one who still covers Fannie Mae’s stock. His recommendation is an understated “underperform” — Wall Street code for sell.
“It’s not really a stock anymore — everyone knows this is going to zero,” he said.
posted on 06 August 2010 by skirchner in Economics, Financial Markets
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When Krugman No Longer Feels the Love
Fred Douglass argues that Krugman has lost his battle with those who comment on his blog:
Krugman had also had enough. On July 23, Krugman showed that he was clearly no longer “in love” with his commenters. Now he called them “ranters” and “trolls.” On July 28, Krugman changed his comment moderation policy. Claiming that “ranters ... say the same thing every time,” Krugman announced that he was going to throw away posts longer than “three inches.” His thinking must have been thus: Three inches are sufficient to write “Krugman is brilliant,” but not sufficient to present a documented and persuasive rebuttal to whichever of Krugman’s standard arguments he was peddling that day.
(HT: Sinclair Davidson)
posted on 06 August 2010 by skirchner in Economics
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Did Cheap Credit Fuel the US Housing Boom?
No, according to Ed Glaeser and his co-authors:
Interest rates do influence house prices, but they cannot provide anything close to a complete explanation of the great housing market gyrations between 1996 and 2010. Over the long 1996-2006 boom, they cannot account for more than one-fifth of the rise in house prices. Their biggest predictive influence is during the 2000-2005 period, when long rates fell by almost 200 basis points. That can account for about 45% of the run-up in home values nationally during that half-decade span. However, if one is going to cherry-pick time periods, it also must be noted that falling real rates during the 2006-2008 price bust simply cannot account for the 10% decline in FHFA indexes those years. There is no convincing evidence from the data that approval rates or down payment requirements can explain most or all of the movement in house prices either.
The authors also note that Robert Shiller’s ‘irrational exuberance’ is a non-explanation:
even if Case and Shiller are correct, and over-optimism was critical, this merely pushes the puzzle back a step. Why were buyers so overly optimistic about prices? Why did that optimism show up during the early years of the past decade and why did it show up in some markets but not others? Irrational expectations are clearly not exogenous, so what explains them? This seems like a pressing topic for future research. Moreover, since we do not understand the process that creates and sustains irrational beliefs, we cannot be confident that a different interest rate policy wouldn’t have stopped the bubble at some earlier stage. It is certainly conceivable that a sharp rise in interest rates in 2004 would have let the air out of the bubble. But this is mere speculation that only highlights the need for further research focusing on the interplay between bubbles, beliefs and credit market conditions.
A more fruitful line of inquiry would be to investigate fundamental factors such as the role of US housing GSEs in distorting the allocation of global capital.
posted on 04 August 2010 by skirchner in Economics, Financial Markets, House Prices, Monetary Policy
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Too Big to Nail: Why There Will Never be an Investigation into Freddie and Fannie
Jonathan Weil asks why there is no investigation into Freddie and Fannie:
Still absent from the government’s agenda is any serious effort to hold anyone accountable for their ruin or investigate why they collapsed.
Back in December 2003, after Freddie disclosed what in retrospect was a relatively mild accounting scandal, its regulator published an exhaustive 185-page report cataloguing the company’s financial-reporting abuses. In May 2006, the same regulator disclosed similar findings about Fannie’s books in a report covering 348 pages.
Strangely, there’s no similar examination under way today by the Federal Housing Finance Agency into the reasons why Fannie and Freddie imploded in 2008, or whether anyone at the companies did anything improper. That’s probably because the agency and its predecessor, the Office of Federal Housing Enterprise Oversight, bear responsibility for letting the companies resume their natural tendency to run amok.
So here we go again. This month Congress passed the 2,323- page Dodd-Frank Act without any clear understanding of why the financial crisis happened—and without doing a thing to address Fannie and Freddie, which were central players. Now the Obama administration says it will deliver a reform proposal to Congress by January on the nation’s housing-finance system, including Fannie and Freddie. Yet the government still hasn’t undertaken any comprehensive inquiry into why these companies blew up and who was at fault.
I can only assume Weil’s column is rhetorical, because it is shriekingly obvious why there will never be an inquiry into the failure of Freddie and Fannie. The two GSEs did exactly what Congress mandated them to do, while Congress also stymied the attempt to reform them in 2004-05. Politicians are not interested in establishing an inquiry that can only lead to one conclusion: they were the authors of the global financial crisis of 2008.
posted on 30 July 2010 by skirchner in Economics, Financial Markets
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Crowding Out and the BER
Crowding out effects were built-in to the BER:
BUILDERS and architects tendering for work under Julia Gillard’s school stimulus program were told to include a “cost escalation” of up to 10 per cent to cover the expected inflationary impact of the scheme.
The hidden cost of the Building the Education Revolution, revealed in documents submitted to a Victorian parliamentary inquiry, suggests that as much as $250 million of taxpayers’ money could have been spent to cover a surge in building material and labour costs created by the state’s $2.5 billion share of the stimulus program.
Contract details provided by an architecture firm reveal it was required by the Victorian Education Department to provide a 7 per cent “contingency fee” and a 10 per cent “cost escalation” in the tenders it submitted for work on four primary schools in Melbourne’s east.
Government sources confirmed last night the department specifically included escalation costs in BER projects “because the stimulus was going to be a significant injection into the market/economy and prices could be expected to increase with greater levels of work being undertaken”.
posted on 29 July 2010 by skirchner in Economics, Fiscal Policy
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Just Enough of Me, Way too Much of You
With both major parties offering to retard economic growth by conditioning immigration on existing policy failures in housing, transport and infrastructure, Imre Salusinszky offers politicians some handy talking points:
From one perspective, it’s a neat trick: you pander to inner-city prejudice by abandoning road construction, then use what you perceive to be outer-suburban bigotry to paper it over.
But in order to prevent further embarrassment, as politicians attempt to source our problems to the fact there are almost three citizens shoehorned into every square kilometre of Australia, here are some talking-points:
* Frustrated you can’t get tickets to the big game? Once we block the reffos, convince people to stop having sex, and move across to a sustainable Australia, everybody will be able to attend the AFL or NRL grand final.
* Sick of waiting around in the morning while other family members use the bathroom? Me too, and I blame the fact there are too many people in Australia.
* Can’t get the job you want? Can’t win the girl you desire? Can’t own the car of your dreams? Have you noticed the common link? That’s right: there’s always some other bastard who already has these things. Too many Australians!
As best as I can tell, the only political party with a pro-immigration policy platform is the libertarian Liberal Democratic Party (you can read their policy here).
posted on 28 July 2010 by skirchner in Economics, Population & Migration
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Greg Mankiw versus Ken Henry on the Role of Economists in Public Policy
The following observation by Greg Mankiw could have been written in response to Ken Henry’s recent lament about the role of economists in public policy:
economists are social scientists, not politicians. And whether they work for the government or have the luxury of merely observing the scene from an ivory tower, the integrity of the profession and the importance of the work involved demand that they be subjected to critical judgment; they must be compelled always to submit their assumptions, data, models, and conclusions to careful scrutiny. The foremost job of economists is not to make the lives of politicians easier, but to think through problems, to examine all the available information about the problems’ causes and potential treatments, and to propose the solutions most likely to work.
This is a simple point, but one that is easy to forget. As Milton Friedman once put it: “The role of the economist in discussions of public policy seems to me to be to prescribe what should be done in light of what can be done, politics aside, and not to predict what is ‘politically feasible’ and then to recommend it.”
In a time of economic uncertainty and political turmoil, we economists — both in and out of government — could hardly do better than to follow Friedman’s sage advice.
posted on 24 July 2010 by skirchner in Economics, Fiscal Policy
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We Will Never Build it Before They Come
John Birmingham gets the relationship between population growth and infrastructure:
Our built environment, our urban infrastructure has always lagged at least a decade behind what was required to house and support our population. We don’t build empty cities and wait for them to fill up. It’s more efficient, and less wasteful, to cram our new arrivals into the streets and houses and apartment blocks and schools and offices and factories we already have. Only then do we begin to build the extra capacity we need to service the growth.
posted on 22 July 2010 by skirchner in Economics, Population & Migration
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An Unlikely RBA Research Discussion Paper
Imagine if you will the RBA publishing a Research Discussion Paper that reached the following conclusions:
despite a relatively stable total fiscal impulse the effectiveness of spending shocks in stimulating economic activity has decreased over time. Short-run spending multipliers increased until the late 1980s when they reached values above unity, but they started to decline afterwards to values closer to 0.5 in the current decade. Long-term multipliers show a more than two-fold decline since the 1980s. These results suggest that other components of aggregate demand are increasingly being crowded out by spending based fiscal expansions. In particular, the response of private consumption to government spending shocks has become substantially weaker over time.
rising government debt is the main reason for declining spending multipliers at longer horizons, and thus increasingly negative long-run consequences of fiscal expansions. We interpret this finding as an indication that further accumulating debt after a spending shock leads to rising concerns on the sustainability of public finances, such that agents may expect a larger fiscal consolidation in the future which depresses private demand and output. We also find that a stronger response of the short-term nominal interest rate goes along with declining spending multipliers. This result is consistent with an increasingly offsetting reaction of monetary policy to the expansionary fiscal shock.
The extract is from a European Central Bank Working Paper and the conclusions reached are in relation to the euro area. Don’t hold your breath waiting for the RBA to publish a similar study of activist fiscal policy in Australia.
posted on 21 July 2010 by skirchner in Economics, Financial Markets, Fiscal Policy, Monetary Policy
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