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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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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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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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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Federal Election Betting Market Probabilities
Simon Jackman provides a handy update on federal election outcome probabilities derived from Centrebet and updated daily at 9am AEST. Along with iPredict, Centrebet is showing a sharp decline in the probability of a Labor win, reflecting recent opinion polls, but also (perfectly legal) inside information:
SENIOR Labor figures have placed significant bets on the outcome of the federal election, with some punting against their own party. A major betting agency said bets had been placed on members of the opposing team to win marginal seats in NSW and Queensland.
Centrebet primary analyst Neil Evans said: ‘‘I can’t tell you who but I can tell you this: these are people very high up betting on some of the critical seats and I can tell you they don’t always stay faithful to their party - they swap sides.
‘‘They are well-known Labor figures and associates that are punting on these seats. A lot of Labor-connected money has been backing a Coalition win in marginal seats and, to a lesser extent, the Coalition has been doing the reverse.’‘
The Sun-Herald understands the figures include parliamentary staffers, advisers and senior party officials.
posted on 01 August 2010 by skirchner in Financial Markets, Politics
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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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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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Libertarian Paternalism without the Libertarianism
Superannuation system review chair Jeremy Cooper, interviewed by Alan Kohler:
ALAN KOHLER: In fact you call it “libertarian paternalism” in your report. And I must say reading your report it seems to leans toward the paternalism rather than the libertarian.
JEREMY COOPER: Possibly but go back to the original idea it’s very paternalistic. Compulsory superannuation, which really only exists in a very few countries, is very paternalistic.
It’s saying, well unless we force the population to put money away for retirement they’re not going to do it, so we’re going to work out what we think what they’re best interest is and we’re going to force them to hold back wages which would otherwise would be spent on school shoes and petrol and all those important things.
That money is held back by the government, that’s very paternalistic. So to criticise these ideas because they’re paternalistic forgets what the system, what super actually is.
Perhaps the most honest assessment of the motivation behind compulsory super I have heard to date.
posted on 19 July 2010 by skirchner in Economics, Financial Markets
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Labor Voters More Confident Following the Demise of Kevin Rudd
The 11.1% surge in consumer confidence between June and July shows a clear partisan divide, with confidence on the part of Coalition voters up 19.8% compared to a more modest 3.9% for ALP voters, but this is still a big surge in confidence among Labor voters for a series that has an historical standard deviation of 5.1%. The ~75-80% probability of a Labor victory being priced in betting and prediction markets suggests that Rudd’s demise has significantly improved Labor’s election prospects.
Meanwhile, Frank Brennan thinks we should give Rudd credit just for showing up to work:
Having resigned as prime minister, Rudd had the good grace to turn up to question time, taking his place on the backbench.
posted on 16 July 2010 by skirchner in Economics, Financial Markets, Opinion Polls, Politics
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Consumer Sentiment Surges on the Demise of Kevin Rudd
Consumer confidence surged 11.1% in July, the ‘strongest monthly increase in the Index from a base above the 100 level since records began in the mid–1970s’ according to Westpac. The press release is far too polite to point to the most obvious reason for the surge in confidence, but we can all read between the lines:
Interest rates do not appear to have been the most significant driver of the July result. The confidence of those folks with a mortgage actually rose a little less than tenants or others. As we noted last month the 5.7% fall in the Index in June seemed to be partly driven by concerns about the Budget and tax policy.
Consumer sentiment doesn’t have much independent explanatory power for economic activity once you control for other variables, suggesting that causality runs from activity to sentiment and not the other way around. But that’s just the average effect observable to the econometrician. It does not preclude one off exogenous shifts in sentiment having a significant economic impact. Assuming the new Prime Minister can sustain the boost in confidence, dumping Kevin Rudd may prove to be something close to an economic free lunch. I have not yet seen the break-down by voting intention, but my guess is that it argues against the view that dumping Rudd was a negative from the standpoint of Labor voters.
Arthur Sinodinos notes that Kevin Rudd could destabilise a future Gillard cabinet, arguing against his inclusion in a future government.
posted on 15 July 2010 by skirchner in Economics, Financial Markets, Opinion Polls, Politics
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No Future in Future Funds
I have an op-ed in today’s Australian arguing that improved fiscal responsibility legislation is a better approach to managing the fiscal consequences of terms of trade cycles than sovereign wealth funds such as the existing Future Fund:
a sovereign wealth fund provides no guarantee current revenue will be spent more wisely in the future than it is today.
If governments are unwilling to commit to binding fiscal responsibility legislation that improves on the existing Charter of Budget Honesty, there is no reason to believe greater use of a sovereign wealth fund will lead to better long-term fiscal management.
Part of the op-ed that hit the cutting room floor noted that Australia is not like Norway, Timor Leste or Nauru, dependent on a single export commodity. Australia’s resource endowment and overall economy is much more diversified, making Australia less vulnerable to some of the macroeconomic and other problems associated with dependence on a single commodity export.
posted on 15 July 2010 by skirchner in Economics, Financial Markets, Fiscal Policy
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The Four Horsemen of the Acropolis
Der Spiegel profiles the four German professors valiantly trying to bring down the euro and the bailout of Greece:
The court in Karlsruhe dismissed their request for a court injunction against the Greek bailout. But now that the Constitutional Court is reviewing at length whether to consider their complaint, Schachtschneider believes that it stands a chance of succeeding after all. In any event, he intends to publish the 60-page brief as a legal reference book, thereby going down in the history of the anti-euro movement once again. Hankel is against the idea. He would prefer that the group publish a book that is more accessible to the general public, something along the lines of their 1998 book “Die Euro- Klage. Warum die Währungsunion scheitern muss” (“The Euro Suit: Why the Monetary Union Must Fail”) or the 2001 work “Die Euro-Illusion” (“The Euro Illusion”).
posted on 03 July 2010 by skirchner in Economics, Financial Markets
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Top 23 Depression-Peddling Doomsayers
Business Insider rounds-up the usual suspects. I agree with at least one of them: Tim Congdon. As I noted in this op-ed earlier in the year, bond markets were overstating inflation risks at the expense of the more likely scenario of continued ‘stimulus’-induced stagnation.
posted on 02 July 2010 by skirchner in Economics, Financial Markets
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