Last Sunday (June 19) I filled up my gas tank. This has been becoming more expensive recently and this time the bill was particularly steep, $69.41. I suspected this might be the most I had ever paid for a fill up and as best I can tell this is correct. I did pay over $65 four times in a row during the summer of 2008 but the most was $67.38 on July 26. This was my previous record. Of course adjusted for inflation the 2008 amounts would still be higher. Somehow I suspect it won't take 14 years to beat the new record.
Showing posts with label economy. Show all posts
Showing posts with label economy. Show all posts
Sunday, June 26, 2022
Saturday, October 13, 2018
Crashed
I recently read "Crashed" a recent (2018) book by Adam Tooze about the great financial crisis (GFC) of 2008-2009 and its aftermath. I had previously read Tooze's book "The Wages of Destruction" about the economy of Nazi Germany and found it interesting so when I saw this book on the new books shelf at my local library I thought it might be worth checking out. This was a mistake.
The book is very long (over 700 pages including nearly 100 pages of index and notes) but displays little insight. There is a old saying about not being able to see the forest for the trees which seems to apply. We are now at some remove from the GFC and so (one would hope) are better placed to identify its important features and effects. But this book doesn't really attempt to do this. Instead it largely consists of a chronological recounting of events with little real analysis. The failure to develop any sort of convincing theoretical framework means the book is of little help in understanding and evaluating policy alternatives going forward.
For example the book states in several places that the American response to the crisis (although flawed) was more effective than the European response. However the book doesn't consider the obvious possibility that the American response just appeared more effective because the problems in America weren't as serious as in Europe.
Again the book seems to vaguely disapprove of the way Europe dealt with Greece but with little consideration of concrete alternatives and their advantages and disadvantages. When the Euro was introduced many American economists thought it was a mistake because the area involved was too diverse to be adequately served by a single uniform monetary policy. The book does not really discuss this.
One general view of the GFC is that people want to save more money than the system can safely accommodate. That is there are more people who want to lend money than credit worthy borrowers. In such a situation there is a great temptation to pretend certain loans are safe when they are not. If this imbalance is real than specific regulations aimed at preventing certain types of bad loans are likely to just cause the problem to reappear in different forms. But this sort of bigger picture view is lacking in this book making it of little value in my view.
To sum up I didn't like this book at all. It just recapitulates events at length without adding much in the way of understanding. I would avoid it.
The book is very long (over 700 pages including nearly 100 pages of index and notes) but displays little insight. There is a old saying about not being able to see the forest for the trees which seems to apply. We are now at some remove from the GFC and so (one would hope) are better placed to identify its important features and effects. But this book doesn't really attempt to do this. Instead it largely consists of a chronological recounting of events with little real analysis. The failure to develop any sort of convincing theoretical framework means the book is of little help in understanding and evaluating policy alternatives going forward.
For example the book states in several places that the American response to the crisis (although flawed) was more effective than the European response. However the book doesn't consider the obvious possibility that the American response just appeared more effective because the problems in America weren't as serious as in Europe.
Again the book seems to vaguely disapprove of the way Europe dealt with Greece but with little consideration of concrete alternatives and their advantages and disadvantages. When the Euro was introduced many American economists thought it was a mistake because the area involved was too diverse to be adequately served by a single uniform monetary policy. The book does not really discuss this.
One general view of the GFC is that people want to save more money than the system can safely accommodate. That is there are more people who want to lend money than credit worthy borrowers. In such a situation there is a great temptation to pretend certain loans are safe when they are not. If this imbalance is real than specific regulations aimed at preventing certain types of bad loans are likely to just cause the problem to reappear in different forms. But this sort of bigger picture view is lacking in this book making it of little value in my view.
To sum up I didn't like this book at all. It just recapitulates events at length without adding much in the way of understanding. I would avoid it.
Sunday, January 26, 2014
Liquidity
Last week I criticized a Kevin Drum post complaining (in effect) that the government wasn't subsidizing home mortgages enough. Drum quoted from a Felix Salmon post which is also wrongheaded in my view. Salmon complains:
Meanwhile, here in Manhattan, no one in my condo building has been able to sell or refinance for the past couple of years, thanks to an ever-shifting series of rules at various different banks, all of which are clearly designed to just give them a reason to say no.
In the first place all cash buyers exist so even if no mortgages were available at all you could still sell. So it appears this is really a complaint about the price obtainable. Perhaps the value of units in Salmon's building has dropped significantly and the owners are in denial about this. This would also explain the lack of refinancing, banks are justifiably reluctant to refinance a $600,000 mortgage on a property currently only worth $400,000 (for example). Banks should not be lending money based on inflated valuations and public policy should discourage them from doing so even if current owners would prefer otherwise.
Salmon also appears to believe that there are both credit worthy potential buyers who are unable to obtain mortgages and banks with money with which they are unwilling to make mortgage loans because mortgage rates are too low. But it is a bit hard to see why this wouldn't lead to rising mortgage rates (as potential buyers bid up the rates) attracting more lenders.
Salmon concludes:
Still, one thing is clear: for all that the Fed has been pumping billions of dollars into mortgage securities as part of its quantitative easing campaign, all that liquidity has failed to find its way to new homebuyers. I’m in general a believer in renting rather than buying, but the US is a nation of homeowners, and in such a country, a liquid housing market is a necessary precondition for economic vitality. Right now, we don’t have one — and we don’t have much hope of getting one in the foreseeable future, either.
It is hard for me to figure out what this even means. Obviously the housing market is much less liquid than the stock market. I recently bought a townhouse in New Jersey and sold a townhouse in New York and would estimate the transaction costs (shared between the buyer and seller) were at least 10% of the sales price. In contrast buying and selling stock has much lower transaction costs, perhaps .1% of the sales price for a liquid stock like IBM, a hundred times less. It is also much quicker and easier to buy or sell stock (to an extent that actually made me a bit uneasy considering the amount of money potentially at risk). But this has little to do with availability of mortgages. The very liquid stock market is largely cash based. In fact mortgages make the housing market less liquid by adding layers of fees and required approvals to a typical transaction. So it appears once again that Salmon's real issue isn't that the housing market isn't liquid (which has always been the case) but that prices are lower than he thinks they should be and that the government should be propping them up by offering subsidized mortgages. I don't agree.
Meanwhile, here in Manhattan, no one in my condo building has been able to sell or refinance for the past couple of years, thanks to an ever-shifting series of rules at various different banks, all of which are clearly designed to just give them a reason to say no.
In the first place all cash buyers exist so even if no mortgages were available at all you could still sell. So it appears this is really a complaint about the price obtainable. Perhaps the value of units in Salmon's building has dropped significantly and the owners are in denial about this. This would also explain the lack of refinancing, banks are justifiably reluctant to refinance a $600,000 mortgage on a property currently only worth $400,000 (for example). Banks should not be lending money based on inflated valuations and public policy should discourage them from doing so even if current owners would prefer otherwise.
Salmon also appears to believe that there are both credit worthy potential buyers who are unable to obtain mortgages and banks with money with which they are unwilling to make mortgage loans because mortgage rates are too low. But it is a bit hard to see why this wouldn't lead to rising mortgage rates (as potential buyers bid up the rates) attracting more lenders.
Salmon concludes:
Still, one thing is clear: for all that the Fed has been pumping billions of dollars into mortgage securities as part of its quantitative easing campaign, all that liquidity has failed to find its way to new homebuyers. I’m in general a believer in renting rather than buying, but the US is a nation of homeowners, and in such a country, a liquid housing market is a necessary precondition for economic vitality. Right now, we don’t have one — and we don’t have much hope of getting one in the foreseeable future, either.
It is hard for me to figure out what this even means. Obviously the housing market is much less liquid than the stock market. I recently bought a townhouse in New Jersey and sold a townhouse in New York and would estimate the transaction costs (shared between the buyer and seller) were at least 10% of the sales price. In contrast buying and selling stock has much lower transaction costs, perhaps .1% of the sales price for a liquid stock like IBM, a hundred times less. It is also much quicker and easier to buy or sell stock (to an extent that actually made me a bit uneasy considering the amount of money potentially at risk). But this has little to do with availability of mortgages. The very liquid stock market is largely cash based. In fact mortgages make the housing market less liquid by adding layers of fees and required approvals to a typical transaction. So it appears once again that Salmon's real issue isn't that the housing market isn't liquid (which has always been the case) but that prices are lower than he thinks they should be and that the government should be propping them up by offering subsidized mortgages. I don't agree.
Sunday, January 19, 2014
Mortgages
There is a powerful lobby in the US in favor of higher house prices. Millions of Americans are homeowners and being generally richer and more politically active than renters they have disproportionate political influence. In addition home builders and realtors also have an obvious interest in higher house prices which is expressed through lobbying by industry groups and trade associations. The result is various government programs and policies which make houses more expensive. These include various forms of government subsidized mortgages. While such programs are sold as helping buyers in fact much of the benefit goes to existing home owners in the form of higher house prices (just as colleges capture much of the government aid to students by raising tuition). In my view this bias in favor of high house values is not in the interest of the nation as a whole. Trying to eliminate (or perhaps even substantially reduce) this high house price bias produced by government policy is probably unrealistic but I certainly think a substantial burden of proof should be imposed on people advocating biasing government policy even further towards high house prices.
Which brings us to this Kevin Drum post advocating fixing (which seems to mean even more government subsidies) the housing finance market without providing much in the way of evidence that it is broken. He claims that even people with good credit (low 700s credit score) can't get mortgages which I highly doubt. See for example according to this recent WSJ article reporting that the average credit score for approved mortgages declined in 2013 from 2012 and that plenty of mortgages are being approved for people with scores below 750 (or even 700).
Borrowers can still qualify for a mortgage with just a 3.5% down payment through the Federal Housing Administration, which has among the easiest qualification rules. The Ellie Mae report showed that the average credit score on an FHA-backed purchase mortgage stood at 690 in December, down slightly from 699 a year earlier. Average total debt-to-income ratios stood at 42% (lenders generally consider anything above 43% to be high).
Perhaps people with good but less than perfect credit scores can't get the very best rate on a mortgage but this is hardly surprising and isn't at all the same thing as being unable to get any mortgage. Drum further claims (quoting Felix Salmon) that bank mortgage rules are designed to give the banks a reason to say no. But this is a natural consequence of the fact that the loss on a bad mortgage is likely to be many times the profit on a good mortgage. So it is much more costly for a bank to give out a bad mortgage than fail to give out a good one and bank rules and procedures will (or at least should be) designed accordingly.
Considering recent history I think Drum should be embarrassed to be advocating lowering mortgage standards on such a flimsy basis.
Which brings us to this Kevin Drum post advocating fixing (which seems to mean even more government subsidies) the housing finance market without providing much in the way of evidence that it is broken. He claims that even people with good credit (low 700s credit score) can't get mortgages which I highly doubt. See for example according to this recent WSJ article reporting that the average credit score for approved mortgages declined in 2013 from 2012 and that plenty of mortgages are being approved for people with scores below 750 (or even 700).
Borrowers can still qualify for a mortgage with just a 3.5% down payment through the Federal Housing Administration, which has among the easiest qualification rules. The Ellie Mae report showed that the average credit score on an FHA-backed purchase mortgage stood at 690 in December, down slightly from 699 a year earlier. Average total debt-to-income ratios stood at 42% (lenders generally consider anything above 43% to be high).
Perhaps people with good but less than perfect credit scores can't get the very best rate on a mortgage but this is hardly surprising and isn't at all the same thing as being unable to get any mortgage. Drum further claims (quoting Felix Salmon) that bank mortgage rules are designed to give the banks a reason to say no. But this is a natural consequence of the fact that the loss on a bad mortgage is likely to be many times the profit on a good mortgage. So it is much more costly for a bank to give out a bad mortgage than fail to give out a good one and bank rules and procedures will (or at least should be) designed accordingly.
Considering recent history I think Drum should be embarrassed to be advocating lowering mortgage standards on such a flimsy basis.
Thursday, November 28, 2013
End this Depression Now
I recently read "End this Depression Now" a 2012 book by Paul Krugman about our current economic problems and what to do about them. I thought it was fairly good although I do not share Krugman's liberal politics. Krugman's books are more balanced and less polemical than his NYT newspaper columns making them more palatable to me. Despite the title most of the book is devoted to discussing our current problems and how we got into them. Less space is devoted to Krugman's ideas for fixing things. Perhaps because, despite Krugman's protestations to the contrary, he realizes they are nonstarters politically.
Krugman's diagnosis is that our current sluggish economy reflects an overall lack of demand. There are idle resources but businesses are unwilling to hire people and increase production because they fear (with good reason) that they will be unable to sell the resulting goods and services. I find this plausible. A competing explanation cites structural problems, that the economy is set up to produce the wrong things and that time is needed retrain workers and refit factories. I don't find this convincing. If overall demand was adequate but not matched to supply you would expect to see shortages developing and prices rising for those goods and services in strong demand as well as idle capacity in areas of weak demand. But for the most part this isn't happening. Now structural problems could become a problem as the economy improves. I am not convinced that estimates of current capacity generated by naive extrapolation of pre-crisis GNP trends are realistic. But I don't think structural problems are currently a binding constraint.
I find Krugman's explanations for the origin of the lack of demand and ideas for fixing things less convincing. He appears to believe that the economy has multiple equilibrium conditions and that although the economy is currently in a unfavorable equilibrium condition (into which it was pushed by the financial crisis) there is also present a preferable full capacity equilibrium. So all that is needed is temporary government actions to push the economy into the more favorable equilibrium where it will remain by itself without needing continuing support. For my part I doubt this more favorable equilibrium actually exists (under current conditions) making policy attempts to push the economy into it futile and potentially dangerous.
One point of disagreement is whether the lack of demand is a chronic condition. Certainly there was a temporary aspect, the financial crisis panicked people into trying to increase savings (or reduce debt) and due to the well known "paradox of thrift" this leads to a drop in demand. But the acute phase of the financial crisis is long past, people are no longer panicked but demand remains depressed. I think this reflects an underlying structural problem which needs to be addressed. Krugman dismisses my favored explanation briefly in a paragraph on p. 83.
For example, one popular story about inequality and crisis--that the rising share of income going to the rich has undermined overall demand, because of the shrinking purchasing power of the middle class--just doesn't work when you look at the data. "Underconsumption" stories depend on the notion that as income becomes concentrated in the hands of a few, consumer spending lags, and savings rise faster than investment opportunities. In reality, however, consumer spending in the United States remained strong despite growing inequality, and far from rising, personal saving was on a long downward trend during the era of financial deregulation and rising inequality.
I find this unconvincing. Personal saving is measured on a net basis which can hide a growing imbalance as part of the population saves more and more while another part spends more than their income and goes deeper and deeper into debt. This can maintain demand for a while but isn't sustainable indefinitely. Eventually the indebted portion of the population reaches their borrowing limits and is forced to cutback on consumption while the savers continue to try to save leading to a drop in demand. This looks to me a lot like conditions before and after the crisis point.
Krugman has two main ideas for improving the economy, pushing up the inflation rate and a temporary deficit financed surge in government spending. Both seem politically difficult at present which in my view is just as well as I find them uncongenial.
The rationale for increasing inflation is that this would allow additional cuts in the real interest rate (which is currently constrained by the inability to reduce nominal interest rates below zero, "the zero bound"). But I am unconvinced that any benefits would exceed the costs. Krugman suggests a relatively benign sounding increase from 2% to 4% but it is unclear why this would be enough to have a significant effect. Perhaps an increase to say 12% would be needed which sounds a lot less benign. In any case, as Krugman acknowledges, an increase in the inflation rate also has large distributional consequences favoring debtors at the expense of savers. So having a lot of savings myself I am not inclined to support increased inflation.
The rational for increasing government spending is to increase overall demand encouraging businesses to expand. I don't doubt it would have some such effects in the short run but am less convinced they would be sustainable. As noted above while Krugman believes temporary deficits would be sufficient to push the economy into a more favorable equilibrium I am not convinced. A political issue is what to spend the money on, there aren't that many uncontroversial and clearly temporary projects for the government to fund. Krugman points out that crisis imposed budget problems led state and local governments to lay off many workers (deepening the crisis) and argues that this could have been prevented by increased federal aid to local governments. But while this might have been a good idea several years ago it is entirely unclear that federal aid to hire all those workers back is a good idea now. There are other problems, some of the increased demand will be reflected in increased imports. This could significantly reduced any benefits to the US economy. US policy cannot really be evaluated in terms of purely domestic effects.
Krugman also discusses Europe's troubles. He attributes many of them to the formation of Euro zone with which I agree, the Euro was clearly a mistake. But it is unclear how to fix things, as Krugman states unraveling the Euro would be very costly but there are also serious problems with keeping it as it forces an inappropriate uniformity of policy throughout the Euro zone.
In summary this book is a reasonable explication of conventional liberal thought about the economy. However it is not all that original, I didn't find it to offer a lot of fresh ideas which I hadn't encountered before. Another issue is the political discussion (which speculates about the outcome of the 2012 elections) is a bit dated. Nevertheless it is reasonable introduction to the issues from a liberal point of view.
Krugman's diagnosis is that our current sluggish economy reflects an overall lack of demand. There are idle resources but businesses are unwilling to hire people and increase production because they fear (with good reason) that they will be unable to sell the resulting goods and services. I find this plausible. A competing explanation cites structural problems, that the economy is set up to produce the wrong things and that time is needed retrain workers and refit factories. I don't find this convincing. If overall demand was adequate but not matched to supply you would expect to see shortages developing and prices rising for those goods and services in strong demand as well as idle capacity in areas of weak demand. But for the most part this isn't happening. Now structural problems could become a problem as the economy improves. I am not convinced that estimates of current capacity generated by naive extrapolation of pre-crisis GNP trends are realistic. But I don't think structural problems are currently a binding constraint.
I find Krugman's explanations for the origin of the lack of demand and ideas for fixing things less convincing. He appears to believe that the economy has multiple equilibrium conditions and that although the economy is currently in a unfavorable equilibrium condition (into which it was pushed by the financial crisis) there is also present a preferable full capacity equilibrium. So all that is needed is temporary government actions to push the economy into the more favorable equilibrium where it will remain by itself without needing continuing support. For my part I doubt this more favorable equilibrium actually exists (under current conditions) making policy attempts to push the economy into it futile and potentially dangerous.
One point of disagreement is whether the lack of demand is a chronic condition. Certainly there was a temporary aspect, the financial crisis panicked people into trying to increase savings (or reduce debt) and due to the well known "paradox of thrift" this leads to a drop in demand. But the acute phase of the financial crisis is long past, people are no longer panicked but demand remains depressed. I think this reflects an underlying structural problem which needs to be addressed. Krugman dismisses my favored explanation briefly in a paragraph on p. 83.
For example, one popular story about inequality and crisis--that the rising share of income going to the rich has undermined overall demand, because of the shrinking purchasing power of the middle class--just doesn't work when you look at the data. "Underconsumption" stories depend on the notion that as income becomes concentrated in the hands of a few, consumer spending lags, and savings rise faster than investment opportunities. In reality, however, consumer spending in the United States remained strong despite growing inequality, and far from rising, personal saving was on a long downward trend during the era of financial deregulation and rising inequality.
I find this unconvincing. Personal saving is measured on a net basis which can hide a growing imbalance as part of the population saves more and more while another part spends more than their income and goes deeper and deeper into debt. This can maintain demand for a while but isn't sustainable indefinitely. Eventually the indebted portion of the population reaches their borrowing limits and is forced to cutback on consumption while the savers continue to try to save leading to a drop in demand. This looks to me a lot like conditions before and after the crisis point.
Krugman has two main ideas for improving the economy, pushing up the inflation rate and a temporary deficit financed surge in government spending. Both seem politically difficult at present which in my view is just as well as I find them uncongenial.
The rationale for increasing inflation is that this would allow additional cuts in the real interest rate (which is currently constrained by the inability to reduce nominal interest rates below zero, "the zero bound"). But I am unconvinced that any benefits would exceed the costs. Krugman suggests a relatively benign sounding increase from 2% to 4% but it is unclear why this would be enough to have a significant effect. Perhaps an increase to say 12% would be needed which sounds a lot less benign. In any case, as Krugman acknowledges, an increase in the inflation rate also has large distributional consequences favoring debtors at the expense of savers. So having a lot of savings myself I am not inclined to support increased inflation.
The rational for increasing government spending is to increase overall demand encouraging businesses to expand. I don't doubt it would have some such effects in the short run but am less convinced they would be sustainable. As noted above while Krugman believes temporary deficits would be sufficient to push the economy into a more favorable equilibrium I am not convinced. A political issue is what to spend the money on, there aren't that many uncontroversial and clearly temporary projects for the government to fund. Krugman points out that crisis imposed budget problems led state and local governments to lay off many workers (deepening the crisis) and argues that this could have been prevented by increased federal aid to local governments. But while this might have been a good idea several years ago it is entirely unclear that federal aid to hire all those workers back is a good idea now. There are other problems, some of the increased demand will be reflected in increased imports. This could significantly reduced any benefits to the US economy. US policy cannot really be evaluated in terms of purely domestic effects.
Krugman also discusses Europe's troubles. He attributes many of them to the formation of Euro zone with which I agree, the Euro was clearly a mistake. But it is unclear how to fix things, as Krugman states unraveling the Euro would be very costly but there are also serious problems with keeping it as it forces an inappropriate uniformity of policy throughout the Euro zone.
In summary this book is a reasonable explication of conventional liberal thought about the economy. However it is not all that original, I didn't find it to offer a lot of fresh ideas which I hadn't encountered before. Another issue is the political discussion (which speculates about the outcome of the 2012 elections) is a bit dated. Nevertheless it is reasonable introduction to the issues from a liberal point of view.
Saturday, March 10, 2012
Green Shoot?
I noticed a help wanted sign posted as I was leaving the restaurant I ate at last night. I don't remember seeing one for quite a while so perhaps the economy is recovering a bit. Ironically the restaurant had seemed emptier than usual.
Tuesday, January 24, 2012
Kodak bankrupt
Long ago I inherited small amounts of a few stocks from my great uncle. Over the years their fortunes have varied. The one that did worst was Eastman Kodak which last week filed for bankruptcy after years of decline. My investment wasn't actually a total loss (although I expect the shareholders will receive nothing in any reorganization) as Kodak had paid a dividend for many years and also spun off Eastman Chemical which while not doing so terrific itself isn't bankrupt. Still not one of my better investments.
While it is of course difficult when your main product dies it is a bit hard to believe that better management couldn't have salvaged something. It is a little hard for me to understand why the current CEO still his job.
Kodak should have had plenty of warning, while the early digital cameras were expensive and not very good their problems were clearly fixable while film was a mature technology without much upside potential. Which brings me to the subject of the Kindle Touch e-reader which I received for Christmas. I like it a lot despite an annoying user interface. The problems seem fixable and I expect over time that e-books will dominate the market.
While it is of course difficult when your main product dies it is a bit hard to believe that better management couldn't have salvaged something. It is a little hard for me to understand why the current CEO still his job.
Kodak should have had plenty of warning, while the early digital cameras were expensive and not very good their problems were clearly fixable while film was a mature technology without much upside potential. Which brings me to the subject of the Kindle Touch e-reader which I received for Christmas. I like it a lot despite an annoying user interface. The problems seem fixable and I expect over time that e-books will dominate the market.
Sunday, July 24, 2011
Jefferson Valley Mall
I visited the Jefferson Valley Mall for the first time in a while on Saturday. I was a bit startled by the amount of unoccupied space, clearly more than could be explained by normal turnover. This was particularly noticeable in the food court, a bad sign as it suggests customer traffic in the remaining stores is also down. Maybe this is just more evidence that the economy is still not very healthy. Or perhaps the mall has started to fail. Two other enclosed malls that I used to shop at when I worked at IBM, the Dutchess Mall and the South Hills Mall , fell on hard times and slowly died.
Monday, May 30, 2011
On the Brink
I recently read "On the Brink" an insider's account of the recent financial crisis by Henry M. Paulson Jr. who was secretary of the Treasury in the last years of the Bush administration. I found it more compelling than Robert Rubin's memoir of his time as Treasury secretary under Clinton which I didn't manage to finish. I expect this is mostly because Paulson served in more interesting times (per the purported Chinese curse) as opposed to any greater literary talent on Paulson's part. The book largely consists of a day by day account from Paulson's point of view of the events of 2008. It comes across as reasonably honest, albeit self-serving. Paulson makes it clear that he often found the Democrats in Congress easier to work with than the Republicans. And Obama is depicted more favorably than McCain. Paulson seems well meaning but in over his head. He admits that although when he took office he had vague worries about some sort of impending financial crisis (because there hadn't been one for a while) he didn't see it arising in the housing market. Throughout the crisis he seems to have been in firefighting mode, dealing with each successive problem as it arose, and hoping for the best (which as the saying goes is not a plan). His signature Troubled Assets Relief Program (TARP) proved unworkable. Fortunately things eventually stabilized. Of course while it is easy to criticize Paulson in hindsight it is unclear that anyone else would have done significantly better. Perhaps this is why Obama did little to change course. Bernanke was retained as Federal Reserve chairman and Paulson was replaced with Geithner, New York Federal Reserve Bank President, who had worked closely with Paulson and Bernanke during the crisis.
So in summary this is a reasonably entertaining insider account which is weak on the big picture.
So in summary this is a reasonably entertaining insider account which is weak on the big picture.
Friday, December 24, 2010
Highland Diner RIP
In the 90s I used to eat dinner regularly in the Highland Diner on Highland Avenue (Route 9) in Ossining. I have fond memories of the place. It appeared to be a venerable Ossining institution. The author John Cheever who lived in Ossining in the later part of his life used to hang out there. Cheever died in 1982 before I moved here but the restaurant still had pictures of him.
The restaurant changed hands about 10 (?) years ago. I continued to eat there sometimes but it was never quite the same. It has since operated under several names and owners but apparently (despite what appeared to be considerable expenditure on renovations) has struggled financially. Perhaps because one of the things I liked about the place, that it was rarely crowded, didn't change. Its latest incarnation was as the Olympic Diner but when I went to eat there last Saturday I found it closed. As with Charlie Brown's I had not noticed signs of distress (unlike an earlier incarnation which was open for a couple of weeks in the summer without AC before finally giving up the ghost). There were signs saying it would reopen with new management. Perhaps things will work out better this time. However I suspect the traditional diner business model is not as viable as it used to be and some changes may be needed. Which is always tricky as you may lose the old customers without getting enough new ones.
The restaurant changed hands about 10 (?) years ago. I continued to eat there sometimes but it was never quite the same. It has since operated under several names and owners but apparently (despite what appeared to be considerable expenditure on renovations) has struggled financially. Perhaps because one of the things I liked about the place, that it was rarely crowded, didn't change. Its latest incarnation was as the Olympic Diner but when I went to eat there last Saturday I found it closed. As with Charlie Brown's I had not noticed signs of distress (unlike an earlier incarnation which was open for a couple of weeks in the summer without AC before finally giving up the ghost). There were signs saying it would reopen with new management. Perhaps things will work out better this time. However I suspect the traditional diner business model is not as viable as it used to be and some changes may be needed. Which is always tricky as you may lose the old customers without getting enough new ones.
Saturday, November 20, 2010
Charlie Brown's post mortem
Charlie Brown's troubles continued during the week as the parent company closed additional locations and then filed for bankruptcy.
The chain's problems can't be blamed entirely on the current economy. The former president and CEO, Russell D'anton (who had worked his way up from busboy), plead guilty this year to charges involving vendor kickbacks.
In retrospect if the only location (in Kingston NJ) that I patronized was typical it isn't too surprising the chain was in trouble. The building was far larger than needed for the current customer traffic and you would sometimes see clumps of employees standing around doing nothing. Restaurants seem to be a business where it is important to have an owner (or someone else who really cares about the bottom line) around a lot keeping an eye on things. Things seemed a little lackadaisical at the Kingston location.
The chain's problems can't be blamed entirely on the current economy. The former president and CEO, Russell D'anton (who had worked his way up from busboy), plead guilty this year to charges involving vendor kickbacks.
In retrospect if the only location (in Kingston NJ) that I patronized was typical it isn't too surprising the chain was in trouble. The building was far larger than needed for the current customer traffic and you would sometimes see clumps of employees standing around doing nothing. Restaurants seem to be a business where it is important to have an owner (or someone else who really cares about the bottom line) around a lot keeping an eye on things. Things seemed a little lackadaisical at the Kingston location.
Monday, November 15, 2010
Charlie Brown's
I went to eat at the Charlie Brown's Steakhouse in Kingston last night and found a sign on the door saying this location had been closed. A bit disconcerting as I had eaten there last week and seen no indications of distress. Apparently the chain is in trouble and closed numerous locations Monday. A minor inconvenience for me, a bit worse for the 1400 employees affected.
Sunday, July 18, 2010
Progressive consumption taxes
According to Matthew Yglesias:
In terms of reform it, the frustrating thing is that everyone agrees that it would be better to have a progressive consumption tax than a progressive income tax. And yet, nobody does this and there’s no sign of a political move to do it. So if there were to be a major political push toward reforming the tax code, why not reform it all the way?
This sounds good (and would benefit misers like me greatly) but there is a problem. There is a quite plausible case that the root cause of our current difficulties is that people are trying to save too much. This can cause cuts in production (and layoffs) because people do not want to currently consume all that the economy is capable of producing. Or it can cause asset price bubbles and bad loans as the amount of savings exceeds the amount of worthwhile investment opportunities. If so a progressive consumption tax would just make things worse.
In terms of reform it, the frustrating thing is that everyone agrees that it would be better to have a progressive consumption tax than a progressive income tax. And yet, nobody does this and there’s no sign of a political move to do it. So if there were to be a major political push toward reforming the tax code, why not reform it all the way?
This sounds good (and would benefit misers like me greatly) but there is a problem. There is a quite plausible case that the root cause of our current difficulties is that people are trying to save too much. This can cause cuts in production (and layoffs) because people do not want to currently consume all that the economy is capable of producing. Or it can cause asset price bubbles and bad loans as the amount of savings exceeds the amount of worthwhile investment opportunities. If so a progressive consumption tax would just make things worse.
Saturday, July 10, 2010
Free money
A lot of people, some of whom should know better, seem to think that a low interest loan is the same as free money. Here Ezra Klein argues that the US government should take advantage of the current low interest rates to borrow a lot of money. This is not a good reason for individuals to borrow money and it isn't a good reason for the government to borrow money. If the money is going to wasted, as I expect most of it would be, a low interest rate doesn't help a lot.
Saturday, June 19, 2010
Freefall
Recently I have reading "Freefall" by Joseph Stiglitz, another book about the recent financial crisis. I haven't managed to finish it (and probably won't as it is due back at the library today) but will review it anyway.
I didn't like this book much. I found Stiglitz's style annoying. He is a liberal prone to taking partisan shots. He will say things like "We believed such and such but we learned we were wrong" where he doesn't really mean "we" but "crazy right wing Republicans". If Alan Greenspan writes a book confessing error that is ok but I don't like such confessions on behalf of others. Particularly since I doubt the real crazy right wing Republicans have learned much of anything and especially not what Stiglitz is claiming was learned.
On a more substantive note I didn't find the book very interesting. A rather conventional and predictable explication of what happened from a liberal perspective is mixed with what seem to me to be some often rather poorly thought out proposals for alleviating the problems.
For example on pages 103-104 Stiglitz writes:
The government (through the Federal Reserve) has been lending money to the banks at very low interest rates. Why not use the government's ability to borrow at a low interest rate to provide less-expensive credit to homeowners under stress? Take someone who has a $300000 mortgage with a 6 percent interest rate. That's $18,000 a year in interest (.06 x $30,000[sic]) or $1,500 a month, even with no payback of principal. The government can now borrow money at essentially a zero interest rate. If it lends it to the homeowner at 2 percent, payments are cut by two-thirds to $6,000. For someone struggling to get along at twice the poverty rate, around $30,000 a year, that cuts house payments from 60% of the before-tax income to 20%. Where 60 percent is not manageable, 20% is. And apart from the cost of sending out the notices, the government makes a nice $6,000 profit per year on the deal. At $6,000 the homeowner will make the payments, at $18,000, he or she will not.
Stiglitz is proposing that the government give 2 percent interest only mortgages so stressed homeowners can payoff their existing 6 percent mortgages and drastically reduce their expenses. He further claims this will be a good deal for the government. This proposal is totally deranged.
First Stiglitz does not explain how someone with an annual income of $30,000 obtained a $300,000 mortgage. A likely explanation of course is a grossly fraudulent loan application (for example claiming an annual income of $120,000). This is theoretically a serious crime and while it may be too much to expect such homeowners to go to jail, the government certainly shouldn't be bailing them out.
Second while it is true that the government can currently borrow money for 30 days at near 0 rates the government can't borrow money for 30 years (much less forever) without paying interest. Borrowing short and lending long is a classic recipe for trouble.
Third Stiglitz does not say how much the house is actually worth but, under current conditions, $200,000 or less seems likely. Lending $300,000 against a house worth $200,000 to a homeowner with an annual income of $30,000 is a really bad idea whether done by a bank or the government. At least for someone intending to profit as Stiglitz claims the government would.
Fourth it is hardly certain that the homeowner will be able to make payments of even $6,000 a year. Property taxes and other expenses on even a $200,000 house can be substantial and the homeowner may have other priorities. In any case the homeowner won't live forever at which point the government will own a $200,000 home with $300,000 mortgage not a desirable situation to be in.
Stiglitz goes on to claim that banks will be opposed to this sort of thing because they don't want the competition. In fact under current conditions the banks would be delighted to unload all their lousy $300,000 mortgages on the government. Something like this is actually happening as the government is currently guaranteeing (through Fannie Mae, Freddie Mac and the FHA) lousy refinancing loans which are getting the banks out from under a lot of dubious loans. This is costing the government a lot of money (far more than the direct payments to the banks Stiglitz complains about in this book). Perhaps at some future point when all the bad loans are gone the banks will try to get rid of the government competition but not just yet.
So in conclusion I didn't find a lot of value in this book. Stiglitz has a economics Nobel prize and there are occasional indications in this book that he is capable of writing an interesting and worthwhile book. However I don't think "Freefall" is it. Give it a pass.
I didn't like this book much. I found Stiglitz's style annoying. He is a liberal prone to taking partisan shots. He will say things like "We believed such and such but we learned we were wrong" where he doesn't really mean "we" but "crazy right wing Republicans". If Alan Greenspan writes a book confessing error that is ok but I don't like such confessions on behalf of others. Particularly since I doubt the real crazy right wing Republicans have learned much of anything and especially not what Stiglitz is claiming was learned.
On a more substantive note I didn't find the book very interesting. A rather conventional and predictable explication of what happened from a liberal perspective is mixed with what seem to me to be some often rather poorly thought out proposals for alleviating the problems.
For example on pages 103-104 Stiglitz writes:
The government (through the Federal Reserve) has been lending money to the banks at very low interest rates. Why not use the government's ability to borrow at a low interest rate to provide less-expensive credit to homeowners under stress? Take someone who has a $300000 mortgage with a 6 percent interest rate. That's $18,000 a year in interest (.06 x $30,000[sic]) or $1,500 a month, even with no payback of principal. The government can now borrow money at essentially a zero interest rate. If it lends it to the homeowner at 2 percent, payments are cut by two-thirds to $6,000. For someone struggling to get along at twice the poverty rate, around $30,000 a year, that cuts house payments from 60% of the before-tax income to 20%. Where 60 percent is not manageable, 20% is. And apart from the cost of sending out the notices, the government makes a nice $6,000 profit per year on the deal. At $6,000 the homeowner will make the payments, at $18,000, he or she will not.
Stiglitz is proposing that the government give 2 percent interest only mortgages so stressed homeowners can payoff their existing 6 percent mortgages and drastically reduce their expenses. He further claims this will be a good deal for the government. This proposal is totally deranged.
First Stiglitz does not explain how someone with an annual income of $30,000 obtained a $300,000 mortgage. A likely explanation of course is a grossly fraudulent loan application (for example claiming an annual income of $120,000). This is theoretically a serious crime and while it may be too much to expect such homeowners to go to jail, the government certainly shouldn't be bailing them out.
Second while it is true that the government can currently borrow money for 30 days at near 0 rates the government can't borrow money for 30 years (much less forever) without paying interest. Borrowing short and lending long is a classic recipe for trouble.
Third Stiglitz does not say how much the house is actually worth but, under current conditions, $200,000 or less seems likely. Lending $300,000 against a house worth $200,000 to a homeowner with an annual income of $30,000 is a really bad idea whether done by a bank or the government. At least for someone intending to profit as Stiglitz claims the government would.
Fourth it is hardly certain that the homeowner will be able to make payments of even $6,000 a year. Property taxes and other expenses on even a $200,000 house can be substantial and the homeowner may have other priorities. In any case the homeowner won't live forever at which point the government will own a $200,000 home with $300,000 mortgage not a desirable situation to be in.
Stiglitz goes on to claim that banks will be opposed to this sort of thing because they don't want the competition. In fact under current conditions the banks would be delighted to unload all their lousy $300,000 mortgages on the government. Something like this is actually happening as the government is currently guaranteeing (through Fannie Mae, Freddie Mac and the FHA) lousy refinancing loans which are getting the banks out from under a lot of dubious loans. This is costing the government a lot of money (far more than the direct payments to the banks Stiglitz complains about in this book). Perhaps at some future point when all the bad loans are gone the banks will try to get rid of the government competition but not just yet.
So in conclusion I didn't find a lot of value in this book. Stiglitz has a economics Nobel prize and there are occasional indications in this book that he is capable of writing an interesting and worthwhile book. However I don't think "Freefall" is it. Give it a pass.
Sunday, April 18, 2010
Bailout Cost
Last week I was annoyed by this NYT article which attempts to minimize the cost of bailing out the banks. The article is annoying because the accounting is misleading, as the article itself later acknowledges some important costs are being ignored. For example Fannie Mae and Freddie Mac, the government mortgage companies, have been making lots of lousy loans in order to prop up the housing market. This is an indirect means of bailing out the banks and the resulting loan losses should be included in the bailout cost. Similarly for things like the home buyer tax credit. There is no reason for the NYT to be parroting administration propaganda about how little this fiasco is going to cost the taxpayers.
Wednesday, January 20, 2010
Post-mortem
In the aftermath of the Republican victory in the Massachusetts Senate special election health care reform (HCR) appears in deep trouble. Many Democrats were never very enthusiastic about HCR but didn't want to openly oppose it. Hence its long and tortuous path through Congress to date. But it is hard to see a path to passage at this point although a simulacrum of life may remain for while as no one wants to be the one to declare HCR officially dead. Of course I have been mistaken before about HCR's chances.
If HCR does fail this will be pretty bad for the Democrats. In my view it was a mistake for the Democrats to make HCR their main priority. They would have been better off passing some incremental changes (like extending COBRA) while concentrating on the economy and financial reforms. Unfortunately it will be difficult to change course at this point. They have thrown away a lot of political capital for nothing and the window for passing strong financial reforms may have passed. This would have been easiest accomplished at the height of the crisis when the banks needed government help to survive. Now the administration has no leverage. Nor do they seem all that determined, perhaps because Obama just isn't that interested in the economy.
If HCR does fail this will be pretty bad for the Democrats. In my view it was a mistake for the Democrats to make HCR their main priority. They would have been better off passing some incremental changes (like extending COBRA) while concentrating on the economy and financial reforms. Unfortunately it will be difficult to change course at this point. They have thrown away a lot of political capital for nothing and the window for passing strong financial reforms may have passed. This would have been easiest accomplished at the height of the crisis when the banks needed government help to survive. Now the administration has no leverage. Nor do they seem all that determined, perhaps because Obama just isn't that interested in the economy.
Tuesday, January 5, 2010
Casey Serin
The recent housing bubble was driven in part by speculation and fraud accompanied by a complete collapse of mortgage underwriting standards. The short career of Casey Serin as a real estate speculator illustrates this. The wikipedia article on Serin summarizes his career as follows:
... In his early twenties, however, Serin decided to quit working full-time in order to pursue house flipping as a means of generating income. Beginning in October 2005 and continuing through the following year, Serin purchased eight houses in four southwest U.S. states, and then began blogging about the foreclosure[2] process on the properties he was unable to resell. In time, five of the eight properties foreclosed. ...
An USA today article describes some of his activities:
He found a Sacramento couple who'd twice cut the price on their home and were asking $360,000. Aware that the market was softening, Serin successfully bid $330,000, including his closing costs. But he also wanted to pay off his credit cards. So he took out a $360,000 mortgage and asked the sellers to give him $30,000 in cash once the deal closed.
This is a common fraud . The buyer and seller agree on an inflated sales price and then the seller returns part of it in cash to the buyer after the closing. Note it is expedited by the availability of 100% financing. On another deal Serin was able to get $50000 back:
"I basically used up all of the equity... and the market is already going down," Serin says. "But it made sense to me at the time because I'll take the $50,000 (cash back from the seller). I'm finding it takes a lot more money than I thought, and what if I run out of the money I already took out?"
This can continue for a while as you can use the cash back to pay the mortgages (perhaps with low initial teaser rates) for a while but eventually it is likely to all come crashing down as it did for Serin costing his lenders a substantial amount.
This 2005 article on the role of speculation in the housing bubble noted:
A recent report by the National Association of Realtors (NAR) reported that 23% of all homes nationwide were bought by investors. Another 13% of homes were purchased as second homes. In Miami, it was reported that 85% of "all condominium sales in the downtown Miami market are accounted for by investors and speculators". This is clear evidence of speculation.
As the article explains sales to speculators inflate demand as a bubble inflates driving prices up and then increase supply (as speculators lose faith that prices will continue to rise and try to dump their properties) and drive prices down as a bubble pops.
And here is a Wall Street Journal article about "hidden speculators" who falsely claimed on loan applications to be planning to live in the homes being bought. This is something Serin did as well:
But Serin also deceived the bank by saying he'd live in the home. Banks typically charge higher rates and require larger down payments for investment properties.
Along with speculators like Serin who obtained fraudulent loans but did plan to pay them back after flipping properties in a rising market there were numerous complete frauds who never had any intention of paying back the loans and who were just interested in extracting as much cash as possible by for example selling properties to themselves (or hapless straw buyers) at inflated prices with 100% financing.
While fraud should of course be illegal and be prosecuted the best way to minimize this sort of thing is to maintain reasonable underwriting standards and not leave yourself wide open as the lenders did. Prosecution is not much of a deterrent when fraud is as pervasive as it was as it becomes clear to everybody that it is not feasible to prosecute more than a tiny fraction of the cases.
... In his early twenties, however, Serin decided to quit working full-time in order to pursue house flipping as a means of generating income. Beginning in October 2005 and continuing through the following year, Serin purchased eight houses in four southwest U.S. states, and then began blogging about the foreclosure[2] process on the properties he was unable to resell. In time, five of the eight properties foreclosed. ...
An USA today article describes some of his activities:
He found a Sacramento couple who'd twice cut the price on their home and were asking $360,000. Aware that the market was softening, Serin successfully bid $330,000, including his closing costs. But he also wanted to pay off his credit cards. So he took out a $360,000 mortgage and asked the sellers to give him $30,000 in cash once the deal closed.
This is a common fraud . The buyer and seller agree on an inflated sales price and then the seller returns part of it in cash to the buyer after the closing. Note it is expedited by the availability of 100% financing. On another deal Serin was able to get $50000 back:
"I basically used up all of the equity... and the market is already going down," Serin says. "But it made sense to me at the time because I'll take the $50,000 (cash back from the seller). I'm finding it takes a lot more money than I thought, and what if I run out of the money I already took out?"
This can continue for a while as you can use the cash back to pay the mortgages (perhaps with low initial teaser rates) for a while but eventually it is likely to all come crashing down as it did for Serin costing his lenders a substantial amount.
This 2005 article on the role of speculation in the housing bubble noted:
A recent report by the National Association of Realtors (NAR) reported that 23% of all homes nationwide were bought by investors. Another 13% of homes were purchased as second homes. In Miami, it was reported that 85% of "all condominium sales in the downtown Miami market are accounted for by investors and speculators". This is clear evidence of speculation.
As the article explains sales to speculators inflate demand as a bubble inflates driving prices up and then increase supply (as speculators lose faith that prices will continue to rise and try to dump their properties) and drive prices down as a bubble pops.
And here is a Wall Street Journal article about "hidden speculators" who falsely claimed on loan applications to be planning to live in the homes being bought. This is something Serin did as well:
But Serin also deceived the bank by saying he'd live in the home. Banks typically charge higher rates and require larger down payments for investment properties.
Along with speculators like Serin who obtained fraudulent loans but did plan to pay them back after flipping properties in a rising market there were numerous complete frauds who never had any intention of paying back the loans and who were just interested in extracting as much cash as possible by for example selling properties to themselves (or hapless straw buyers) at inflated prices with 100% financing.
While fraud should of course be illegal and be prosecuted the best way to minimize this sort of thing is to maintain reasonable underwriting standards and not leave yourself wide open as the lenders did. Prosecution is not much of a deterrent when fraud is as pervasive as it was as it becomes clear to everybody that it is not feasible to prosecute more than a tiny fraction of the cases.
Thursday, December 31, 2009
2009
I wasn't paying attention and failed to note the arrival of 2010. Despite getting laid off 2009 wasn't a bad year for me. I wasn't enjoying my job much at the end and early retirement was financially feasible but not the sort of thing I was likely to do on my own. So, after the initial shock, getting fired wasn't the worst thing in the world for me. Kind of like having your spouse leave and discovering you are happier without them.
Things seem to be looking up a bit for the rest of the country as well. At least immediate disaster seems to have been averted. However the economy still seems quite fragile to me. It's nice that the markets are up but the speed and magnitude of the rise are a bit unsettling as they suggest another bubble. And the politicians aren't helping by failing to do much of anything constructive to prevent future crises. And the oil is running out which isn't going to be good.
Oh well perhaps things will work out alright. Here's hoping you all have a good 2010.
Things seem to be looking up a bit for the rest of the country as well. At least immediate disaster seems to have been averted. However the economy still seems quite fragile to me. It's nice that the markets are up but the speed and magnitude of the rise are a bit unsettling as they suggest another bubble. And the politicians aren't helping by failing to do much of anything constructive to prevent future crises. And the oil is running out which isn't going to be good.
Oh well perhaps things will work out alright. Here's hoping you all have a good 2010.
Wednesday, December 30, 2009
Superfreakonomics
One of the presents I received for Christmas was the book, "Superfreakonomics", by Levitt and Dubner, a sequel to their book, "Freakonomics", which I reviewed here .
I have now read Superfreakonomics and my take is that it is similar to Freakonomics. That is, it is a provocative and entertaining read but should not be taken as the last word on the subjects it covers.
As with Freakonomics it covers a diverse set of topics somewhat peripheral to the main concerns of economists. It has nothing much to say about macroeconomics and the recent crisis.
The chapter on global warming has been widely criticized but I didn't find it highly objectionable. They do make a much criticized remark about the color of solar panels which, as I explain here , seems rather fundamentally misguided. However it is not central to their main point which is that it may be more sensible and feasible to find ways to mitigate the effects of CO2 emissions than to eliminate them. I see no justification for dismissing mitigation strategies out of hand as many global warming alarmists would prefer. However it is not surprising that many people would find the author's irreverent attitude about global warming offensive as the subject has taken on a quasi-religious aspect in some circles.
The book considers numerous other topics. Some conclusions I find rather plausible. For example that child safety seats for children older than 3 provide little benefit over using adult seat belts. Others less so. Such as the conclusion that children's exposure to TV caused an increase of 50% increase in property crime and a 25% increase in violent crime in the 1960s.
In general I suspect the author's arguments rely on assumptions which may or may not be true. An egregious example occurs at the start of the book. The authors wish to compare the risks of driving home drunk and walking home drunk. In order to do this they need to know the fraction of drunk pedestrians. With no justification at all they just assume this is the same as the fraction of drunk drivers. Perhaps this is true (or nearly true) but arguments based on these sorts of guesses are obviously not ironclad.
So in conclusion a fun read but should not be taken too seriously.
I have now read Superfreakonomics and my take is that it is similar to Freakonomics. That is, it is a provocative and entertaining read but should not be taken as the last word on the subjects it covers.
As with Freakonomics it covers a diverse set of topics somewhat peripheral to the main concerns of economists. It has nothing much to say about macroeconomics and the recent crisis.
The chapter on global warming has been widely criticized but I didn't find it highly objectionable. They do make a much criticized remark about the color of solar panels which, as I explain here , seems rather fundamentally misguided. However it is not central to their main point which is that it may be more sensible and feasible to find ways to mitigate the effects of CO2 emissions than to eliminate them. I see no justification for dismissing mitigation strategies out of hand as many global warming alarmists would prefer. However it is not surprising that many people would find the author's irreverent attitude about global warming offensive as the subject has taken on a quasi-religious aspect in some circles.
The book considers numerous other topics. Some conclusions I find rather plausible. For example that child safety seats for children older than 3 provide little benefit over using adult seat belts. Others less so. Such as the conclusion that children's exposure to TV caused an increase of 50% increase in property crime and a 25% increase in violent crime in the 1960s.
In general I suspect the author's arguments rely on assumptions which may or may not be true. An egregious example occurs at the start of the book. The authors wish to compare the risks of driving home drunk and walking home drunk. In order to do this they need to know the fraction of drunk pedestrians. With no justification at all they just assume this is the same as the fraction of drunk drivers. Perhaps this is true (or nearly true) but arguments based on these sorts of guesses are obviously not ironclad.
So in conclusion a fun read but should not be taken too seriously.
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