Monday, October 13, 2008

The $64,000 Question

The only question now is whether Paul Krugman will pay taxes on the Nobel prize at the low rates enabled by the Bush tax cuts he has done so much to discredit, or if he will volunteer to pay taxes at higher rates he considers more fair.

~Don Luskin

MP: The 2000 Clinton tax rates are shown above.
Assuming Krugman is already in the top tax bracket, the difference in income taxes on the $1.4 million prize income between the old rate under Clinton of 39.6% and today's rate under Bush of 35% would be $64,400. That amount could be sent to the Treasury as a gift to the U.S. government, here are the instructions.

(Update: Thanks to "notnidiot" for his comment that led to the new title.)

U.S. Sugar Tariffs Double the Price for Americans

U.S. price of sugar: About 22 cents per pound.

World price of sugar:
About 12 cents per pound.

How the Bailout Auction Should Work

How much should the Treasury pay for distressed assets that nobody else wants?

You might reasonably say that the fair price for an asset nobody wants is zero. But bailout proponents tell us that these assets are plenty valuable; it's just that nobody's stepping up to buy them because it's hard to borrow right now. So how do you set a fair price for an asset that nobody else is bidding on?

Rochester economist Steven E. Landsburg explains how a fair price could be established for distressed assets that nobody wants, using a unique auction strategy.

No Need To Wait for Gov't. Health Care Reform

Employers typically rein in health care costs, now galloping at 6% a year, by slapping their workers with higher premiums, deductibles and co-payments. Is there a better way?

Walgreen, the $54 billion (sales) pharmacy chain, is pushing a different approach: supplying the company doctor. It operates 364 work-site clinics for 183 large (1,000-plus employees) employers, including Goldman Sachs, Continental Airlines and Toyota. Walgreen says employers can lower costs by as much as 20%, thanks to the preventive care it provides. Its service will link employees' health records and those of spouses, dependents and retirees, to Walgreen's 6,356 drugstores.

"We can't wait for health care reform," says Hal F. Rosenbluth, who manages the in-company clinics and sold his retail chain, Take Care Health Systems, to Walgreen last year for a reported $100 million.

~Forbes Magazine article "In-House Calls"

Markets Remain Our Best Hope for a Better Future

"The financial crisis is not the crisis of capitalism," according to French president Nicolas Mr. Sarkozy. "It is the crisis of a system that has distanced itself from the most fundamental values of capitalism, which betrayed the spirit of capitalism." Give credit to Mr. Sarkozy for demonstrating leadership in attempting to salvage what we know is true -- that democratic capitalism is the best hope for mankind -- while jettisoning the abuses and fraudulent practices that have distorted the outcomes of free-market competition.

Who would have guessed that it would take a Frenchman to remind us that hope is the limitless source of power that drives the human spirit to create, to improve, to achieve its dreams; it is the greatest civilizing influence in our culture. Yet it was Mr. Sarkozy, speaking before Congress last November, who offered the most profound assessment of our nation's gift to the world.

"What made America great was her ability to transform her own dream into hope for all mankind," he said. "America did not tell the millions of men and women who came from every country in the world and who -- with their hands, their intelligence and their heart -- built the greatest nation in the world: 'Come, and everything will be given to you.' She said: 'Come, and the only limits to what you'll be able to achieve will be your own courage and your own talent.'"

It's a lesson that should never be lost or forgotten.

~Judy Shelton in today's WSJ article "A Capitalist Manifesto: Markets remain our best hope for a better future."

Don't Sell US Short:Keep Your Money in the Market

We are not going to have a depression, and we have survived financial crises before. A century of investing experience, as well as insights from the field of behavioral finance, suggest that investors who bail out of equities during times like these are almost always making the wrong decision.

Look at history: The market eventually bounded back from the damaging stagflation of the 1970s and the savings-and-loan crisis of the early 1990s, when a whole industry had to be rescued. Stocks also recovered from the Asian crisis of the late 1990s. Similarly, investors who held on after the more than 20% one-day stock-market decline in 1987 were eventually well rewarded.

Don't forget that the U.S. economy is still the most flexible in the world and our "innovation machine" is alive and well.

No one has consistently made money by selling America short, and I am confident the same lesson is true today.

~Burton Malkiel in today's WSJ

Sunday, October 12, 2008

Intrade is Not An Opinion Poll, It's a Prediction Mkt.

Bobble comments: I don't put much stock (pun not intended) in Intrade. I find is a far better source of how the candidates are doing. It computes averages of all the major polls and publishes the results in easy to comprehend format (see chart above).

MP: The average of the polls shows Obama ahead of McCain by 49.7% to 42.4%, while Intrade odds are 77.1% for Obama and 22.6% for McCain. Why the huge difference?

Because they are measuring something completely and totally different. The opinion polls are based on surveys of likely voters say who have stated which candidate THEY will likely vote for. The Intrade betting is not based on who traders will vote for themselves, and it is not based on who the traders WANT to win the election (or not win), the betting is on who is MOST LIKELY TO WIN THE ELECTION!

I could be a strong Obama supporter or a strong McCain supporter, or I could hate Obama or McCain, or be completely indifferent, and none of those positions about MY OWN voting preferences would influence what position I would take on Intrade. My position on Intrade is based on how I expect millions of other people to vote.

Bottom Line: Given that Obama has a 7.3% lead in the polls, the trading on Intrade suggests that Obama now has a 77.1% chance to win the election. That's not saying that Obama will get 77.1% of the vote, just that he has a 77.1% to win the election.

As some others have pointed out, if you think Intrade is flawed, inefficient or deficient in some way, that means you can make lots of money on Intrade by exploiting those inefficiencies by betting against the collective wisdom of the masses who have money at risk when they take a position on Intrade. Good luck.

5 Steps To A Housing, Credit and Financial Crisis

1. Weaken lending standards to increase home ownership. Mortgage underwriting standards have been undermined by virtually every branch of the government since the early 1990s. The government had been attempting to increase home ownership in the U.S., which had been stagnant for several decades (see chart above). In particular, the government had tried to increase home ownership among poor and minority Americans. Although a seemingly noble goal, the tool chosen to achieve this goal was one that endangered the entire mortgage enterprise: intentional weakening of the traditional mortgage-lending standards.

2. Celebrate the success of weakened lending standards, as home ownership surges to historical high levels. The weakening of mortgage-lending standards did succeed in increasing home ownership (from 64% to 69%, see chart above). As home ownership rates increased there was self-congratulation all around. The community of regulators, academic specialists, and housing activists all reveled in the increase in home ownership and the increase in wealth brought about by home ownership. The decline in mortgage underwriting standards was universally praised as an “innovation” in mortgage lending.

3. Increased home ownership creates a speculative housing bubble. The increase in home ownership increased the price of housing, helping to create a housing “bubble.” The bubble brought in a large number of speculators in the form of individuals owning one or two houses who hoped to quickly resell them at a profit. Estimates are that one quarter of all home sales were speculative sales of this nature.

4. Investors use ARMs and low(no)-down payment mortgages to speculate in housing. Speculators wanted mortgages with the smallest down payment and the lowest interest rate. These would be adjustable-rate mortgages (ARMs), option ARMs, and so forth. Once housing prices stopped rising, these speculators tried to get out from under their investments made largely with other peoples’ money, which is why foreclosures increased mainly for adjustable-rate mortgages and not for fixed-rate mortgages, regardless of whether mortgages were prime or subprime. The rest, as they say, is history.

Unfortunately, it seems likely that our governing bodies have learned little or nothing from this series of events. If the proper lessons are not learned, we are likely to have a reprise sometime in the future.

From the article "
Anatomy of a Trainwreck," by Professor Stan Liebowitz, featured previously on CD here.

MP: We could add step #5: Easy monetary policy by the Fed in 2000-2002, which brought the Fed Funds target rate from 6.5% to 1%, and lowered mortgage rates to record-low levels in 2002-2003 (see chart below, click to enlarge).

Cartoon of the Day

Saturday, October 11, 2008

Joe Bonamassa: Turn It Up & Check This Guy Out

Joe Bonamassa, the new Stevie Ray Vaughan? How did I miss this guy?

More Than 3:1 Odds for Obama on Intrade

Intrade Odds: 77% for Obama, 23.5% for McCain.

Want Health Insurance? Go Out and Buy It’s Nick Gillespie isn’t making a run for the White House, but he knows how to get coverage to at least half of the 45 million Americans who need it. Call it the Gillespie Plan: If you want health insurance, get some.

In Michigan, you can get basic health insurance through Blue Cross starting at $47.14 per month for those 18-30 years old (about the cost of a basic cell phone plan), and starting at $138.54 per month for another plan for individuals under 65 (not too much more than a cable TV plan with premium channels, and less than two cells phones at the monthly average of $77).

More on the "Decline of the Middle Class" Myth

On this CD post about this Skeptical Optimist post, Bobble writes (with grammar/punctuation corrected): You might want to check Steve's latest revisions. They are inflation adjusted and the income trends look pretty flat. Real income increased from 1994-2007 at approximately 1%. He still compares the period of 1994-2007 with the period 2001- 2007. If he showed the increase from 2001 to 2007 I *think* it would be around zero. He still doesn't show the increase for the top quintile. So how can we tell how the middle class did compared to the top earners? I think this guy and his charts are busted. That you are ignoring this reflects negatively on you and your website. I hope you are more diligent in your teachings.

1. If you look at the actual Census data, you'll see that: a) the datasets for household income are available from 1994 to 2007, and b) household income is NOT reported by quintile or decile, but by income categories in increments of $2,500 UP TO $100,000: e.g. under $2,500, $2,500 to $4,999..... $97,500 to $99,999, and THEN $100,000 AND OVER.

As Steve explains, "The bottom 4 quintiles of household income are easy to analyze, but the 5th (top) quintile is not. Each quintile has the same number of households in it, but only 4 out of 5 quintiles have easy-to-calculate, weighted-average income per household, and income per earner. That's why the charts don't show the highest one."

Certainly, if Census had reported income by quintile, and Steve Conover left that quintile out of his analysis, that omission would be subject to criticism. But if you look at the data, and read Steve's explanation, you'll see that it was not possible to report the top quintile because of the way Census organized the income data.

And adding the top quintile would not change the fact that "income per earner" for all four of the bottom quintiles increased between 1994-2007. In other words, the "middle class" did not disappear and income for that group and even income for the "lower class" did NOT stagnate. And if income inequality per earner did increase during that period (which we can't tell without the top quintile), it was NOT because the income of the middle and lower income groups stagnated or declined.

2. Adjusting for inflation doesn't change the original analysis that showed "income per earner" for all four bottom quintiles increasing between 1994 and 2007, at about the same rate, but with a slightly higher rate for the bottom quintile than the other three (see top graph above). Subtracting 2.5% average annual inflation from each quintile doesn't change the facts that: a) real income per earner for each of the four groups increased between 1994 and 2007 at about the same rate (1%), except that the LOWEST QUINTILE increased at a significantly HIGHER rate of 1.5% (see bottom chart above).

Bottom Line: The value of Steve Conover's analysis is that he has converted the Census Bureau's raw data on "Household Income" from 1994-2007 to INCOME PER EARNER, BY QUINTILE, to investigate the often-reported stories about "the decline of the middle class" (305,000 Google hits), "the war on the middle class" (515,000 Google hits), etc. Whether we look at nominal income or real income, the result is the same: all income groups have experienced gains in "income per earner" from 1994-2007, and the lowest income quintile did even better than the next highest 3 quintiles. Therefore, the rich got richer, the middle class got richer, and the poor got richer.

Any analysis of household income over time will always be distorted by the facts that: a) the number of "persons per household," and b) the number of "earners per household," vary significantly by quintile, and change over time.

My own analysis showed this in a previous post, when I adjusted real median household income over time by the average number of persons per household, which has declined significantly from about 3.3 persons per household in 1967 to about 2.55 in 2007. After adjusting for household size, the real median income per person reached an all-time high in 2007, see charts below:

Friday, October 10, 2008

Gas Below $2.50 in Missouri


I'll Drink To That

Andy Roth at Club for Growth points out that Anheuser Busch (BUD) stock is up by 30% over the last six months, while the Dow Jones average is down by 30% (see chart above, click to enlarge).

U.S. Economy Ranks #1 for Competitiveness

Good News: Despite the financial crisis, the United States continues to be the most competitive economy in the world according to the World Economic Forum's "Global Competitiveness Report 2008-2009." (see top chart above) This is because it is endowed with many structural features that make its economy extremely productive and place it on a strong footing to ride out business cycle shifts and economic shocks. Thus, despite rising concerns about the soundness of the banking sector and other macroeconomic weaknesses, the country’s many other strengths continue to make it a very productive environment. The United States is ranked first for innovation, and its markets support this innovative activity through their efficient allocation of resources to their most effective use.

Bad News: However, the United States has built up large macroeconomic imbalances over recent years, with repeated fiscal deficits leading to rising and burgeoning levels of public indebtedness. This indicates that the country is not preparing financially for its future liabilities and is on the road to making interest payments that will increasingly restrict its fiscal policy freedom going into the future.

The three most problematic factors for doing business in the U.S. are 1) tax rates, 2) tax regulations and 3) inefficient government bureaucracy (see bottom chart).

Cartoon of the Day

Thursday, October 09, 2008

Income PER EARNER Has Actually Risen For All Groups, And Rose Fastest For The Lowest Quintile

From The Skeptical Optimist:

Median household income since 2001 looks stagnant at best, doesn't it (see chart above)? Something must have been really wrong with a growing economy that left the median household out of all that growth, don't you think? No wonder we hear so much about it from our politicians.

Hold on though. Try to think of one company — just one, large or small — that has ever written a payroll check to a "household." For example, has Microsoft Corp. ever written a payroll check to "The occupants of the house at 2345 Main Street, Redmond, Washington"? No, of course not.

A household has a group of people in it; most of those groups contain at least one specific person who earns a paycheck. The U.S. Census Bureau calls those people "Earners." The amount of money income received by a household depends to a great degree on the number of "earners" in that household (
Census data here).

So the question about stagnated incomes is really a multi-part question. Here is the better question, and its multi-part answers:

1. Did household income stagnate or decline for households with no earners at all? YES.

2. How about for households that had a decline in the number of earners? YES.

3. How about those that had the same number of earners? NO.

4. How about those that had an increase in the number of earners? NO.

By now it should be obvious that an even better question is: Did the middle class income earner participate in the overall economy's growth? It's a better question because it removes the confusion caused by differences in the number of earners per household.

So let's take a look at how "income per earner" did for each of the quintiles of household income.

The chart below shows the result for the period 1994-2007. Note that any possible definition of the "middle class" would show that middle class earners' incomes did not stagnate or decline. In fact, they grew in tandem with the 3.2% average growth rate of overall disposable income per capita (a derivative of GDP).

Bottom Line: A previous CD post highlighted 5 problems with the Census Bureau's data on median household income, and showed that on a "per household member," real median household income actually reached an all-time high in 2007.

The Skeptical Optimist now provides evidence that on an "income per earner" basis, income grew at about the same rate (3.4% to 3.9%) for all income groups between 1994 and 2007, and actually grew the fastest (3.9%) for the bottom quintile (see chart above). In other words, between 1994 and 2007, the rich have gotten richer, the middle class has gotten richer, and the poor have gotten richer, all at about the same rate.

The Top 1% of Taxpayers Paid More in Federal Income Taxes in 2006 Than the Entire Bottom 95%

According to the most recent tax data from the IRS through 2006 (available here from the Tax Foundation):

The top 1% of taxpayers earned $1.79 trillion (22.06% of the total) in 2006 and paid $408.4 billion in taxes (about 40% of the total). The bottom 95% of taxpayers earned $5.14 trillion (63.34% of the total) and paid $408.1 billion taxes (about 40% of the total).

In other words, the top 1% of U.S. taxpayers paid slightly more in federal income taxes ($408.4 billion) in 2006 than the entire bottom 95% of taxpayers paid ($408.1 billion), see top chart above.

Moreover, the tax burden on the top 1% has increased over time, while the tax burden on the bottom 95% has decreased (see bottom chart above). For example, in 1980 the top 1% paid only 19% of total federal income taxes paid, while the bottom 95% paid more than 63%. Over the last 25 years, the tax burden on the top 1% increased from 19% to 40%, while the tax share of the bottom 95% has decreased from 63% to 40%.

In 2002, before most of the "tax cuts" went into effect, the share of income taxes paid by the top 1% was below 34%, and by 2006 that share increased to almost 40%. If we assessed tax policies by the share of income taxes paid by "the rich" (i.e. top 1%), the "Jobs and Growth Tax Relief Reconciliation Act of 2003" wasn't a tax cut, it was a tax increase, since it increased the tax burden on the top 1% to record levels (40%), and resulted in more tax revenue from the top 1% than the entire bottom 95% of taxpayers!

Now, it's also true that the share of adjusted gross income earned by the top 1% has increased over time, while the share of income earned by the bottom 95% has decreased (see chart below), although the income share of the top 1% has been fairly stable at around 20% for the last ten years.

Who Needs Investment Banks? Trade Finance Makes a Comeback and Booms Amid The Global Crisis

GENEVA (Reuters) - Business is booming in the trade finance market as exporters and importers return to a tried and tested form of credit amid the chaos of the financial crisis, bankers in the sector say.

Demand for trade finance -- a traditional form of banking dating back to the Middle Ages -- is so strong that some houses say they are turning away business for lack of capacity.

Trade finance is the easiest, cheapest and most collateralized form of credit, industry experts say.

In recent years customers were lured away by investment banks and corporate finance departments offering sophisticated products, but now they are flooding back attracted by the simplicity and transparency of trade finance.

HT: Clover Aguayo

Bottom Line: Markets adjust. The invisible hand will survive any financial crisis.

Update: Traffic Volume

Thanks to John Thacker for a pointer to a longer historical data source for traffic volume back to 1971. There were two previous periods of significant decreases in traffic volume, comparable to the most recent 9-month, 2.08% decrease in miles driven (moving 12-month total) from November 2007 to July 2008.

There was a 11-month, 2.12% decrease in traffic volume from December 1973 to October 1974 (see shaded area in graph above), when gas increased from 40 cents to 55 cents per gallon. I think price controls were in effect then and prevented an even higher increase in gas prices, since oil went from $4.30 to $11.16 per barrel during that period.

A 3.25% reduction in traffic volume occurred over a 12-month period from May 1979 to May 1980 when oil almost tripled from $15 to $40 per barrel, and retail gas prices almost doubled from 62 cents to $1.11 (see shaded area in graph).

Therefore, I stand corrected - there were several previous periods in U.S. history with greater reductions in traffic volume than the recent 9-month period of a cumulative 2.08% decrease in miles driven. With gas prices falling now ($2.68 in Missouri) in October, the trend may reverse, although we'll probably see monthly declines in August and September when those data become available.

What You Need To Know About The Bailout

George Mason economist Russell Roberts (and Cafe Hayek blogger) breaks it down.

More Food At Home, Less Dining Out

Link. (HT: Rolf Penner)

Restaurant industry performance remained soft in August, as the National Restaurant Association's comprehensive index of restaurant activity stood below 100 for the tenth consecutive month. The Association's Restaurant Performance Index (RPI) - a monthly composite index that tracks the health of and outlook for the U.S. restaurant industry - stood at 98.3 in August, up 0.1% from its July level.

The recent lack of change in the Restaurant Performance Index reflects the wait-and-see sentiment in the financial markets and overall economy. Restaurant operators reported negative same-store sales for the eighth time in the last 10 months, and their outlook for sales growth in the months ahead remains uncertain. A record 31% of restaurant operators said the economy is the number-one challenge facing their business, while 22% identified food costs as their top challenge.

Wednesday, October 08, 2008

Longest Record of Conservation in U.S. History?

The Federal Highway Administration reported that travel during July 2008 on all roads and streets in the nation fell by -3.6% compared to July last year. June marks the ninth consecutive month of traffic volume decline compared to the same month in the previous year. Travel YTD through July in 2008 fell by -3.0% compared to 2007.

There was never more than a single monthly decline in traffic volume (vs. the same month a year ago) until 2006, a few examples of two consecutive monthly declines 2006 and early 2007, but never in the history of these data was there ever a period of more than a 2-month consecutive decline until recently, and therefore the 9 consecutive monthly decline (November 2007 through July 2008) in miles driven is a record, and represents the most significant adjustment to driving behavior in recent history.

On a moving 12-month total basis, traffic volume in July fell to a four-year low of 2.944 trillion miles, the lowest level since July of 2004 (see chart above), and this measure has fallen in each of the last nine months.

Gasoline Price Free Fall: Gas Now At $2.89 in Michigan and $2.62 in Missouri. Predatory Pricing?

Link for Michigan.

Link for Missouri.

Are gas stations now guilty of predatory pricing? Are speculators now guilty of driving oil and gas prices down?

A Couple of Great Letters From FreeMarket Politics

Dear UnitedHealthcare:

As you may know, health care coverage is now a right. Barack Obama said so in last night's debate. The purpose of this letter is to inform you that I have decided to stop paying monthly insurance premiums. I don't pay a dime for any of my other rights - life, liberty, pursuit of happiness, blah blah blah... - why should I pay you guys for health insurance? Of course, I expect you to continue to provide your services for me and my family. If you don't, I'll sue you. For violating my rights.

Best Regards,

Jeff Lehner


Dear Wells Fargo:

I'm writing to inform you that I have decided not to make my next eight (8) mortgage payments. There are nine (9) rooms in my home; I only have one (1) high-definition television. You do the math. If you have any questions, please feel free to contact Treasury Secretary Hank Paulson. He is responsible for keeping me in my home. Whatever that means.

Best Regards,

Jeff Lehner

Markets In Everything: Cars for Women in Iran

A car designed specifically for women, with electronic parking aids and a jack making it easier to change a wheel, has been unveiled by Iran's state-backed manufacturer.

Iran's hardline Islamic government encourages gender separation, and last year backed a proposal to create a womens' bicycle which covered the rider's legs and upper body. A women-only taxi service, with female drivers, has been launched in the country's main cities and buses and underground trains are segregated.


Inverse Relationship

The story of my life as a professor:
Indexed by Jessica Hagy, via Free Market Politics

Let's Be Energy Independent. NOT

“Energy independence” is a bad idea. Every individual understands that it is far better to depend on others for most of what we want rather than trying to do everything for ourselves. This is true whether we’re buying oil or haircuts. The principle applies to groups of individuals living in large geographical areas called countries.

Energy “dependence” is much cheaper. In fact, the case for being “dependent” on other countries for oil is the same as the case for being dependent on other countries for bananas or coffee. At some tariff-protected price, the United States could be self-sufficient in bananas or coffee. If the price were high enough, someone would grow bananas and coffee plants in greenhouses. But why would we want that? Why would we want to pay more for coffee and bananas than we need to?

Another way of saying that we would pay more is that we would give up more of our resources (capital, labor, and land) to have domestic bananas and coffee than we now give up by producing other things with these resources and using the proceeds to buy coffee and bananas more cheaply abroad. We would be poorer.

The reasoning doesn’t change when the good is oil. By preventing people from importing oil, either with a ban on imports or a tariff on oil, the government would make us poorer.

Or think of it another way. Do you ever take your shirts to the local cleaner to be washed? If so, you are “dependent” on the cleaner. You could wash your shirts yourself, but you don’t. The reason you don’t is that your time is more valuably used producing other things, some of which you sell, and using some of the proceeds to pay the cleaner.

~Economist David Henderson in
The Freeman

MP: As David Henderson points out, advocating "energy independence" is as nonsensical as advocating "banana independence," "coffee independence," "lumber independence," "clothing independence," "diamond independence," "cashmere independence," "spice independence," etc. for the U.S. In fact, the inevitable result of the logic of "energy independence" is complete and total self-sufficiency for the U.S., with no imports and no exports, and complete "foreign trade independence."

But if economic self-sufficiency actually made the U.S. better off, wouldn't it also make the state of Michigan better off? And if economic self-sufficiency made the state of Michigan better off, wouldn't it also make each of Michigan's 83 counties better off to be self-sufficient? And if economic self-sufficiency made each county better off, wouldn't it also make me better off as an individual, to be "energy independent," "food independent" and "clothing independent?" If so, I guess I better start chopping wood and converting my back yard into a vegetable garden.

Lessons from the Bailout

The financial collapse of Fannie Mae and Freddie Mac is not a failure of the free market because lending institutions in a free market would not have taken on the high-risk loans. They were forced to by the heavy hand of government. The solution is not a taxpayer-financed bailout. The solution is to let them fail and allow the people who invested in them, as well as the people who purchased homes they couldn't afford, suffer the losses. Of course that takes a level of political courage that is in short supply.

~George Mason economist Walter Williams

Tuesday, October 07, 2008

Causes of the Mortgage Meltdown

From the article "Anatomy of a Trainwreck," by Economics Professor Stan Liebowitz, University of Texas at Dallas

Executive Summary: Why did the mortgage market melt down so badly? Why were there so many defaults when the economy was not particularly weak? Why were the securities based upon these mortgages not considered anywhere as risky as they actually turned out to be?

This report concludes that, in an attempt to increase home ownership (see chart above), particularly by minorities and the less affluent, virtually every branch of the government undertook an attack on underwriting standards starting in the early 1990s. Regulators, academic specialists, GSEs, and housing activists universally praised the decline in mortgage-underwriting standards as an “innovation” in mortgage lending. This weakening of underwriting standards succeeded in increasing home ownership and also the price of housing, helping to lead to a housing price bubble. The price bubble, along with relaxed lending standards, allowed speculators to purchase homes without putting their own money at risk.

The recent rise in foreclosures is not related empirically to the distinction between subprime and prime loans since both sustained the same percentage increase of foreclosures and at the same time. Nor is it consistent with the “nasty subprime lender” hypothesis currently considered to be the cause of the mortgage meltdown. Instead, the important factor is the distinction between adjustable-rate and fi xed-rate mortgages. This evidence is consistent with speculators turning and running when housing prices stopped rising.

Conclusion: The political housing establishment, by which I mean the federal government and all the agencies involved with regulating housing and mortgages, is proud of its mortgage innovations because they increased home ownership. The housing establishment refuses, however, to take the blame for the flip side of its focus on increasing home ownership—
first, the bubble in home prices caused by lowering underwriting standards and then the bursting of the bubble with the almost catastrophic consequences to the economy as a whole and the financial difficulties being faced by some of the very homeowners the housing establishment claims to be trying to benefit.

MP: More support of the proposition that U.S. public policy turned good, responsible renters into bad, irresponsible homeowners.

Commercial and Industrial Loans Set New Record

Commercial and industrial loans at large commercial banks in the U.S. set a new record of $801 billion in the week ending September 24, going above the $800 billion for the first time, according to weekly banking data just yesterday by the Federal Reserve (see chart above, click to enlarge).

It doesn't seem like the credit crunch/crisis is affecting commercial lending at large U.S. banks yet????

Carpe Diem Moves Up to #11 on Gongol

Traffic Rankings for Business and Economics Websites, by average daily visits, at

Pumpkin Shortages and Scary Price Gougers?

Attorney Generals across the country, be on the lookout for potential pumpkin "price gouging" this month, as pumpkin shortages are a scary possibility in many parts of the country, according to various news reports. If there was a futures market for pumpkins we could blame greedy pumpkin speculators for the high prices, but I guess we'll have to settle for blaming greedy pumpkin "price gougers."

Gas Below $3 All Over The Midwest, $2.68 in Texas

Lowest reported gas prices today in:

Texas: $2.68

Oklahoma: $2.80

Missouri: $2.79

Kansas: $2.87

Iowa: $2.87

Minnesota: $2.94

World Economic Growth Will Resume and Recover

Is this a final "Crisis of Global Capitalism" -- to borrow the title of a book by George Soros written shortly after the Asian financial crisis of 1997-98? The crisis that kills capitalism has been said to happen during every major recession and financial crisis ever since Karl Marx prophesized the collapse of capitalism in the middle of the 19th century. Although I admit to having greatly underestimated the severity of the current crisis, I am confident that sizable world economic growth will resume before very long under a mainly capitalist world economy.

Consider, for example, that in the decade after various predictions of the collapse of global capitalism following the Asian crisis, both world GDP and world trade experienced unprecedented growth thanks to the power of market competition on a global scale. The South Korean economy, for example, was pummeled during that crisis, but has had significant economic growth since. World economic growth will recover once we are over the present severe financial difficulties.

~Gary Becker in today's WSJ editorial "We're Not Headed for a Depression: No, this isn't the crisis that kills global capitalism."

Monday, October 06, 2008

A Replay Of 1929? Don't Count On It

Today some have questioned whether we could have another 1929-style Depression. The answer is no — at least, it shouldn't happen.

Then we had over 25% unemployment; now it's 6% and could move somewhat higher, which is typical for economic corrections (see chart above). Then, by 1934 about one-half of mortgages were in default, today it is only 6%. Nearly 94% of homeowners are still making their monthly payments.

So what's the big lesson to be learned here by the public? That this financial crisis was the result of yet another Big Government program that had great intentions but created devastating unintended consequences that hurt millions of people.

It was not the fault of African American groups, which naturally want to help their people. Nor was it the fault of America's free enterprise system, or a lack of enough regulation. No, it was Big Government once again trying to run a private industry.

Mortgage Lessons From Down Under: US Politicians Were Wrong to Pimp The Homeownership Fraud

Lessons To Learn From Mortgage Lending in Australia:

Maybe only a friendly foreigner could say this. But America needs to realize that not everyone can own a home. The American Dream of home ownership for all is a fraud. Politicians who pimped this dream created an unsustainable mortgage industry whose collapse is only surprising because it didn't happen earlier. America's mortgage industry will not recover, nor deserve to recover, unless it is prepared to challenge this politically unpalatable reality.

Now, Australians -- and others -- place a high value on homeownership too. But they are aghast at the dumb things America has tolerated in pursuit of that goal. Even more dumbfounding is that nobody in Washington seems to be talking about fixing it.

~Editorial in today's WSJ by Australian journalist

The editorial points out some significant differences between mortgage lending in the U.S. and Australia - the U.S. has nonrecourse, 30-year fixed rate mortgage loans, typically without prepayment penalties, and we also passed the CRA, and all of these uniquely American features of mortgage lending serve to "stack the cards against lenders and in favor of risky homeownership." And it's safe to say that all or most of these pro-borrower, anti-lender mortgage policies in the U.S. are government-mandated.

In contrast, mortgage loans in Australia are recourse, so "When Australians borrow money to buy a house, they know that if they default and the mortgaged property doesn't cover the debt, they will be responsible for the shortfall. And the lender will chase them for it. It's a neat way of reminding Australians to borrow responsibly."

Australian mortgages have either variable rates of interest, or fixed rates for periods of a maximum of five years, and they face a prepayment penalty when refinancing a mortgage to compensate the lender for the "lost interest the loan would have brought in had it been carried to term."

Bottom Line: One part of fixing our credit crisis is to consider reversing the pro-borrower, anti-lender mortgage policies in the U.S. Moving towards the Australian system would go a long way towards solving our mortgage troubles, and would stabilize our credit market and banking system and make them less vulnerable to credit shocks in the future.

Expected Inflation At a Six-Year Low (Unadjusted)

10-year TIPS-derived expected inflation

The charts above show the market-based 10-year TIPS-derived expected inflation from the Cleveland Fed (both unadjusted - top two charts, and adjusted - bottom chart), calculated from the difference between 10-year nominal treasury notes and 10-year treasury inflation-protected securities. On an unadjusted basis, inflation expectations fell to a six-year low of 1.47% last week, falling below 1.5% for the first time since September of 2002 (see top chart above).

After adjusting for an inflation-risk premium and a liquidity premium (see details here), the Cleveland Fed's adjusted measure (2.45%) shows that expected inflation is the lowest since early November 2007 (see bottom chart above).

MP: As Frederic Mishkin wrote several weeks ago in the WSJ, "Don't worry about inflation." We might have many other economic concerns right now, but I think it's time to take inflation off the list of economic variables to worry about.

Sunday, October 05, 2008

Lesson of I-35W Bridge: Private Enterprise Works

So what is the primary lesson of the St. Anthony Bridge (I-35W bridge in Minneapolis, see photo above) rebuild? Private enterprise works. Most road and bridge construction in America gets performed by state agencies who subcontract bits and pieces out while retaining the general-contractor role. In this case, the bridge replacement was so badly needed that Minnesota dumped that model to use one that would produce a bridge in a shorter period of time — and incentivized the contractor to get it done fast.

Private enterprise works. Businesses understand this. When they need project work done, especially for projects where speed is essential and the work outside the scope of their expertise, they hire contractors to do it rather than hire the expertise onto their own payrolls. Contractors who fall behind can be penalized or even replaced without having to worry about employment law and other administrative headaches. They can also get bonuses without invoking other kinds of payroll issues.

Related 1: "5 Engineering Lessons From the New, Reopened Minnesota Bridge" in Popular Mechanics

Related 2: As economist Steven Landsburg reminds us, "Most of economics can be summarized in just four words: People respond to incentives. The rest is commentary."

Tina Fey As Sarah Palin Nails It Again on SNL

Just in case you missed it last night.

Capitalism vs. Socialism In a Single Picture

North Korea vs. South Korea at night. (HT: OBloodyHell)

According to the CIA World Factbook, 2007 GDP per capita (PPP) was $25,000 in S. Korea vs. $1,700 in N. Korea.

In "Why Socialism Failed," I concluded that "The main difference between capitalism and socialism is this: Capitalism works."

Markets In Everything:Heavy Equipment Play Arena

For the first time in history, you can test your skills behind empowering earth-moving machines. Dig This invites individuals and groups to operate dozers and excavators and complete invigorating material moving projects. Adventures can be structured as just-for-fun recreational diversions or we can incorporate team building games and activities.

Farm Subsidies Gone Wild: Cows in Europe Earn More Per Day ($2.20) Than 1.2 Billion Poor People

1. Primary farm producers in the world's developed countries receive about $280 billion a year in government support. In the European Union, farmers receive a third of their income from government subsidies. Beef and veal producers get more than 70% of their income from subsidies. A typical cow in the European Union receives a government subsidy of $2.20 a day. The cow earns more than 1.2 billion of the world's poorest people.

~Mark Vaile, Australian trade minister in 2005

2. The developed world funnels nearly $1 billion a day in subsidies to its farmers, encouraging overproduction. That drives down prices and leaves farmers in poor nations unable to compete with subsidized products, even within their own countries. In recent years, American farmers have dumped cotton and other products on world markets at prices that do not begin to cover their cost of production. Europe's system is even worse; the United States' farm subsidies are only a third of Europe's. A cow in France shouldn't make more than a farmer in Burkina Faso. That is just shameful.

~NY Times editorial "Cow Politics" in 2005

3. In 2006, expenditures on the Common Agricultural Policy (farm subsidies) were €49.8 billion, compared to €48.5 billion in 2005. This represents 47% (the largest component) of the EU's expenditures in 2006, up from 46% in 2005.

~Financial Management in the European Union

And just in case, 47% seems high, it's actually "low" compared to the past. Until 1992, farm subsidies represented nearly 61% of the EU's budget. Reminds me of the joke:

Q. How do you starve a European farmer?

A. Weld his mailbox shut.

Saturday, October 04, 2008

As A Share of Income, U.S. Has Lowest Food Prices on the Planet; Europeans Spend Almost 2X As Much

Click on the chart above to enlarge, it shows the "Percent of personal consumption spent on food by selected countries, 2007" based on data available from the Department of Agriculture.

Notice that spending on food consumed at home in the U.S. is only 5.7% of total household consumption (disposable personal income), by far the lowest in the world, at least for the 71 countries in this study. Spending on food in the EU countries at 12.1% of disposable personal income is more than twice the U.S. rate. Japan's rate of 14.6% is more than 2.5 times greater than the U.S. and even Canada at 9.2% doesn't even come close to the U.S.

Russians spent almost 29% of their income on food in 2007, the Chinese 35% and the Indians 32.4%, levels even higher that the U.S. rate of 21.2% in 1930. That is, the average American in 1930 spent less of their disposable income on food than the average person in almost half of the countries list above spent in 2007.

Bottom Line: When it comes to affordable food (as a share of disposable income), there's no place on the planet where it's cheaper than the U.S. And it's gotten better and better over time, as food expenditures in the U.S. have fallen from 21.2% of income in 1930 to only 5.7% in 2007.

Pork Breakdown Of the Bailbout Bill + Ron Paul

Ron Paul: "You take the original bailout bill, make it a lot worse and you get 57 congressmen switching from no to yes."

Demystifying the Mortgage Meltdown

Via Coyote blog, the webcast of The Milken Institute presentation "Demystifying the Mortgage Meltdown: What It Means for Main Street, Wall Street and the U.S. Financial System," (October 2) is available, slides available here. The slides contain loads of great graphical information about the credit crisis (like the one above).

When It Comes To Charity, It's Not Even Close. The Palins Are Almost 12X As Charitable As the Bidens

A recent CD post reported Joe Biden's miserly charitable contributions (averaging less than $300 per year from 1998 to 2006 on average annual income of $237,000). CD reader Kansas Bob provided the link to Sarah Palin's Tax Records, providing data for a comparison of the vice-presidental candidate's records of charitable giving.

When it comes to giving money to charities, it's not even close: the Palins are almost 12 times as generous as the Bidens, when measured by charitable contributions as a percent of Adjusted Grosss Income (AGI) in 2006 and 2007: 2.79% average for the Palins in those two years, vs. 0.24% for the Bidens (see top chart above).

And even though the Palins ($294,000) earned only about half the income of the Bidens ($569,000) in 2006 and 2007 combined, the Palins gave almost 6 times as much to charity ($8,205) in those two years as the Bidens ($1,375), see bottom chart above.

In Defense of Speculators and Short-Sellers

Everywhere today government bureaucrats and media pundits blame unwanted price movements on speculators and short-sellers. If prices are “too high”--it’s the fault of greedy speculators; if prices are “too low”--it’s the work of evil short-sellers. To hear these critics tell it, speculators have the ability to create artificially high prices, while short-sellers can wantonly destroy sound companies.

The critics then claim that since neither speculators nor short-sellers perform any positive economic function, barring them from the marketplace is an appropriate remedy, one that’s long past due.

If prices are to reflect reality, they must be the result of an objective process of discovery and judgment performed by interested actors. Just as doctors specialize in identifying and evaluating the facts affecting health and disease, speculators and short-sellers specialize in identifying and evaluating the facts pertinent to market prices. They make it their business to understand economic facts like supply and demand, and then risk their capital on their judgment, properly profiting if they’re right and losing if they’re wrong. Thus in a free market, rather than prices being set by wish or decree, they are set by a rational process, one which benefits from the knowledge of all who participate.

Speculators and short-sellers don’t create facts, they seek to identify and respond to them; and in the process they help adjust prices to economic conditions and establish smooth and liquid markets. As a result--instead of being scapegoated and banished--they should be respected and welcomed for the productive role they play in our markets.

~Trader, speculator and short-seller
Amit Ghate