Saturday, September 29, 2007

Preparing for Chinese Olympics: Fantastic

Amid the international discussion regarding the merits of a somewhat tyrannical government hosting the 2008 Olympics, TIME magazine reported the most important preparations underway:

Government officials say some 4 million Beijing residents have received English language lessons. Famous for aloofness and droll irony, the city's people have been getting training in other areas too in the hope that they will curb their spitting, erratic driving, incessant littering and inability to form an orderly line.

Saturday, September 22, 2007

Mulling Over Bush's Proposal

Bush's plan to alleviate the credit crunch (expanding FHM loans) seems mild compared to the political alternatives. The Wall Street Journal today discussed its without comparison.

No one wants to see borrowers lose their homes, and the good news is that private lenders are already working with late-payment borrowers to refinance the terms of these subprime loans. What's troubling about the FHA expansion plan is that the insurance guarantee places taxpayers atop the housing bubble. Uncle Sam would insure tens of billions of dollars in new mortgage liabilities, and just when default levels are cascading.
Worse, both the White House and Congress want to suspend the FHA's downpayment requirements to insure even zero-equity loans. They should read a new study by the Office of Federal Housing Enterprise Oversight (OFHEO), which reviewed 5,000 FHA loans and found that borrowers "who make no downpayment at all have the highest default rates." Sometimes these default rates were three times higher than high downpayment loans. In the latest "FHA modernization" bill, some borrowers would have no equity in their home.

Thursday, September 20, 2007

Why They Should Stay

I apologize for the delay in posting, I've been out of town. As I've said before, subscribe to my RSS reader to make up for my skirmish-ness.

Allow me to briefly delve into foreign policy. The Economist had a very well organized argument in their cover story last week.

From a slightly different perspective, but perhaps a more pertinent one, economist Thomas Sowell articulates the mistake of Iraq--and the disaster it would be to leave.

If nothing else comes out of the Iraq war, it should banish the concept of "nation-building" from our language and our minds. "The track record of nation-building and Wilsonian grandiosity ought to give anyone pause," as was said in this column before the Iraq war began...

You cannot turn a territory and its population into a functioning nation with the stroke of a pen or the drawing of lines on a map.

Real nations evolve over time out of the mutual accommodations of peoples, not by imposing the bright ideas of theorists from the top down...

This is not a plea for withdrawal. Whatever the situation when we went in, international terrorists have chosen to make this the place for a showdown battle. We can win or lose that battle but we cannot unilaterally end the war. It is the terrorists' war, regardless of where it is fought.

Saturday, September 8, 2007

A Good Point Regarding Payroll Cuts

The Labor Department's August employment report shows a gain of 24,000 private sector jobs. Job growth for June and July was revised lower, suggesting that the job market had been
under pressure even before the latest bout of financial market unrest in August.

A drop in government payrolls more than erased the private sector gain, but economists pointed out that the biggest culprit was teachers, a segment that is vulnerable to large
seasonal swings and appears likely to be revised higher next month to reflect the start of the school year.

The data was collected in the week that included August 12, the height of the financial market turbulence, but before a rash of reported financial job cuts, which will likely show up
in employment reports for September or October.

Interesting read.

Friday, September 7, 2007

No Net Job Growth in August

The AP is reporting that employers dropped 4,000 net jobs in August. Huge gains in education, retail, and healthcare where overshadowed by losses in various manual labor sectors and government jobs.

It's really quite amazing what around 1% of the mortgage industry-- and prior to that, the fed's excess money supply- can do to the rest of the economy.

Unemployment as a whole remains a healthy 4.6%, and August showed reasonable wage gains.

Wednesday, September 5, 2007

2008 Breaking News: John Edwards is a Populist

Who picks up Labor Union endorsements. Thank you, Mr. Edwards, I'll be sure to consider that when casting my vote.

“The union movement is not just important for the past, it is crucial to strengthening and growing the middle class in America, crucial to lifting millions of Americans out of poverty,” Mr. Edwards said while visiting a region of the country where the steel and manufacturing businesses have declined.

You can just see a plethora of empirical data ooze from that statement. You can, can't you? Surely someone can. I'm just inferior.

Monday, September 3, 2007

Competition Improves Efficiency - Shocking!

In the most shocking news since Criss Angel made a pocketknife disappear, look for an article in the next American Economic Review entitled "Do Markets Reduce Costs? Assessing the Impact of Regulatory Restructuring on US Electric Generation Efficiency." It's conclusions are so blunt it even caught US News and World Report's attention:

Over the past two decades, huge swaths of the economy have been deregulated, from banking to electricity to airlines. But has competition increased efficiency? In a paper forthcoming in the American Economic Review, a group of academics from Emory University's Goizueta School of Business, MIT, and the University of California's Haas School of Business say yes. In Do Markets Reduce Costs? Assessing the Impact of Regulatory Restructuring on U.S. Electric Generation Efficiency, the researchers examine production at fossil-fuel generating plants from 1981 to 1999, before and after deregulation. Publicly owned plants, which were largely sheltered from deregulation, experienced the smallest efficiency gains. Investor-owned plants in states with restructured markets improved the most. Even in a stodgy old industry like electricity, markets do seem to work their magic.

The paper is currently available for free on the Berkley website. The abstract explains well:

While neoclassical models assume static cost-minimization by firms, agency models
suggest that firms may not minimize costs in less-competitive or regulated
environments. We test this using a transition from cost-of-service regulation to
market-oriented environments for many U.S. electric generating plants. Our
estimates of input demand suggest that publicly-owned plants, whose owners were
largely insulated from these reforms, experienced the smallest efficiency gains,
while investor-owned plants in states that restructured their wholesale electricity
markets improved the most. The results suggest modest medium-term efficiency
benefits from replacing regulated monopoly with a market-based industry structure.

An excellent empirical work, nearly the entire article is as quotable as the abstract. The principle argument of free market advocates during electric reform was nearly dead-on.

During the second half of the 1990s, states began to shift their focus from
incentive regulation to restructuring. By 1998, every jurisdiction (50 states and the
District of Columbia) had initiated formal hearings to consider restructuring their
electricity sector, and by 2000, almost half had approved legislation introducing some
form of competition that included competitive retail access, whereby companies competed
to sell power to retail customers.10 Restructuring initiatives, in contrast to incentive
regulations, fundamentally changed the way plant owners earn revenue....Retail access programs in combination with the creation of the new
wholesale spot markets may increase the intensity of cost-cutting incentives, leading to
even greater effort to improve efficiency.

David Letterman: “Top Signs President Bush Needs A Vacation”: Staffers found him having a conversation with a coat rack; Asked CIA director to have Jason Bourne join hunt for Osama; Hasn’t stopped sobbing since he was passed over for “The Price is Right”; Has only seen the new Harry Potter movie four times; So overworked he’s pronouncing words correctly; He’s been drinking like an astronaut.

Jay Leno: Pretty busy day in Washington today. Attorney General Alberto Gonzales and Karl Rove went to U-Haul together to help each other move. ... Idaho Sen. Larry Craig, a married, conservative Republican, was arrested by a plainclothes police officer for lewd conduct in a Minneapolis airport men’s room. Today the senator’s office said it was all a big misunderstanding. The undercover police officer said the senator tried to reach under the stall to touch him, but the senator said, no, he wasn’t trying to touch him, he was only trying to pick up a piece of paper off the floor. Who picks up paper off the floor in the men’s room? I don’t even like when my shoe laces touch the floor in the men’s room. ... You know who I feel sorry for in this whole thing? The undercover cop. How’d you like to have that job? Sit in an airport bathroom all day, your pants around your ankles with a coffee and a donut waiting for guys to hit on you. ... At a political forum here in Hollywood last week, Hillary Clinton said that she does not support gay marriage. In fact, she said she’s not too crazy about straight marriage anymore, either. ... Fred Thompson said he’s still testing the waters in his bid for the presidency. He’s been testing the waters for what, like six months now? In fact, those aren’t wrinkles on his face—he’s starting to prune up from being in the water for so long.

Obama Blames All Consumer Choices on Mortgage Lenders

Unscrupulous lenders who deceptively sold subprime mortgages to millions of Americans should be fined and the proceeds used to help bail out borrowers facing a wave of foreclosures, according to Barack Obama, the Democratic senator running to be his party’s presidential candidate...

Writing in today’s Financial Times, Mr Obama blamed lobbyists working on behalf of lenders for obstructing tougher regulation of the subprime industry, adding: “Our government failed to provide the regulatory scrutiny that could have prevented this crisis.

“While predatory lenders were driving low-income families into financial ruin, 10 of the country’s largest mortgage lenders were spending more than $185m (€136m, £92m) lobbying Washington to let them get away with it,” he wrote, citing figures from the Centre for Responsive Politics.

Obama's harsh rhetoric is shallow and ill-conceived by most economic standards. Foreclosures are painful, not profitable, for lending institutions. These businesses have very little incentive to repossess on shaky subprime mortgages. As painful as it sounds to those struggling to make payments, the unwise consumer who borrowed more than he or she could afford, and poor planning on the part of the lender, are the principle financial villains in this story. Yes, some people were probably not fully informed on the ramifications of these adjustable rate mortgages. Nonetheless, "learning the lesson" of mortage marketing doesn't come easily. Bailing them out or punishing a business that is losing out does little to rectify potential future crisis: will this happen again? Certainly, no one wants perpetual problems with subprime lending. People need to learn their lesson, and a painful one at that. The Economist confesses that, "The retreat to a new level of risk was never going to be orderly or free of casualties. Neither should it be. Bankers and investors need to suffer precisely because the methods of modern finance have been found wanting. It sounds Darwinian, but the brutal demonstration that you pay for your sins is what leads the system to evolve. Markets learn from their mistakes. Only fear will spur investors to price risks better and get them to put more effort into monitoring their counterparties."

Several facts should be remembered before we take wide scale legislative action. While the economy suffer to some degree, CATO pointed out last week that new home construction is still growing, albeit much slower. The economy outside of the housing market remains strong. The loans in "crisis" represent about one in one hundred mortages in the US, the scale of these foreclosures is marginal, modest at worst. Jim Cramer and his cadre have little justification to berate Mr. Bernake's "academic" explanation and words of comfort about "Armogeddon." Scare mongerers do little to improve consumer confidence.

Many businesses messed up. Politicians like Mr. Obama needing to capitalize on the situation at the expensive of the consumer and economy are daft and unethical to scream, "curse you for messing up!" As The Economist explains:

But there is a price that is only now becoming apparent. Because lenders expected to be able to sell on the risk of default to someone else, they lent too easily. After all, they would not have to pick up the pieces. In theory, that risk should have been borne by the people best able to carry it. But with everybody having sold on the risk to everyone else—and the risk often being carved up, repackaged and sold again—nobody is sure where the losses are. The fear is that some risks ended up with those who least understood what they were getting into, and fear is a potent force in this disintermediated world. In the interbank market, every counterparty was potentially vulnerable. Even small amounts of bad credit can drive out good.

In theory, ratings agencies and mathematical models help investors price the risk they are taking on, even if the securities they are buying are scarcely traded. Yet when some supposedly good-quality assets proved to be worth little, people lost faith in the models and the ratings. Across the board, investors had failed to take account of how fast and how far asset prices fall when everyone wants to sell at the same time. Hard-to-sell long-term securities had been bought with short-lived debt, which left borrowers vulnerable to a change in sentiment every time the debt fell due. It does nothing to restore confidence when the biggest model-driven hedge funds had to get in new money. The people at Goldman Sachs lost a packet when something happened that their computers told them should occur only once every 100 millennia.

Politically, something will have to happen. No "tragedy" can avoid it. We can only hope it's a mild course of action that doesn't excessively bind the individual or businesses, such as President Bush's proposal for FHM loans or, at worst, other policy prospectives such as allowing homeowners to stay in their homes and pay ordinary rent instead of payments. We can then pray radical populists like Mr. Obama have their plans shown to be, well, radical.

Jay Leno: Today Chinese officials recalled one million tons of lead because it may contain toys. ... Hillary Clinton was chastised by The Washington Post for showing too much cleavage in front of the Senate. See, that seems sexist to me. They’ve never gone after Senator Ted Kennedy for doing the exact same thing. ... Isn’t this ridiculous? Shouldn’t we be focusing on I-raq, not her rack? ... It’s amazing isn’t it? The United States is 231 years old, but apparently the media is only 13. ... Democratic presidential candidate Barack Obama said today that he would not use nuclear weapons under any circumstances. I didn’t realize his battle with Hillary had escalated to this level. I just thought there was a little friction. ... Madame Tussauds’ new wax museum in Washington, DC, is going to feature a “scandal room,” featuring wax likenesses of elected officials involved in sex, alcohol or ethics scandals. Why would you go there, when you can just walk five blocks to the Capitol building and see the real thing? ... If you haven’t seen “The Bourne Ultimatum,” it’s about a guy who works for the government but can’t remember his past. The original title was “The Alberto Gonzales Story.” ... Happy Birthday to our governor, Arnold Schwarzenegger, who is 60 years old. You can tell he’s getting up there. Remember when he used to say things like, “I’ll be back”? Now he says, “Ow, my back.”