US local lenders knew about the housing bubble

Among the main culprits of the recent boom and bust in the US housing market that have been identified, the lenders and their excessive pushing of mortgages have been prominently featured. As pushing mortgages to people who cannot afford it seems to be a losing proposition, some pretty weird incentives must be in place for this to work. In other words, their must be some pretty sophisticated scheme in the lending business for some to make a gain from this. Local lenders, though, are not that sophisticated, as they handle most of the steps in the lending process themselves. As it turns out, they saw the debacle coming and pretty much got out of lending mortgages as soon as they felt things were getting excessive.

This is what you can conclude from the the analysis of Kristle Romero Cortés. She finds that where home prices where rising the fastest, the share of local lenders on the mortgage market was declining the fastest. In the subsequent bust, home prices were declining less in areas where local lenders were more present during loan origination. And looking at California only, foreclosures rates were lower where local lending was more prevalent. And all these results are even stronger where local lenders did not securitize the mortgages. What this shows is that there is still good value in homegrown lending, where the lender knows the markets intimately and knows to back off where things are getting dicey. Or, this can also be an indictment of the national mortgage chains like Countrywide Financial that were lending without thinking or had twisted incentives in place.

Stevenson-Wolfers on Reinhart-Rogoff

They write:

In the end, all the corrections advocated by the critics shift the average GDP growth for very-high-debt nations to 2.2 percent, from a negative 0.1 percent in Reinhart and Rogoff’s original work. The finding remains that economic growth is lower in very-high-debt countries (see chart). It has been disappointing to watch those on the left seize on the embarrassing Excel errors but ignore this bigger picture.

Click on graphic to enlarge. 

Department size and research productivity

This is a bit late for the current job market for Economics PhDs, but say you have to choose among several job offers (lucky you). The departments are are all of equal prestige and working conditions, salary, and geographic environment are all comparable. The only difference is the size of the faculty. What offer should you take if you care about your future research output?

Clément Bosquet and Pierre-Philippe Combes say you should go for the uniformly good, more field diverse, and larger department. At least this applies to French academic economists. Even more interesting, they observe that department characteristics are as important as researcher characteristics. The initial placement of a researcher thus matters a lot for her future, and this may explain why there are so few success stories after an initially poor placement, at least in Economics. Of course, the academic market in France is very different from any other country, so I am not sure the results can generalize, but this is a start.

Snapshots from the Performance

 Photo credit:  JACOB BELCHER/HARVARD OFA

The President as Financial Planner

He and Michelle seem inattentive to their own finances:

The Obamas paid $45,046 in mortgage interest in 2012, which appears from the disclosure statement to be at a 5.625% interest rate with Northern Trust. That suggests an outstanding principal balance of about $800,000. 

On the other hand, the bulk of their investments are in Treasury notes. Based on the disclosures, I estimate they hold about $3 million in Treasury notes (also held by Northern Trust), yielding 0.71% if averaging a five-year maturity. 

By selling some of those Treasuries and paying off the mortgage, they would effectively be getting five more percentage points on the amount; they would also be about $40,000 better off each year before taxes, not to mention being less exposed to notes that could take a hit from possible rising rates. 

The Obamas would pay more in taxes but make much more after taxes -- especially since they aren’t getting the full deduction anyway, due to the AMT. That's more money going to the U.S. Treasury and more money for them; Northern Trust would be the loser.

Egypt's World Beggary Tour 2013 Goes On

The rise and millennia-long fall of the Egyptian Empire continues apace. From the giddy heights of empire catalogued in the Bible to its present penury, Egypt has come a long way--down, that is, with no end in sight. The latest humiliation of course is being flat broke after the "Arab Spring" broke its back financially as tourism and FDI have disappeared due to the very poor law and order situation in the country. That is, the very essential thing a country needs to move forward--political order--is elusive post-Mubarak.

What is happening should be known to almost all readers by now. Losing foreign exchange and unwilling to give up on politically popular food and energy subsidies in a context where even more civil unrest would emerge if these are removed, Egypt is going around the world--begging bowl in hand--to cadge foreign exchange to tide it over. But, for how long can it last without an IMF deal which would unlock further emergency funding? This being the IPE Zone, the "international" aspect comes from its never-ending search for money to tide it over, while the political one comes from its leadership delaying much-needed changes to set it on a more sustainable path in fear of losing in the polls. In a number of simple steps, then:

1. Egypt's foreign exchange reserves have been dwindling since the Arab Spring events since the emergent lack of political order has hurt tourism and FDI;
2. The natural lender would be the IMF but the institution is exceedingly unpopular at home due to Egypt being a repeat borrower during the Mubarak years;
3. Moreover, the IMF is asking for long-desired reforms to do away with foreign exchange-sapping food and energy subsidies;
4. Knowing the political fallout from scrapping these subsidies, the Muslim Brotherhood-dominated leadership has been wary of doing so while its leadership position remains tenuous;
5. Something the Brothers are awaiting to secure their leadership is another landslide victory in parliamentary elections set to be re-run in H2 2013 (a definite date has not yet been set);
6. In the meantime, Egypt is cadging any and all countries--especially energy exporters whose pricey products have caused the country so much difficulty in the first place such as Qatar, (supposedly) Libya and so on. 

The difficulty in lending to Egypt is that, on its own, it cannot conceivably repay its recent loans. It is banking on the IMF coming in after (a) the Brotherhood presumably wins parliamentary elections. With a firmer political base and to please the IMF, it is hoped that Egypt can then (b) remove these subsidies which will almost certainly result in even wider mass riots. It is further hoped that an IMF seal of approval will lead to (c) both tourist revenues and FDI coming back. That's a lot of "ifs" and "buts"--not encouraging stuff for would-be lenders. Before the IMF comes in, though, Egypt is using its recent loans to literally waste on rather pointless government spending including the aforementioned food and energy subsidies that do nothing to put in on a more sustainable economic path. Meanwhile uncertainties abound. It seems the latest cadging target is none other than Russia:

During a meeting in a Black Sea resort city, Egypt's president and members of his government turned to Russian President Vladimir Putin and asked for a sizable loan, according to Putin aide. Egypt's Mohammed Morsi appealed to Moscow and Cairo's past ties, recalling how the former Soviet Union stepped in to finance the building of the Aswan High Dam in the 1960s after the United States abruptly withdrew from the project, according to Russian media. 

Still, the Russians' response seemed rather equivocal: We'll talk later. Egypt has been knocking on doors around the region seeking billions of dollars in loans, bond purchases and grants, trying to fill rapidly draining coffers so it can keep power stations running and bakeries churning out cheap bread for the country's millions of poor. 

The AP gets most big picture details right:

The most crucial piece of aid, a $4.8 billion loan from the International Monetary Fund, has been delayed by months of negotiations over how Egypt will reduce its massive system of subsidies, which the poor rely on for cheap fuel and food but which suck up large portions of the budget. The government has taken some limited steps, but many economists believe it is postponing extensive reforms until after parliament elections to avoid austerity measures that could hurt Morsi's majority Muslim Brotherhood party at the polls. The problem is: No date has been set for elections, and they won't be held until the fall at the earliest. That could mean months of economic limbo, with foreign lenders and donors reluctant to give unless there is a clear economic plan. Securing the IMF loan is considered key to boosting investors' confidence in Egypt and unlocking further aid.

In the meantime, the government has been seeking injections of cash. Overall, Egypt has sought or is in talks for more than $30 billion since the fall of Mubarak — the vast majority since Morsi was inaugurated in June, according to a compilation by The Associated Press of what has been announced. In an email, an official in the president's office could not confirm exact numbers but said the figure is "close to accurate." The official, who was not authorized to talk to reporters and spoke on condition of anonymity, did not give further comment on economic policy...

With revenues down, the government has been burning through its foreign currency reserves, which have fallen to just $13.4 billion, a third of the pre-uprising level. Much of that has gone to propping up the currency and importing fuel and wheat for the subsidy system. Egypt spends some $14.5 billion a year in subsidizing fuel and $4 billion in food subsidies, the bulk of which goes to bread. Nearly half of Egypt's 90 million people live near or below the poverty line of $2 a day. 

They have no pride for Brother Morsi will beg anywhere, anytime, anyhow. Such is the fate of modern-day Egypt. I'll bet the Pharaohs are turning in their graves:

How to contain housing bubbles

One cannot deny that housing bubbles can lead to nasty consequences, as shown in Japan, the US and Spain, for example. What can a policy maker do? Foremost, it is difficult to identify bubbles on the spot, and even in hindsight. Also, imagine the backlash when the government intervenes to rein in a booming industry. One thus needs a policy rule that kicks in automatically, or some policy that just reduces the volatility of prices. Natural candidates are transaction taxes and capital gains taxes for houses, and such taxes have been proposed not only for real estate markets, but also for financial markets in general (for instance, the Tobin tax).

Nicole Aregger, Martin Brown and Enzo Rossi exploits differences in such taxes across Swiss administrative divisions, as well as corresponding house price indices, to identify whether such taxes work. They do not. The capital gain taxes, especially those that apply to short-term gains, amplify prices movements. Why? Likely because house owners are reluctant to put their house on the market if such penalties apply, which drives prices even higher. As for transaction taxes, they have no impact whatsoever on price fluctuations. Thus such tax policies do not work, unlike you are willing to subsidize capital gains...