Why it is hard to imagine consumption reigniting.

Mark Thoma wonders about whether consumption will come back any time soon.

A graph making the rounds uses the Federal Flow of Funds data to look at the ratio of Household Debt to GDP--the ratio rose from around 60 percent as recently as 15 years ago to more than 100 percent now. If households begin reducing their leverage back toward the long-term average, it will depress consumption for three reasons:

Debt service payments will rise when interest rates rise, and so discretionary income will be lower than it was when households had less leverage ( we are getting some relief right now because of very low interest rates on debt tied to LIBOR or the prime rate).

Households will not take on new borrowing to support spending.

Households will in fact be amortizing their current debt (meaning they won't spend).

The counter-argument is that average household net worth relative to GDP remains quite normal by historical standards. But here is where the skewed distribution of wealth is a problem. I am reasonably sure that when the next Survey of Consumer Finances is released for 2015, median household net worth will be down. Corelogic says that one in four households with mortgages has negative home equity--this would be about 18 percent of owner households (about 30 percent of owners have no mortgage). If we combine this with the fact that 1/3 of the country rents, this means that the median households has little or no home equity. The median household is not loaded with financial assets, either. According to the 2007 Survey of Consumer Finances, only half of families have a retirement account, and only 21 percent owned stocks. Put this all together, the median household is not in great shape financially, and the median household consumes a higher share of its income than higher income households.

One more back of the envelope calculation on getting us back to a steady state: suppose the steady state household debt to GDP ratio is 70 percent. If the national economy uses 5 percent of its income to pay down that debt (which is about 7.5 percent of current consumption), at an interest rate of 8 percent, it would take 9.2 years to de-lever down to the steady state ratio.

[Update: the above back of the envelope assumes six percent nominal growth. If nominal growth is less, it will take longer].

Terrorists can't stand the best of us

Suketu Mehta writes about how to respong to the Mumbai terrorists:

"But the best answer to the terrorists is to dream bigger, make even more money, and visit Mumbai more than ever. Dream of making a good home for all Mumbaikars, not just the denizens of $500-a-night hotel rooms. Dream not just of Bollywood stars like Aishwarya Rai or Shah Rukh Khan, but of clean running water, humane mass transit, better toilets, a responsive government. Make a killing not in God’s name but in the stock market, and then turn up the forbidden music and dance; work hard and party harder.

If the rest of the world wants to help, it should run toward the explosion. It should fly to Mumbai, and spend money. Where else are you going to be safe? New York? London? Madrid?"

Mumbai is among the most cosmopolitan, dynamic, open places in the World. Walking around the city is like walking around the London described in Dickens, both in its wonders and its horrors. If fear undermines the dynamism, something wonderful will have been lost. My suspicion is that the citizens of Mumbai will be like the citizens of London--they will mourn and then shake off the results of the terror.

I was waiting for this

From this morning's Wall Street Journal

Even as the national housing market has been hit by slow sales and falling prices, Manhattan has continued to shine. But now its light may be dimming.
[Manhattan]
Upper East Side townhouse was listed in July for $24.5 million. Current asking price: $19.5 million.

Fewer apartments are being sold -- 858 went into contract in September, a 9.9% drop from a year ago and the lowest total in two years, according to brokerage Corcoran Group -- and the inventory of unsold apartments is increasing. Prices are also leveling off. The median price of a Manhattan apartment fell 3.4% in the third quarter from the previous one, according to the research firm Radar Logic. The firm says properties are sitting on the market longer, too, an average of 123 days, up from 94 days at the peak of the market in 2005.

Developers used to seeing yet-to-be-built apartments get snapped up sight-unseen are increasingly offering incentives, from help with closing costs to museum memberships, to jump-start sales. "Buyers are more hesitant," says Hall Willkie, president of brokerage Brown Harris Stevens.

I wrote a paper some years ago on the effect of the tech stock market on house prices in California. Short answer: none in LA, lots in San Jose. I am guessing that the stock value of investment banks (and the bonuses of their employees) has the impact on Manhattan real estate that the stock value of tech companies has on Silicon Valley real estate.

Harvard Joint Center for Housing Conference on Understanding Consumer Credit

I have spent the past two days participating in a conference at Harvard Business School on Consumer Credit (so it became a conference about subprime). Some impressions:

(1) When it comes to mortgages, very few of us are really informed about what we are doing. Of the people in the audience who had an adjustable rate mortgage, no one could say what their payment would be if it rose to the fully indexed amount next year. And the audience was filled with law professors and economists who teach at places like, um, Harvard. This has pretty profound implications about the meaning of consumer choice in the mortgage market.

(2) John Campbell noted that competitive pressures lead lenders to offer products that rely on somebody being stupid (the stupid subsidize the savvy). The 2-28 ARM may be just such a product. While I couldn't imagine myself saying this a year ago, it may be welfare improving to reduce mortgage choice. A menu that contains 30-year fixed mortgages, and fully indexed one, three and five year ARMS may be enough (although I reserve the right to change my mind on this).

(3) Amy Cutts showed (I think) that when lenders can foreclose more rapidly, there is a greater tendency for both cures and mortgages.

(4) Everyone involved in the mortgage process needs to have some capital at stake--including borrowers (i.e., no down payment mortgages just don't make sense).

(5) The housing market may be getting bad enough that some sort of bail-out might not create serious moral hazard problems--that is, many people who did nothing wring are now at risk, and for the sake of the macroeconomy, we need to think about how to help them.

(5) They regulate the mortgage chain far more in the UK and the Continent than in the US. Good news: defaults are much rarer. Bad news, consumers have much less mortgage choice. Borrowers in the UK can't get fixed-rate mortgages; borrowers in Germany can't prepay their loans.

(6) I love visiting Cambridge (I know, HBS is in Alston, but close enough).

Githabul people win land title recognition

Back in January 2015 I reported on the agreement between the Githabul people and the NSW Government about a large native title land claim over a large portion of New England. Now the claim has moved another step forward. I was going to give you a link, but the story seems to have vanished into Fairfax's digital store, so I will just report the key facts.

In the first claim in ten years settled under the Commonwealth's Native Title Legislation and the first time that the Sydney Government and an indigenous community have jointly sought a decision, the Githabul people have won rights over an area of 112,000 hectares including nine national parks and thirteen state forests in the Kyogle and Tenterfield Shires.

The decision will afford traditional owners the right of access to the area for spiritual purposes; to camp, fish, hunt and gather animals, plants and water there for non-commercial needs and to lawfully protect places of importance to them.

One thing that made me sad, though, was a comment from Trevor Close, the successful applicant of the claim. He said:

You will never see this again in NSW. Too many elders have passed away who
hold the information and language necessary to pass the evidence test.

In the midst of all the macro Australian argument about things like reconciliation and saying sorry, my concern has been much more local. Recording and preserving what we have now, while meeting the needs of New England's indigenous peoples as they are today.

Homeowners Associations contribute to Global Warming

Over the holidays, I have learned from my parents that there are homeowners associations that ban drying clothes on clotheslines and make it difficult to place solar panels on houses. I did a google search on the issue, and learned to such hostility toward environmentally friendly practices is fairly widespread.

This sort of thing has got to stop. While apparently some states have passed laws that ban homeowners associations from prohibiting solar, the laws are sufficiently vague that they can be circumvented.

To keep blogger status

I gave a seminar on urban economics today at the George Washington Institute for Public Policy. I learned that to be a true blogger, I must post at least once a month, so here I am.

I am trying to figure out how soft the housing market has gotten. One of the problems--the two best known data sets for looking at house prices--the NAR median house price set and the OFHEO repeat sales index--are moving in opposite directions. The NAR data probably reflect the way the assign regional weights for determining house prices, but there are still cities where the NAR data show price declines, while OFHEO shows increases.

More tomorrow.

Dubai, Academic Freedom, and Real Estate

Sometime around 2006, when I was an Associate Dean at George Washington University, I was asked to be part of a team to go to Dubai to explore the possibility of opening a degree program there. After spending three or four days there and running some financials, our team decided that unless GW got a heavy subsidy from Dubai, it was economically a non-starter for us to set up something. Our team's judgments is looking pretty good right now.

The more interesting part of the story, though, is a conversation I had with a professor at one of the universities there. I asked about academic freedom in Dubai, and he said there was plenty. I then asked whether it would be OK to raise in class a discussion about whether the Emir had shown good judgment in building Burj Dubai, the still incomplete tallest skyscraper in the world. The look on his face told me all I needed to know.

John Taylor insists that Permanent Tax Cuts are the answer

In doing do, he leans on the permanent income and life-cycle hypotheses. While these are totems of economic theory, they do not stand up particularly well when tested against data.

As George Akerloff emphasized in his magnificent AEA Presidential address, the five famous neutrality results in macroeconomics don't hold up especially well when tested against data. Akerloff notes:

"Each of the neutralities is based on the assumption that the respective decision makers are utility maximizers. But in each case the utility functions of the decision makers have been very narrowly described. They depend only on real outcomes. For example, in the consumption- neutrality models, utility depends on consumption and leisure; in Modigliani-Miller it depends only on the discounted real return to shareholders.

But as early as the beginning of the Twentieth Century, Vilfredo Pareto pointed out that
such characterizations of utility missed important aspects of motivation. According to Pareto people typically have opinions as to how they should, or how they should not, behave. They also have views regarding how others should, or should not, behave. Such views are called norms, and they may be individual as well as social."

[I am having difficulty figuring out how to do block quotes in Safari].

The events of the past 18 months suggest to me that we should regard the neutrality results with more suspicion than ever--and that we should be most suspicious of policies whose foundation is in the neutrality results. (Paul Krugman and Mark Thoma have their own criticisms of Taylor's policy recommendations).

Fareed Zakaria's column this week is worth reading

It is here:

http://www.newsweek.com/id/70991

The point is that America is shooting itself in the foot by making it difficult for foreigners to come here for tourism and short business meetings. I did a paper last year on the importance of airports as engines of growth, and the results are sufficiently powerful that I really believe them (see Airports and Economic Development, Real Estate Economics, Spring 2015).

We seem to have made it a national policy to make visiting here as unpleasant as possible. Among other things, our airports are not good (Singapore, Hong King Dubai and Frankfort have our airports beat hands down; thank goodness that Narita, Charles de Gaulle, and Heathrow are as bad as anything we have). And I guess that dealing with the INS is just no fun for foreigners. While I find Dubai and Singapore somewhat oppressive, their immigration processes are remarkably efficient. Put all this together, and we are losing business meetings (and world-class graduate students) to other countries.

If any of this was really preventing terrorism, one might make the cost-benefit calculation and decide that the cost to us economically was worth it. But I am skeptical of the utility of our hostility to foreign visitors. I also think nothing does a better job of instilling good feelings about the United States among foreigners like allowing them to have pleasant visits here. And we need all the sympathy we can get.

Hoisted from Mark Thoma's comments

Mark Thoma was kind enough to refer to my post on forecasting housing prices. ONe of the comments came from Fishy Math:

Fishy math says...

Wait a second! This formula is based on a perpetuity! Of course you are going to get huge swings resulting from relatively modest changes in assumptions. If you believe that housing prices will decrease by 5% per year INDEFINITELY, then you're correct. More likely, we will experience sharp depreciation for a couple of years, followed by a resumption of whatever the normal level of appreciation in housing in perpetuity.

Assuming 2 years of 10% declines followed by a resumption of 5% annual increases, I get a multiple of about 16x capitalized rents.

I want to make it clear that I am NOT forecasting declines of 5 percent in perpetuity. My point was that expectations, which overshot on the upside before, could now overshoot on the downside, and that we have rather poor estimates of what expectations are--although the CSW housing futures index suggests that those who are putting money on the line think that prices are going to fall for quite awhile. People also seem to be myopic when they form expectations.

The most important point, as Mark notes, is that small changes in expectations can lead to big changes in prices. To use a less extreme example, if expected appreciation drops from five percent to two percent per year, values would fall by about 40 percent. I think that is quite enough.

Three principles for avoiding future subprime messes

Changes in policy should accomplish three things:

(1) It should make sure that all parties in the lending chain have “skin in the game.” While reputational risk mitigates against bad behavior, there is no substitute for financial incentives.

(2) It should make sure that all parties in the lending chain are subject to federal supervision. This will reduce regulatory arbitrage.

(3) It should do what it can to improve disclosures throughout the lending chain. Borrowers must be better informed as to the consequences of their lending choices (although this will be difficult); ratings must be consistent, and securities must be more transparent.

Long run vs Short run

I should follow us my earlier post by noting that while expectations can be ideosyncratic in the short run, they are probably about right in the long run.

With that in mind, let me point out that in 2002 I thought that house prices in most cities (with the possible exceptions of Boston, San Diego and San Jose) were tied pretty well to fundamentals. So if you want to know long-run house prices in most places, look at values in 2002 and add around 3 percent per year. Alas, many places had double-digit increases per year between then and now...

Pleasant memories

One of my cousins got married this weekend, and in the course of the festivities, my family (all my immediate and some of my extended) went to the MIT museum. It was there that I was reminded of one of the most exciting experiences of my life.

The MIT museum has an exhibit dedicated to the work of Harold, or Doc, Edgerton, "the man who made time stand still." When I was 16, I made a campus visit to MIT. I wanted to go to college there, as my very smart Aunt and Uncle had Ph.Ds from the place, and my very smart cousin, who worked on Apollo rockets, was an engineering alum (since then, yet another cousin got at Econ Ph.D. there--he now teaches at Northwestern). During the campus visit, I was taken to Doc Edgerton's lab, where the man himself was working (playing?) with his strobe. He asked if I wanted to see how it worked! And so it was for the first time that I saw milk drops falling and eggs smashing at a speed at which every detail was visible (it was like watching CSI for real, only not so bloody).

Boy, did that make me want to go to the Institute! In the end, they made the wise decision not to take me (I am really not good enough at math), so I spent four nice years a couple of miles down the street. But I hadn't thought about that day for a long time, and it was nice to have it returned to me.

Brad Delong cites the FT on The Arnold and Subprime

http://delong.typepad.com/sdj/2015/11/i-may-have-to-r.html

By bringing together four large subprime lenders and getting them to cooperate, Schwarzenegger has done something incredibly important--he has gotten lenders out of the prisoner's dillemma and onto a welfare-improving cooperative equilibrium.

Unless everyone agrees to modify their loans, everyone has an incentive not to modify (if there are going to be lots of defaults,one might as well get a high coupon rate for each mortgage that stays current). But now all the players have an incentive to modity, so long as everyone else modifies. This will prevent some defaults, and thus reduce the inventory of houses for sale relative to what it might have been.

But if any one of the four lenders starts fooling around, the whole thing will come unglued. It is important that the Terminator use his ability to intimidate to keep the deal together.

The problem with forecasting house prices

The value of a house should, in equilibrium, be its capitalized rents. Its capitalization rate is (roughly) the after-tax required rate of return, plus depreciation and expenses less expected appreciation. We may write this out as:

r + m - pi.

The r and the m are relatively easy to measure. Households in the conventional conforming market can borrow at an after-tax mortgage rate of about 5 percent right now, and with very little equity, they can borrow at around 6 percent (the cost of interest plus mortgage insurance). Let's add a risk premium and put the total around 7 percent (this is probably a bit high). Depreciation and expenses will run around 2 percent of house value. So the value of a house is the value of its rent divided by 9 percent less expected appreciation.

Now let's see what happens when we let expectations about future prices rangs from an increase of 5 percent in a year to a decrease of 5 percent in a year. If expected prices increase five percent, values are 25 times rent (rent/.04); if the decrease 5 percent in a year, values are about 7 times rent. So a ten percentage point deline in expectations could cause house prices to fall by two-thirds.

I think this is part of the current problem. On the one hand, after roughly 2002, prices in many markets shot up well past the 25 to 1 point (on a quality adjusted basis), in part because of very low interest rates, and in part because of unrealistic expectations. Now that prices are falling (as inevitably they would), expectations have reversed, although it is not yet clear by how much.

Some months ago, when others were writing that the bottom was coming, I wrote that I didn't know when the bottom of the housing market was coming, and neither did anyone else. I wish I had been wrong.

From the vaults - the first UNE Bulletin

Browsing around, I found the first ever University of New England Bulletin issued in March 1957.

In that year, the University expected to have 400 internal students with over 300 students in residence, still mainly in town houses. The College building program was just getting underway. In addition, external enrollments were 750, bringing the total number of undergraduate students to 1,150.

Those who know the University will recognise many names from the past.

The Pleasures of Teaching

Last night, I heard 10 presentations from my MBAs on TARP, TALF, PPIP and HAMP. I learned at least one thing from every one of them.

Shiraz Allidina (attribution corrected) creates a nice indicator of over-leverage in commercial real estate.

He uses the Federal Flow of Funds to look at Commercial Real Estate Loans Outstanding as a fraction of GDP. When the share goes well above the long term mean, bad stuff in commercial real estate seems to ensue.

FDR explains how liquidity crises happen

Worth a listen.

He had been in office for a week when he gave this fireside chat. 

New England - Federal Election Eve 2015: and the next day

Note to readers: I am now uploading final numbers for each seat. This may take a little while, so those with feeds are likely to get multiple feeds. Final results added for:

• Charlton
• Cowper
• Shortland

Australia votes tomorrow. At this stage based on opinion poll averages, the most likely outcome is a Rudd Labor Government with a majority in the range 10-20. However, there is now some confusion in the polls, suggesting that the Howard Government may be clawing back some ground.

I will provide reports on the counting in New England seats. However, because electoral boundaries keep changing I thought that it might be helpful especially for New England expats if I provided a short seat by seat description. The material that follows is drawn from the ABC's Antony Green election guide.

Charlton. Safe Labor - present margin 8.4%

A Hunter Valley based seat covering 578 sq.km on the western side of Lake Macquarie. It includes the outer suburbs of Newcastle around Wallsend and Cardiff, as well as Toronto, Wangi Wangi, Morisset and Wyee further south. While the electorate contains some agricultural industries, the district's wealth is created by coal mining, electricity generation and heavy industry.

At the last redistribution, lost areas around Warners Bay to Shortland while gaining Wallsend and Maryland from Newcastle. The Labor margin rose from 7.9% to 8.4% as a consequence.

Adjusting for boundary changes, the 2004 primary votes were:

• Labor 46.6%
• Liberal 35.2%
• Greens 8.8%
• Family First 3.7%
• One Nation 2.8%
• Australian Democrats 1.9%
• Others 1.0%

After distribution of preferences, Labor won with 58.4% to the Liberals 41.6%.

Since the, sitting Labor MP Kelly Hoare, the daughter of the previous member, lost Labor Party endorsement after representing the seat since 1998. Her place was taken by Trade Union boss Greg Combet. The whole process caused local resentment, but is unlikely to affect the outcome.

Candidates this time are:

• Ulrich, Stuart Independent
• Pritchard, Suzanne Green
• Stow, David Citizens Electoral Council
• Cook, Terry Socialist Equality Party
• Combet, Greg Labor
• Paterson, Lindsay Liberal
• Barry, Patrick Christian Democratic Party (Fred Nile Group).

Forecast: Labor to retain with increased margin.

Update: as at 8.17 pm:

• Greg Combet, ALP, 20,998, 54.6%, up 6.6%
• Lindsay Paterson, LIB, 11,669, 30.4%, down -3.2%
• Suzanne Pritchard, GRN, 3,131, 8.1% down -0.8%

Final Results

Enrolment 91,129, turnout 95.74%

Results by candidate:

• Ulrich, Stuart: Independent - 2,008 votes, 2.41%, swing +2.41%
• Pritchard, Suzanne: Greens - 6,708 votes, 8.06%, swing -o.71%
• Stow, David: Citizens Electoral Council - 294 votes, 0.35%, swing -0.23%
• Cook, Terry: Socialist Equality Party - 404 votes, 0.49%, swing +0.49%
• Combet, Greg: Labor (elected) - 44,156 votes, 53.08%, swing +6.47%
• Paterson, Lindsay: Liberal - 26,353 votes, 31.68%, swing -3.49%
• Barry, Patrick: Independent - 1,253 votes, 1.51%, swing +1.51%
• Kendall, Jim: Christian Democratic Party (Fred Nile Group) - 2,007 votes, 2.41%, swing +2.41%

Two Candidate Preferred Vote:

• Combet, Greg, Labor, 52,298, 62.87%, swing +4.47%
• Paterson, Lindsay, Liberal, 30,885, 37.13%, swing -4.47%

Cowper. Notionally safe National - present margin 6.7%

Once a Clarence Valley electorate centered on Grafton and held by Earle Page for 42 years, progressive boundary changes have moved the electorate's focus south. Today the seat covers 7,911 sq.km between the Macleay and Clarence Rivers.

In the north, the seat covers a relatively small proportion of the Clarence Valley on the south side of the river including Maclean. Moving south, the first main centres are the coastal resorts of Woolgoolga and then Coffs Harbour, the biggest centre in the electorate with a population of over 60,000.

This is followed by a number of river valleys: the Bellinger (Urunga, Bellingen), the Nambucca (Nambucca Heads, Macksville) and the majority of the Macleay (Kempsey, South West Rocks).

At the Bellinger, the electorate bulges inland to include the Tablelands around Dorrigo, once part of the New England electorate.

Adjusting for boundary changes (loss of Yamba, addition of Kempsey), the 2004 primary votes were:

• National 50.5%
• Labor 31.7%
• Greens 8.9%
• One Nation 4.2%
• Lower Excise Party 2.3%
• Australian Democrats 1.9%
• Others 0.6%

So the Nats won on the primary vote.

There are slightly fewer candidates this time:

• Hartsuykey, Luke, sitting member, Nationals
• Sekfy, Paul, Labor
• Carty, John, Greens
• Arapi-Nunez, Flavia, Family First
• Belgrave, Leon, LDP
• Lions, Deborah, Christian Democratic Party (Fred Nile Group)

On 2004 results, Luke Hartsuykey should hold the seat. However, there were signs that the National position was weaker than appeared.

As a consequence, Labor dumped its originally chosen candidate John Fitzroy in September. The reported reason in newspaper stories was that Labor internal polling indicated that Cowper could fall, and Labor wanted a more experienced and better known candidate in the seat.

This is a seat where the indigenous vote is important. At 5 per cent, Cowper has the twelfth highest indigenous proportion of the population of all Australian electorates. The indigenous proportion is especially high in Kempsey and the Macleay Valley, also areas of limited employment opportunities, especially for the unskilled.

Forecast: Based on the very latest opinion polls - these do not include specific figures for this seat, however - the Nats should hold. I classify it is a possible Nationals loss.

Update as at 8.26pm

• Luke Hartsuyker, NAT, 22,378, 46.0%, -4.6%
• Paul Sekfy, ALP, 18,976, 39.0%, +6.%
• John Carty, GRN, 5,322, 10.9%, +2.5%

Final Results

Enrolment 92,767, turnout 95.15%

Results by candidate:

• Hartsuykey, Luke: sitting member, Nationals, elected - 39,444 votes, 46.54%, swing -3.92%
• Sekfy, Paul:Labor - 32,276 votes, 38.08%, swing +6.43%
• Carty, John: Greens - 9,359 votes, 11.04%, swing +2.15%
• Arapi-Nunez, Flavia: Family First - 759 votes, 0.9%, swing +0.70%
• Belgrave, Leon: LDP - 491 votes, 0.58%, swing +0.58%
• Lions, Deborah: Christian Democratic Party (Fred Nile Group) - 2,428 votes, 2.86%, swing +2.86%

Two Candidate Preferred Vote:

• Hartsukyer, Luke, Nationals 43,423 votes, 51.23%, swing -5.52%
• Sefky, Paul, Labor 41,334 votes, 48.77, swing +5%

Hunter. Safe Labor - margin 11.1%

Starting in the Hunter Valley around Cessnock, Maitland and Kurri Kurri, Hunter covers 10,593 sq km and extends west and north up the New England Highway to include Singleton and Muswellbrook. The electorate's economic base is a mix of agriculture and heavy industry, being dominated by coal mining, aluminium smelting and electricity generation, but also possessing some of the country's best vineyards and richest beef cattle grazing areas.

This is Labor heartland country, with Joel Fitzgibbon holding the seat since 1996. On the adjusted boundaries, the 2004 vote was:

• Greens 6.3%
• One Nation 3.3%
• Fox, Independent 3.3%
• Citizens Electoral Council 2.9%
• Chrstian Democrats 1.7%
• Family First 1.3%.

Candidates this time are:

• Albury, Daniel, Citizens Electoral Council
• Davis, Jan, Greens
• Black, Beth, nationals
• Harvey, John Climate Change Coalition
• Fitzgibbon, Joel, Labor
• Neville, Bernie Christian Democratic Party (Fred Nile Group).

Forecast: Labor to win with increased majority.

Update 8.34 pm

• Joel Fitzgibbon, ALP, 30,043, 59.9%, up 8.8%
• Beth Black, NAT, 13,490, 26.9%, down 3.5%
• Jan Davis, GRN, 3,277, 6.5%, up 0.1%

Lyne. Safe National - margin 13.4%

This seat is held by Mark Vaile, Deputy Prime Minister and the Leader of the Nationals.

The seat covers 9,039 sq.km on the Mid North Coast and includes Taree and Port Macquarie. Taree in the Manning River valley is a traditional rural service town that has been re-inventing itself since the Pacific Highway by-pass was built, while Port Macquarie has seen huge growth as a retirement haven and holiday resort.

At the last redistribution, Lyne lost Kempsey to Cowper, causing the National Party margin to rise slightly from 13.0% to 13.4%.

Based on the adjusted boundaries, the 2004 vote was:

• National 56.7%
• Labor 26.6%
• Greens 4.8%
• New Country Party 3.6%
• One Nation 3.4%
• Australian Democrats 1.6%
• Family First 1.4%
• Others 2.0%

The candidates this time are:

• Wright, Barry, Independent
• Russell, Susie, Greens
• Vaile, Mark, Nationals
• Langley, James, Labor
• Scott-Irving, Stewart, Independent
• Harrison, James, Independent
• Riach, Rodger, Independent.
• Muldoon, Graeme, Citizens Electoral Council,
• Waldron, Robert Christina Democratic Party (Fred Nile Group)

Forecast: Nats to retain with a slightly reduced majority.

Update 8.50pm

• Mark Vaile, NAT, 29,349, 51.9%, swing -4.4%
• James Langley, ALP, 18,543, 32.8%, swing +5.9%
• Susie Russell, GRN, 4,009, 7.1%, swing +2.4%

New England. Safe Independent - margin 13.6%

My own home seat, a traditional National Party seat that was held by my grandfather (David Drummond) from 1949 to 1963. Now a safe independent seat held by Tony Windsor.

Covering an area of 58,463 sq.km the seat covers much of the New England Tablelands and Western Slopes. Main towns from south to north include Quirindi, Tamworth, Armidale, Glen Innes, Inverell and Tenterfield. At the last redistribution, gained Quirindi, Werris Creek and the Liverpool Plains Council area from the abolished seat of Gwydir.

Based on the redistributed boundaries, the 2004 vote was:

• Independent 55%
• National 20.8%
• Liberal 9.6%
• Labor 9.2%
• Greens 3.3%
• One Nation 1.5%
• Citizens Electoral Council 0.6%.

The candidates this time are:

• Detman, Brian, One Nation
• Windsor, Tony, Independent
• Witten, Richard Innes, Citizens Electoral Council
• Betts, Phil, Nationals
• Brand, Luke, Country Labor
• Taylor, Bruce, Greens

Forecast: Tony to retain with a very comfortable majority.

Update 9.01 pm

• Tony Windsor, IND, 40,943, 62.2% swing + 7.%
• Phil Betts, NAT, 15,201, 23.1% swing +2.3%
• Bruce Taylor, GRN, 2,122, 3.2% swing -0.1%

Newcastle. Safe labor - margin 9.1%

Newcastle covers 335 sq.km. and lies at the mouth of the Hunter River, taking in the port district and Newcastle CBD, as well as surrounding suburbs including Merewether, Adamstown, Lambton and Waratah on the southern side of the Hunter Rover, and Stockton and Williamstown on the northern side.

Following the redistribution, the electorate lost areas around Wallsend to Charlton and now extends west towards Maitland, taking in Thornton, Woodberry, Beresfield and Tarro. Even with the closure several years ago of the BHP steel plant, the electorate retains a substantial heavy industry base, including the major coal export facility for the Hunter Valley's mines.

On the adjusted boundaries, the primary votes in 2004 were:

• Labor 45.6%
• Liberal 36.3%
• Greens 11.3%
• Australian Democrats 2.3%
• Progressive Labor Party 2.1%
• Citziens Electoral Council 1.0%
• Socialist 0.5%
• Other 1.0%.

The candidates this time are:

• East, Malcolm, Family First
• Johnson, Aaron, Democrats
• Payne, Geoff, Socialist Alliance
• Buman, Aaron, Independent
• Grierson, Sharon, Labor
• Holt, Neil, Socialist Equality Party
• Eckersley, Charmian, Greens
• Curry, Joel, Independent
• Caine, Milton, Christian Democratic Party (Fred Nile group)
• Walker, Krysia, Liberal

Forecast: Labor to retain with increased margin.

Update 9.08 pm

• Sharon Grierson, ALP, 30,067, 51.6%, swing +4%
• Krysia Walker, LIB, 14,116, 24.2%, swing -10.1%
• Charmian Eckersley, GRN, 6,132, 10.5%, swing -1.4%

Page. Moderately safe National - margin 5.5%

Covering 16,091 sq.km, Page includes Grafton and those parts of the Clarence River valley on the northern side of the river, as well as Casino, Lismore and Ballina in the Richmond River valley. For those who know New England well, this is actually a very strange electorate, for it includes Grafton, one the heart of Cowper, and Lismore, the heart of Richmond. Now both Cowper and Richmond lie elsewhere.

At the last redistribution, Page gained Wollongbar and Alstonville from Richmond in exchange for the loss of Nimbin and rural northern parts of Lismore City Council. Also gained Yamba from Cowper.

On the adjusted boundaries, the 2004 primary votes were:

• National 49.7%
• Labor 33.1%
• Greens 9.6%
• Liberals for Forests 2.6%
• Outdoor Recreation Party 1.4%
• Behn 1.4%
• Citizens Electoral Council 0.9%
• Others 1.4%.

The candidates this time are:

• Behn, Doug, Independent
• Vega, Mirio, Family First
• Culverwell, John, Citizens Electoral Council
• Melland, Julia, Democrats
• Jongen, Theo, Greens
• Saffin, Janelle Labor
• Kane, Tony, Independent
• Avasalu, Rhonda, Christian Democratic Party (Fred nile Group)
• Beatty, Ben LDP
• Gulaptis, Chis, Nationals.

According to the ALP blog, North Coast Voices, this is very much a seat to watch. With the retirement of Ian Causley, the National Party has selected 52 year-old Chris Gulaptis who has lived in the Clarence Valley for the past 27 years. He is a qualified surveyor, has run his own small business, is a former Mayor of Maclean and currently serves as a Clarence Valley Councillor.

His Labor opponent is 52 year-old Janelle Saffin who comes from the opposite end of the elctorate. Janelle was a member of the NSW Legislative Council from 1995 to 2003. She was a lawyer before entering parliament, and has worked actively in the past on human rights issues. She was involved in East Timor's transition to self government, and has worked as an advisor to new President Jose Ramos Horta. She is a long-time resident of Lismore, and contested that seat at the 1991 state election.

So in the two main candidates we have the north and south of it.

Forecast: Chancing my arm, a Labor win.

Update 9.13 pm

• Janelle Saffin, ALP, 27,691, 42.3%, swing +8.8%
• Chris Gulapti. NAT, 27,94, 42.7%, swing -7.3%
• Theo Jonge, GRN, 5,185, 7.9%, swing -1.2%

Parkes. Very safe National - margin 17.5%

Parkes is really the old and now abolished Gwydir. The locals were up in arms about the abolition of Gwydir, and so was I.

Parkes now covers 107,108 sq.km. along a north-south axis covering the agricultural districts of the north western and central western slopes. From north to south it includes the major centres of Moree, Walgett, Narrabri, Gunnedah, Coonabarabran, Coonamble, Gilgandra, Dubbo, Wellington and Mudgee.

This means that the majority of the seat is in New England, but with a major southern extension.

On the new boundaries, the 2004 vote was:

• National 61.8%
• Labor 24.6%
• Independent 4.8%
• Greens 4.3%
• One Nation 3.3%
• Citizens Electoral Council 1.1%

The candidates this time are:

• Horan, Tim Independent
• Keily, Michael, Climate Change Coalition. I suspect that this is the same Michael Keily whose blog is on my regular read list.
• Haigh, Bruce, Independent
• Coulton, Mark, Nationals
• Stringer Richard, Citizens Electoral Council
• Patriarca, Margaret, Country labor
• Parmeter, Matt, Greens

Nationals candidate Mark Coulton was raised in Warialda before attending Farrer Memorial Agricultural High School in Tamworth as a boarding student. Coulton has been Mayor of Gwydir Shire Council since 2004 and has been a member of a wide variety of community organisations.

His Labor opponent is Dubbo businesswoman, Margaret Patriarca. After starting her career as a teacher, Patriarca became actively involved in community work and subsequently left teaching and worked for 25 years in social welfare including as Community Social Worker in Local Government; as a child protection caseworker and in disability, adolescent, child and family services. She moved to Dubbo with her two daughters in 1990 and currently works with her husband as Director of a family owned and operated construction company.

Again, in electoral terms, we have the north and south of it.

Forecast: Nationals to retain, but with a reduced majority. I say reduced majority only because I expect the Labor candidate to have stronger pulling power in Dubbo.

Update 9.19 pm

• Mark Coulton, NAT, 21,828, 46.2%, swing -15.5%
• Margaret Patriarca, Country Labor, 11,893, 25.2%, swing + 0.4%
• Tim Horan, IND, 10,338, 21.%
• Matt Parmeter, GR, 1,353, 2.9%, swing -1.%

Paterson. Apparently safe Liberal - margin 6.3%

Based in the lower Hunter Valley and lower New England North Coast, Paterson covers 9,373 sq.km, including the Hunter River centres of Raymond Terrace and parts of East Maitland, the resort towns around Port Stephens, agricultural districts between Dungog and Gloucester, and the holiday and retirement havens of Forster and Tuncurry.

In the last redistribution, the seat lost Thornton, Woodberry, Beresfield, Tarro and Williamstown to Newcastle, while gaining Metford, Morpeth and parts of East Maitland from Hunter. Thsi reduced the Liberal majority from 7.0% to 6.3%.

On the new boundaries the 2004 vote was:

• Liberal 46.5%
• Labor 36.3%
• Greens 4.5%
• National 4.2%
• One Nation 2.0%
• Citizens Electoral Council 1.3%
• Veterans Party 1.0%
• Family First 0.9%
• Fishing Party o.8%
• Australian Democrats 0.6%
• Others 1.9%

The candidates this time are:

• Arneman, Jim, Labor
• Hennelly, Paul, The Fishing Party
• Donnelly, Judy, The Greens
• Stokes, Christopher, Family First
• King, Tony, Citizens Electoral Council
• Haynes, Heather, Christian Democratic Party (Fred Nile Group)
• Hamberger, John, One Nation
• Baldwin, Bob, Liberal

Forecast: possible Labor win.

Update 9.29 pm

• Bob Baldwin, LIB, 27,206, 47.4%, swing 0.5%
• Jim Arneman, ALP, 24,614, 42.9%, swing + 6.4%
• Judy Donnelly, GRN, 2,98, 5.2%, swing + 0.7%

Richmond. Marginal Labor - margin 1.4%

Once centerd on Lismore, this is a 2,756 sq.km at the north-east tip of New Engaalnd, including Tweed Heads and Murwillumbah in the Tweed Valley, Byron Bay and Byron Shire, some rural parts of Ballina Council north of Ballina itself, as well Nimbin and the rural northern parts of Lismore City Council.

In the redistribution, Richmond lost around 7,000 voters near Wollongbar and Alstonville to Page in exchange for Nimbin and approximately 6,000 voters in the rural northern parts of Lismore City Council. The Labor margin rose from a narrow 0.2% to a slightly more comfortable 1.4%.

On the new boundaries, the 2004 primary vote was:

• National 44.5%
• Labor 35.7%
• Greens 13.6%
• Gamily First 1.9%
• Liberals for Forests 1.9%
• Australian Democrats 1.1%
• Others 1.4%,

Despite the high National primary vote, the Nationals went down on Green preferences.

This time the candidates are:

• Farmilo, Daniel LDP
• Elliot, Justine, Labor
• Ebono, Giovanni, Greens
• Page, Sue, Nationals
• McCallum, Graham Citizens Electoral council
• Sledge, Scott, Democrats
• Raymond, Barbara, Christian Democratic Party

Forecast: Labor to hold with increased majority.

Update 10.25 am

• Justine Elliot, ALP, 27,651. 44.0%, swing + 7.8
• Sue Page, NAT, 22,744, 36.2%, swing -7.0%
• Giovanni Ebono, GRN, 9,967, 15.8%, swing + 1.3%

Shortland. Safe Labor - margin 9.2%

Shortland

Shortland covers 182 sq.km, squeezed between Lake Macquarie and the Pacific Ocean, stretching from the southern suburbs of Newcastle to the Central Coast, from Redhead to Budgewoi. Main population centres are Charlestown, Belmont, Swansea and Budgewoi.

Based on the new boundaries, the 2004 votes were:

• ALP 49.3%
• Liberal 35.8%
• Greens 8.2%
• One Nation 2.6%
• Family First 2.4%
• Australian Democrats 1.6%
• Others 0.1%

Forecast: Labour to hold with increased margin

Update 11.12 pm

• Jill Hall, ALP, 39,723, 57.1%, swing + 7.2%
• Jon Kealy, LIB, 21,328, 30.7% swing -4.9%
• Keith Parsons, GRN, 5,799, 8.3%, swing 0.4%

Final Results

Enrolment 93,192, turnout 95.78%

Results by candidate:

• Parsons, Keith: Greens - 7,097 votes, +0.15% swing
• Hall, Jill: Labor (elected) - 48,525 votes, +7.40% swing
• Kealy, Jon: Liberal - 26,620 votes, -4.69% swing
• Reeves, Mathew: Family First - 1,644 votes, -0.49% swing
• Wallace, Les: Christian Democratic Party (Fred Nile Group) - 1,655 votes, +1.93% swing

Two candidate preferred vote:

• Hall, Jill, Labor, 55,379 votes, 64.74%, swing +5.50%
• Kealy, John, Liberal, 30,162 votes, 35.26%, swing -5.50%

Public Works

I watched President-Elect Obama's weekly address this morning on You-tube, in which he called for a massive public works programs to help us crawl out of recession.

In principle, this is a very good idea.  One of the deficiencies of policy over the past eight years (and for 20 or the past 28) has been an ideological denial of the existence and importance of public goods--goods with high fixed costs, close-to-zero marginal costs (i.e., non-rival), and goods where it is difficult to exclude.  The Republican throwaway lines--you are always better at spending your own money than the government, and government doesn't solve the problem, it is the problem--represent the contempt Republicans have for public goods.

Many public goods, however, are manifestly beneficial to the economy.  Even George Will cites the Interstate Highway System as an unambiguous success.  Rural electrification, which has a heavily subsidized enterprise, was almost certainly a positive net present value investment for the country,  as were the California aqueducts (or for that matter, the Roman aqueducts).  The bridges and tunnels of New York City helped it become the world's leading city.  One could go on and on.

When one looks at the long term insufficiency of our roads, our water systems, our power grid, our ports and our airports, it is clear that there are many positive NPV opportunities for government now--particularly in light of the low cost of long-term Treasury debt.

The problem is that government usually allocates investment funds via a political process, rather than a feasibility process.  Government officials also often prefer grand, ineffective projects to more pedestrian, effective projects (transit officials here in LA prefer extended light rail to synchronizing the traffic lights).  So if we are about to spend a lot on public works, I think we need some sort of non-partisan entity, such as the CBO, that develops a rigorous capital budget process for determining spending priorities.  In the absence of such a process, we will spend money on negative NPV bridges to nowhere.

Happy Thanksgiving!

Let's hope nothing too eventful happens this weekend. See you on the Mass Pike!

Oy vey

On July 16 I wrote:

The current 10 years treasury rate is 5.1 percent; Cap Rates on San Francisco office buildings are running around 5.5 percent.

On the one hand, rents rise, meaning that the expected IRR on a San Francisco office building is higher than 5.5; on the other hand, buildings depreciate and need to be recapitalized, meaning that net stablized net cash flow growth will be less than market rent growth. While office rents in San Francisco rose smartly last year, they had been stagnant for serveral years before, and office buildings always have the potential for substantial vacancy. So would I buy an office building at a 40 basis point spread over Treasuries? I don't think so...

The good news: 10 years Treasuries are now at around 4 percent. The bad news: see web.mit.edu/cre. Commercial real estate values are falling. Just what we need.

Brad Delong Blogs on Luck and Laptops

Both of this posts his morning hit me where I live.

Although Brad writes about blogger luck, those of us with tenure at good universities are also very lucky indeed.  When I think about all the ways I was blessed with good fortune to get here...

He also writes about Macbooks.  My 5 year old Sony Vaio (which I actually loved) had slowed to a crawl, and no fix seemed to speed it up.  So I took the plunge and ordered a Macbook from JR.com.  I have had it for three days now.  It really is a superior product. 

Freddie Mac's Earnings

Yesterday was not a good one for Freddie Mac: its earnings were substantially more negative than nearly everyone was expecting, and the value of the stock slid by 30 percent.

I am not entirely sure yet why earnings were so poor, but press accounts suggest that the heart of the problem was the mark-downs the company took on delinquent loans that it had repurchased from loan pools. The losses on these loans have not actually been realized in a cash-flow sense (Freddie has not sold them at below market value), but in light of the fact that these are by definition problem loans and that losses conditional upon default seem to be rising, the write-down seems appropriate.

The episode brings home several points. First, it was not long ago that Fannie and Freddie were criticized for having returns on equity that were "too high" and for charging guarantee fees that were also "too high." Guarantee fees are the insurance premium the GSEs charge to sellers of loans to guarantee timely payment of principal and interest. The reason ROES were so high for years is because house prices rose everywhere, and so default losses were nearly non-existent. The companies faced an environment analogous to a casualty company with a book of business in Florida that didn't face a serious hurricane for five years. It one looks at the long term history of default in the United States, Fannie/Freddie G-fees were not excessive (fwiw, I made this point at least as far back as 2005).

Second, as Freddie is confined to conventional/conforming loans, and focuses on prime loans, the markdown at which the market is pricing its non-current loans reflects the fact that the market is building in a high risk-premium for all loans. One thing we know about prime mortgages from the past is that people actually rarely defaulted on them, unless they were facing job loss, divorce or illness, regardless of house price movements. It is possible that attitudes toward default among prime borrowers have changed--we are in the middle of an experiment that will allow us to find out.

Finally, it is an important and open question as to what the role of the companies should be going forward. If the regulatory climate (such as capital requirements) remains tight, the inability of the companies to purchase loans could make housing conditions worse. On the other hand, if house prices overshot up, they will likely overshoot down regardless of credit market conditions. Congress and regulators need to ask themselves whether they are willing to hang on tight if they allow Fannie and Freddie to increase lending in such an environment.

We went through a ride like this in the early 1980s, where because of interest rate changes, Fannie Mae was technically insolvent (and bleeding cash flow). The government decided to forbear, and once interest rates fell, Fannie was OK again.

144 years ago yesterday

Brad Delong's blog reminds me that this was spoken:

Four score and seven years ago our fathers brought forth on this continent, a new nation, conceived in Liberty, and dedicated to the proposition that all men are created equal.

Now we are engaged in a great civil war, testing whether that nation, or any nation so conceived and so dedicated, can long endure. We are met on a great battle-field of that war. We have come to dedicate a portion of that field, as a final resting place for those who here gave their lives that that nation might live. It is altogether fitting and proper that we should do this.

But, in a larger sense, we can not dedicate -- we can not consecrate -- we can not hallow -- this ground. The brave men, living and dead, who struggled here, have consecrated it, far above our poor power to add or detract. The world will little note, nor long remember what we say here, but it can never forget what they did here. It is for us the living, rather, to be dedicated here to the unfinished work which they who fought here have thus far so nobly advanced. It is rather for us to be here dedicated to the great task remaining before us -- that from these honored dead we take increased devotion to that cause for which they gave the last full measure of devotion -- that we here highly resolve that these dead shall not have died in vain -- that this nation, under God, shall have a new birth of freedom -- and that government of the people, by the people, for the people, shall not perish from the earth.

Gary Wills' book on the Gettysburg Address is among my all-time favorites. Lincoln used the occasion to replace the Constitution with the Declaration of Independence as the document that declared our principles (as opposed to out legal structure). We have been better as a country ever since. The Declaration declared that all men are created equal, while the Constitution as is existed at that time condoned slavery. It was only when the 13th, 14th and 15th amendments came into being that our laws began to match our aspirations.

How to reform Division I sports?

This is from Gregg Easterbrook's TMQ column today. I don't care that much for his "serious" stuff, but he has the best football column going. And today, he reported on a beauty of a suggestion from his brother:

Thus Lewis' article gives me an opening to repeat the reform proposal made by Official Brother Neil Easterbrook, a professor at TCU -- for every year a Division I football or men's basketball player performs, he receives an additional year of tuition, room and board at the school. That way, when NCAA eligibility expires and the player realizes no NFL or NBA payday will ever happen, he can buckle down, get serious about studying and obtain the college education that will help him advance in life. Neil's rule would ensure that Division I football and men's basketball players are not used up and tossed away by the sports-factory schools; would create a strong incentive for those schools to be serious about teaching their athletes, so they graduate on time and don't represent extra years of costs; and would create a campus presence of once-star players who didn't make the NFL or NBA and are now at the library studying, radiating the message that you'd better study. How about it, NCAA? Why not use your billions of dollars to set up a system that would allow revenue-sport athletes who have brought you cash and glory on the field to remain in school until their degrees are complete?

Dick Cavett is a national treasure

His piece on Sarah Palin is hilarious.  It also brings to mind:

(1) There are many things about my parents for which I am grateful.  One was they allowed me to stay up late to watch Dick Cavett.

(2) A real estate developer told me the other day that he decided to pay the "Palin Tax": he voted for Obama (and therefore for a tax increase for himself) so that Alaska's governor would not be a heartbeat away.  Apparently this phrase has become common.  So now to Pigou Taxes and Ramsey Taxes we may add Palin Taxes as those that are welfare improving (or that at least avoid deadweight loss). 

Eichholtz, Kok and Quigley find Economic Value from Green Buildings

This is forthcoming in AER:

This paper provides the first credible evidence on the economic value of the certification of green buildings-- value derived from impersonal market transactions rather thanengineering estimates. For some 10,000 subject and control buildings, we match publicly available information on the addresses of Energy Star and LEED-rated office buildings to the characteristics of these buildings, their rental rates and selling prices. We find that buildings with a green rating command rental rates that are roughly three percent higher per square foot than otherwise identical buildings - controlling for the quality and the specific location of office buildings. Ceteris paribus, premiums in effective rents are even higher - above six percent. Selling prices of green buildings are higher by about 16 percent. For the Energy-Star-certified buildings in this sample, we subsequently obtained detailed estimates of site and source energy usage from the U.S. Environmental Protection Agency. Our analysis establishes that variations in the premium for green office buildings are systematically related to their energy-saving characteristics. For example, an increase of ten percent in the site energy utilization efficiency of a green building is associated with a two percent increase in selling price - over and above the 16 percent premium for a labeled building. Further calculations suggest that a one dollar saving in energy costs from increased thermal efficiency yields roughly eighteen dollars in the increased valuation of an Energy-Star certified building.

I find the value results compelling; the rent results less so (the t-stat on their best specification is not that impressive given their large sample size). But in any event, an important contribution.

Practical Greenhouse Gas Reduction/Transportation

Today Duncan Black states that cars are useful things.  Duncan Black also lives in central Philadelphia and does not own a car.  Cars simply have the advantage of flexibility and speed available in no other form of transportation, a fact that we need to keep front and center as we think about practical methods for curbing emissions and reducing congestion.

Some very non-sexy things that would help:

(1) Increase incentives to fill the right front seat of automobiles.  If the average number of vehicle occupants increased from 1.3 to 1.5, passenger miles per gallon would increase by 15 percent.

(2) Get out of SUVs and Pickup Trucks.  Hybrids are cool.  But if people would just continue to move out of SUVs that get 15 mpg to normal cars that get 20, passenger miles per gallon would increase by 33 percent.  That is a lot.  If they want to buy Civics and Corollas, even better.

(3) Encourage people to reduce the number of trips per day (we really started to see this happen when gas prices were north of $4 per gallon).

(4)  Synchronize traffic lights.  Ed Mills showed years ago that the bang for the buck of doing this is enormous.

The greatest challenge of these is (1).  But if money spent on light rail were instead spent on encouraging commuters to double up, my guess is we could get a lot more people moving a lot faster while consuming much less gasoline.

Bad manners

I was on a panel of four people yesterday.  We were all told to speak for 10-12 minutes; one person spoke for 25.  It was the second time I have been on a panel with this person over the past two months, and he did the same thing both times.

Small slippages in time happen to us all--very often the pace of our speaking changes with venue.  But someone who takes up more than double his allocated time is either unprepared or inconsiderate--probably both.

In defense of mortgage backed securities

Some time ago, Susan Wachter and I wrote an article about (among other things) the history of the US mortgage market. One of the points of the piece was that depositories are not capable of holding long-term fixed-rate mortgages, because it subjects them to too much duration risk: mortgages are assets with long duration (i.e., have values that are sensitive to changes in interest rates), while deposits are liabilities with short duration.  Hence, when short-term interest rates fall, depositories make large profits, but when they rise, depositories invested in mortgages can quickly become insolvent.  This is exactly what happened to Savings and Loans in the 1970s and 1980s.

Life-insurance companies and pension funds have long liabilities, and are therefore better candidates to hold mortgages, but they can be harmed by negative duration.  When interest rates fall, homeowners refinance their loans.  This means that insurance companies and pensions funds see the income they were going to use to meet their long-term obligations fall, and so must raise capital or premiums lest they become insolvent.

In light of this, there is a role for un-leveraged investors to hold mortgages.  But these investors may not wish to hold individual mortgages, because individual mortgages carry idiosyncratic risk.   A mortgage backed security stitches together the cash-flows of multiple mortgages, and as such diversifies risk: an investor should prefer owning 1/30 of 30 mortgages to owning a single mortgage.  

At the same time, Fannie Mae and Freddie Mac, because of their (perhaps unfair) market advantage, could impose common underwriting standards on all the mortgages they purchased and placed into securities.  This turned the securities into commodities, and so they traded in deeply liquid markets.  Even now, Fannie-Freddie MBS are performing reasonably well under very difficult market conditions.

Problems arose when Wall Street became overly enthusiastic about developing derivative products based on MBS.  I will post more on these at another time (I actually think the CMO structure is basically fine; it is the CDO structure that reflected hubris).  But the basic MBS was and remains an ingenious product, and will continue to be an important instrument of housing finance in the years to come.

Is there room for more than one Chicago?

Last weekend, for the first time since leaving the Midwest in 2002, I spent time enjoying Chicago. The best part was visiting my daughter, but the second best part was seeing Millennium Park, the New Modern Wing of the Art Institute, and just plain walking around and eating in Chicago.

Within one-half mile of Lake Michigan, from Cermak Road on the South to the Evanston city limit on the North, Chicago is an Urbanist's dream. It is walkable, it has more impressive urban landscapes than any other city I know, transit is good, there is well-tended and contiguous green space, and, of course, the magnificent lakefront.

So why don't we have more Chicagos? Part of the reason is that countries have systems of cities, whose size seems to kind-of-sort-of follow Zipf's law, and so there is room for a limited number of cities of Chicago's size. But one could ask why we don't see Chicago in miniature more often. To the extent that it is preferences--that there are only a limited number of us who like the features of places like Chicago--the fact that there are few Chicagos is nothing to worry about.

But I suspect that it has to do more with policies--zoning that requires separation of uses, low densities, large setbacks, etc. Particularly problematic is the hostility many communities show toward multi-family housing, and the silliness of greenspace requirements that encourages many little playgrounds but fails to develop large parks. The again, policies are put into place by elected officials, so maybe the absence of Chicagos does reflect preferences (or prejudices). And that's too bad.

Worthwhile reading on Wamu vs Cuomo

http://globaleconomicanalysis.blogspot.com/2015/11/tanta-on-wamu-vs-cuomo.html

Tanta On WaMu vs. Cuomo

There was a great post by Tanta on Calculated Risk's blog about a legal battle involving Cuomo, Fannie Mae, and Washington Mutual.

For background information on the lawsuit please see WaMu Collapses Under Appraisal Probe. My ending comment was "If Washington Mutual has to buy back those loans from Fannie Mae, the patient will die."

Tanta took things further, looking at the entire appraisal industry itself, including some legal repercussions of what might happen depending on how the lawsuit progresses.

Tanta's must read post is called WaMu and The Rep War.
Following are a few snips:

Fannie Mae is saying that WaMu will take back any loans with dubious appraisals this "independent examiner" digs up. WaMu is saying that it will "rigorously" avoid doing so.

WaMu is also saying, in effect, that it signed a contract with eAppraiseIT that puts all liability for inflated appraisals on eAppraiseIT.

Fannie Mae is saying, in effect, that it signed a contract with WaMu that puts all liability for inflated appraisals on WaMu.

This is very interesting precisely because it isn't going to be about inflated appraisals. It's going to be about how far anyone can get away with two practices that are the lynch-pins of the mortgage industry: outsourcing regulatory liability to a third party bag-holder and doing business on a representation and warranty basis without pre-sale due diligence.

....

Trust me; all of that stuff is detailed and specific enough that it isn't that hard to find contractual grounds to declare breach and demand repurchase of a loan.

...

Anyway, this is why the whole flap is scaring the panties off everyone in the mortgage industry, far, far beyond any worry over stiffer appraisal regulation. The core issue here is a cornerstone of the whole "originate and sell" model that has created such a crisis.

If Cuomo's suit makes any headway at all, it will put eAppraiseIT out of business one way or the other. That's because if appraisal management companies are no longer willing or able to write these liability swaps into their contracts, they won't be able to offer what the lenders really want from them. The advantage of doing business this way isn't really about saving a few dollars on outsourcing administrative work for the lenders, it's about getting out from under a huge expensive compliance and legal risk.

No wonder Cramer's head is exploding again. This thing really isn't about appraisals, it's about stopping the game of risk-layoff.

Yes, WaMu (WM) will collapse if it has to take back those loans, but the bigger picture is the entire "originate and sell" model might collapse along with it. Won't that be fun?

The originate to sell model has taken a reputational hit as a result of subprime. Nevertheless, the old-fashioned retail-depository model had had its share of problems throughout its history; we shouldn't forget that securitization helped solve the savings and loan crisis. It would be a shame if in the midst of our current troubles we forgot about how the ability to sell mortgages has deepened the liquidity of prime mortgages, and enabled households to become attached to capital markets in a positive manner.

More on regional differences

As much as I love California, I do prefer Five Guys to In-and-Out Burger.

A Clue as to Why Goldman is So Good

The Times this morning has a flattering piece on Goldman-Sachs. And no wonder: they took hedge positions that have increased the company's profitability at a time when other investment banks are having, shall we say, serious problems.

The Times gives some reasons about why the company is so good, but let me suggest another. My limited exposure to people in the company suggests to me that part of the culture is actually to encourage reflective study. Instead of making decisions coming "straight from the gut," people at the company read current literature and appreciate the history of financial markets. Unlike its competitors, Goldman has people who understood that house values could not go up forever in all markets. This simple insight was fundamental to the company having a very sensible (and in the end) profitable risk management strategy.

It is often the case that ex post high payoffs result from nothing more than a favorable draw from a distribution of outcomes. But every now and then, one sees an institution that gets the favorable draw time-after-time. Berkshire-Hathaway seems to be one of these institutions, GS is another. The probability of getting great draws at random again and again becomes vanishingly small. I am willing to believe that Goldman Sachs is just plain smarter than its competitors.

Manski and Identification

I am teaching Charles Manski's great book on Identification Problems in the Social Sciences right now (I must say that I find his writing much clearer than the class I had with him as a grad student).

One of this important points is that one cannot evaluate the counter factual or a persons' life. Suppose we find that children who come from in fact families graduate from high school at an 87 percent rate. Then without assuming a lot of structure, all we can know is if children in non-intact families could magically be transported to intact families, the children's graduate rate would lie between 0 and 100 percent. It is only if we assume that kids got randomly picked into intact and non-intact families that we can assert that all kids in in-tact families will graduate at the 87 percent clip. But this assumptions seems hardly reasonable. More on this tomorrow...

Suburbs Separated at Birth?

I live in Bethesda, Maryland a suburb immediately outside of Washington. My in-laws live in S. Pasadena, CA, a suburb immediately outside of LA. I was comparing rents and prices on a per square foot basis in both towns, and they seem remarkably similar. I will need to investigate this more carefully (making adjustments for housing quality etc.), but still...

Bethesda and Pasadena have a couple of things in common. They have always had town centers, and as such have long had a greater sense of identity than the typical cookie-cutter suburb. They have also seen their downtowns develop remarkably in recent years. In fact, Pasadena is one of the great urban renewal stories of the post-War era. Twenty-five years ago, the heart of downtown Pasadena, the corner of Fair Oaks and Colorado, was a dump. It is now very beautiful, with nice retail and many interesting restaurants. Bethesda never got as down-in-the-mouth as Pasadena, but it was pretty dull when I first lived in the DC area immediately after college. Downtown Bethesda is now lively. Both downtowns have lots of street life. Both towns have nice residential districts with some distinguished houses architecturally (I particularly like the craftsmen bungalows in Pasadena).

They are also convenient to many employment centers within thriving metropolitan areas.

Why we get in this business

GW inaugurated its new president last week, and I attended or was involved with a number of events surrounding the festivities. The highlight for me was a lunch, where the new President, the President of the Alumni Association, and a Senator who is an alum spoke. It wasn't the speeches, however, that made the lunch.

The lunch was rather made by the two undergraduates who sat at my table--one was a freshman, and one a junior. They were engaged, curious and highly intelligent, and just lots of fun to talk with. We spoke largely about potential opportunities for real estate development in China and India. The conversation centered around the fact that the challenges facing developers in these fast growing places are more grounded in politics than economic feasibility: if one can build a block of flats in Mumbai, they will sell. The issue is getting the government to give permission to build them. We also discussed the problems of property rights in China, and the remaining suspicion of foreign investment in India.

Other than a few seminars, I think the last time I taught undergraduates was 2004, when I taught 120 undergrads at Wharton. I need to get back into undergraduate teaching....

If only we knew ...

The basic problem with valuing underwater loans is that borrowers are heterogeneous. Some borrowers are going to walk away from their mortgages; from the standpoint of financial institutions, it would be better to simply write down their mortgage balance, swap the value of the debt above the mortgage balance for equity, and avoid foreclosure.

But other borrowers insist on paying their mortgages, no matter what. These mortgages continue to be worth something like their par value. Financial institutions do not want to modify their loans. But if those who pay their mortgages know that those who don't will get a modification, they will change their behavior.

So the optimal program (from the lender's perspective) would be one that identifies those who wouldn't repay, and then grant those people a secret modification. I can't figure out how to either (1) how to do the identification or (2) write to contract binding the borrower to secrecy.

This morning on NPR

I am interviewed about the mortgage crisis.

http://media.vmsnews.com/MR.pl?id=111808-896263-U001574416

Story of the Northern Separation or New England New State Movement

In recent times I have noticed a quite remarkable increase in interest in the New England New State Movement. Half of the ten most recent searches have been on this topic.

To IP 58...., Mr Whitlam was a member of the Federal Parliamentary Constitutional Review Committee with David Drummond. This Committee recommended changes to the constitution to make the creation of new states easier. In regard to your second search on the New England Movement I have a fair bit of material covering the whole movement from the early colonial period.

The same advice applies to IP c211-30... who was also searching on the New England Movement.

To IP c211-30... who was searching on the Cohen Royal Commission, I can give you the full history here.

More broadly, my own support for separation will be clear from this blog. However, that does not prevent me supplying objective historical information. If you have questions or want info as to sources, please leave a comment.

Postscript

Thinking about it further, perhps the most useful thing that I might do is to put up some more historical material on the New England history blog. I have been slow in posting material to this blog because of the time pressures on me, so far really only starting to sketch out a blog structure.

I will add a further postscript when I have put something up.

Election 2015 Worrying times for New England's Nationals

As we enter the last week of the Federal election campaign, the New England scene is now looking decidedly difficult for the coalition in general and the Nationals in particular.

There are eleven Federal seats in New England, broken up into Labor 5, Nats 4, Liberal Party and independents one each. The latest Galaxy poll in the Telegraph shows an average swing to the ALP across the NSW marginals including the New England seats of of 7.5%.

On this swing, the Liberals could lose Paterson, the Nationals Page and Cowper. New England would then be Labor 8, Nats 2, independent one.

I have continued to read North Coast Voices, the ALP supporters blog. Given that it seems very likely that Mr Rudd will win the election, it will be interesting to see if Federal ALP can effectively represent both Northern Rivers and broader New England interests. While experience with state Labor is far from encouraging, the Federal Party is a different beast.

Postscript

I see from later information that the poll in question did not include any New England seats, so that leaves the whole thing even more up in the air.

New England Australia - writers

I was trawling away looking for New England blogs when I came across Loonie Bin, a student blog from the University of New England. The writer is heavily into games, but I was struck by one quote:

Might I just add, and I may have mentioned this before: Sharkey is a MACHINE. I handed that assignment in on friday. Friday! And I swear he'd had it marked before today, he probably marked all the assignments over the weekend and had them ready for collection on Monday. It's insane, he puts all other lecturers to shame!

Now the Sharkey in question is one Michael, a very hard working staff member at the University of New England. He is also one of New England's better known poets.

I mention this because I knew that had written on him before, but had to search to find the story. I have therefore updated the New England writers tag to pick up posts that I had missed.

The various posts give some still limited indication of the richness of New England writing.

Biggest Loser since 1950

The New York Times this morning had a story about the unhealthiest city in the United States: Huntington, West Virginia. The story was disturbing in all kinds of ways, but one number in it really stuck out to me--the decline in population in that city between 1950 and 2000 was more than 44 percent.

This brought to mind a conversation I had with John Weicher some years ago about which city had lost the most population. Just to be clear, we were talking about municipalities, not metropolitan areas. I went to the census web site this morning, and generated the following growth (loss) rates between 1950-2007 for the 50 largest municipalities in 1950:

Jacksonville 293.91%
San Diego city 278.82%
Houston city 270.40%
San Antonio city 225.38%
Dallas city 185.53%
Fort Worth city 144.57%
Oklahoma City city 124.75%
Columbus city 98.92%
Los Angeles city 94.60%
Indianapolis city 86.21%
Long Beach city 86.04%
Memphis city 70.21%
Omaha city 69.04%
Miami city 64.36%
Atlanta city 56.69%
Louisville/Jefferson County metro government (balance) 51.11%
Portland city 47.31%
Denver city 41.50%
Seattle city 27.08%
Norfolk ciy 10.41%
New York city 4.85%
Oakland city 4.40%
San Francisco city -1.34%
Kansas City city -1.37%
Toledo city -2.83%
Milwaukee city -5.52%
St. Paul city -10.95%
Richmond city -14.14%
Worcester city -15.15%
Jersey City city-18.94%
Chicago city -21.66%
Akron city -24.28%
Boston city -25.22%
Washington city -26.66%
Minneapolis city -27.66%
Birmingham city -29.52%
Philadelphia city -30.02%
Providence city, RI -30.18%
Dayton city -32.02%
Baltimore city -32.88%
Syracuse city -33.22%
Cincinnati city -34.04%
Rochester city, NY-34.29%
Newark city -36.16%
Detroit city -50.42%
Cleveland city -52.12%
Buffalo city -53.01%
Pittsburgh city -54.02%
New Orleans city-58.08%
St. Louis city -59.06%

[sorry for the formatting--if anyone has good ideas for table formatting in blogger, I would love to hear them].

Some striking things emerge. First, only 22 of the 50 top 50 from 50 gained population. And among the 22, Jacksonville, Los Angeles and Oklahoma City had lots of land within their municipal boundaries in which to grow, and Louisville, Nashville and Indianapolis merged with their counties. Denver and Miami are quite remarkable stories, because their boundaries were both fixed and pretty tight in 1950. But keep in mind that the country doubled in population between 1950 and 2007, so if a city's growth is anything less than 100 percent, it is underperforming. By this standard, only 7 of America's top 50 in 1950 has matched or surpassed the country. This illustrates starkly how the country's population has spread.



That said, the cities on the bottom of the list are those that have suffered the most stress. New Orleans does reflect Katrina: before Katrina is population loss was actually fairly typical of a city from the top 50 in 1950.

Phoenix and Las Vegas are not on the list because they were not among the top 50 cities in 1950.