When agglomeration makes things worse

I have just returned from the Asian Real Estate Society conference in Macao. The conference was very good, as was the food. The small, historic center of Macao, is very beautiful.

But Macao is largely about gambling--the claim is that it has higher gambling revenue than Las Vegas. There are already lots of glitzy casino-hotels. The conference venue was at one of them--the Wynn. Given the construction cost of the place and the posted room rates, it must be the case that it makes its money on the casino.

I have a (small) libertarian streak in me; that streak tells me it is none of my business is people want to blow their money on gambling. I myself go to Santa Anita every other year or so and bet as much as $18 on horse races. But there is a well established literature (http://scholar.google.com/scholar?hl=en&lr=&q=addictive+gambling) that there are gambling addicts--and it is here that there is an agglomeration problem.

Around the casinos of Macao, one finds large numbers of two kinds of retail outlets: pawn shops, and ATM machines. This makes complete business sense--if people need to feed the gambling beast, places that provide money should cluster near casinos. The problem is that it is like putting free booze into the hands of an alcoholic. Even worse is the fact that some casinos have ATM machines on the premises.

I have no illusions about the possibility of eliminating problem gambling, but it might be worthwhile to make it a little less easy to do. Limiting the number of ATM machines and banning pawn shops within a certain radius of a casino might be a start.

Peter Wallison calls Consumer Protection Elitist

He writes:

Traditionally, consumer protection in the United States has focused on disclosure. It has always been assumed that with adequate disclosure all consumers -- of whatever level of sophistication -- could make rational decisions about the products and services they are offered. No more. If the administration's plan is adopted, many consumers will be told that they cannot have particular products or services because they are not sophisticated, educated or perhaps intelligent enough to understand what they have been offered.

Conservatives have always argued that liberals are elitists who do not respect ordinary Americans; this legislation seems to prove it. For example, the administration's plan would allow the educated and sophisticated elites to have access to whatever financial services they want but limit the range of products available to ordinary Americans.

This unprecedented result comes about because, under the proposed legislation, every provider of a financial service (a term that includes organizations as varied as banks, check-cashing services, leasing companies and payment services) is required to offer a "standard" product or service -- to be defined and approved by the proposed agency -- that will be simple and entail "lower risks" for consumers. These standard products are called "plain vanilla" in the white paper that the administration circulated in advance of the legislation.

Such protection is actually not unprecedented. For example, people must be deemed to be "accredited investors" or (for more complicated products) "qualified purchasers" in order to invest in certain types of hedge funds. And stock brokers have an obligation to make sure their clients' investments are "suitable."

But beyond the issue of precedence, there is a broader issue of safety. We reasonably forbid or require a variety of actions in the interest of safety. We require people to wear seatbelts. Be don't allow people to buy certain type of narcotics over the counter. Perhaps Mr. Wallison thinks such protections are a bad idea too, in which case he is consistent, if not also ridiculous. Mortgages can be dangerous products. Let's turn it over to Richard Thaler:

Fast forward to 2015, and the world of mortgage shopping had become a much more complicated place. Borrowers were quoted low initial “teaser” rates that would jump later to some higher level, depending on market interest rates at the time, and there were prepayment penalties for paying off the loans early. For such mortgages, an A.P.R. was no longer an adequate measure of the loan’s cost.

How can we help people make sense of all this?

One extreme approach would be to ban complex mortgages entirely: we could just go back to the world of uniform fixed-rate mortgages. But the cost of simplicity is an end to innovation. Shopping for televisions was easier in the 1970s, when we did not have to decide between plasma and L.C.D. technology — but who wants to go back to those hulking old TV sets?

A better approach is to strive for maintaining diverse options but helping consumers make smart choices and avoid the most common pitfalls.

For mortgages, the specific plan proposed by the administration appears to be strongly influenced by Michael S. Barr, an assistant Treasury secretary. Mr. Barr is a former law professor at the University of Michigan who wrote an important article sketching out these ideas with Sendhil Mullainathan, an economist at Harvard, and Eldar Shafir, a professor of psychology and public affairs at Princeton. As the administration plan describes it, lenders could be required to offer some mortgages they call “plain vanilla,” with uniform terms. There might be one vanilla 30-year, fixed-rate mortgage and one five-year, adjustable-rate mortgage. The features of these plain mortgages would be uniform, much as in a standard lease used in most rental agreements.

Lenders would also be free to offer other exotic mortgages — perhaps called “rocky road” mortgages? — along with the vanilla variety, but these offerings would receive more intense scrutiny from regulators.

I am not sure what is so elitist about this, other than the fact that those who are hostile to regulations tend to like to use elitist as an epithet for their opponents. So I guess I have two questions for Mr. Wallison:

(1) If I gave him an HP12C calculator, assumptions about an interest rate path, and the terms of an option-ARM mortgage, would he be able to tell me the payment on that mortgage in, say, month 62? Perhaps he could, but I don't know too many lawyers (and he is a lawyer) who could do that calculation. If highly education lawyers are generally flummoxed by this calculation, it is hard to see how ordinary Americans could understand it. The point is not to disparage ordinary Americans, but to emphasize a fact--most of us do not have the equipment to make informed judgments about complex financial products.

(2) I am curious how often Mr. Wallison hangs out with those who are not elite. Does he socialize with, say, median income people? With people whose eduction is at the median (i.e., high school graduates?). Perhaps he does, in which case he is entitled to refer to "the elite" as an other. But I have my doubts.

Fossicking in New England

Photo: Fossicking, Inverell

Some time ago, I started a series of posts describing the Fossicker's Way, the New England road linking some of New England's best fossicking areas.

Google blogger is down just at present, so I cannot provide details of these posts. I will add links once the problem is sorted.

I did just the first two days in this series, leaving my travellers stranded at Nundle. Now the people from Big Sky Country have put together some useful material on fossicking in New England's Northern Tablelands' region that allows me to extend the series.

Moving from Nundle, visitors travel to Tamworth and then up the western edge of the Tablelands through to Inverell and Glen Innes. Here we come to some great fossicking country. Here the sapphires are plentiful but, they can also be really, really big.

A couple sifting through a pile of wash at Inverell’s 7 Oaks Fossicking Park, can attest to this fact, after discovering a 42.13 carat blue sapphire, the largest stone ever found by a fossicker on site.

According to 7 Oaks’ owner, Peter Black, the stone is “an absolute monster”.

While the size of this find was rare, unearthing gemstones in decent quantities from the region is not, say the resident fossicking experts of Big Sky Country.

Along with the royal blue sapphire, the region is prolific for its rich diversity of gems and minerals, such as aquamarine, emerald, fluorite, topaz, zircon, garnet and quartz.

Big Sky Country is the New England North West region of NSW, part of it intersected by the road known as – yes, The Fossicker’s Way. The best towns to stay in for a few good days of fossicking are Inverell and Glen Innes.

Inverell justifiably goes by the title of ‘The Sapphire City’ because 70 per cent of Australia’s sapphires come from here, while Glen Innes boasts Minerama, one of the biggest annual gem and mineral festivals in Australia.

Here’s a basic guide to some of the fossicking options provided by Big Sky Country.

7 Oaks Fossicking Park, Inverell

This 300 acre property on Frazer Creek is family operated and has been producing sapphires since the 1960's. You can fossick on the natural creek banks, but the easier and most popular option is to sift through the piles of wash supplied to you.

Peter Black had only just bought 7 Oaks in April 2015, when a few weeks later, a couple from Port Macquarie found a 42.13 carat sapphire – the biggest find ever by a fossicking visitor at the park. The stone is estimated to be worth $5,000 to a collector.

Situated 19kms from Inverell, 7 Oaks is open for basic bush camping, with bush toilets, picnic tables and wood fire barbecues. Cost is $20 per day for adults and $10 for children aged 8 to 14.

http://www.sapphiresinverell.com.au/

Phone 02 6725 1582

Billabong Blue Sapphire Fossicking Park, Inverell

This park, 16km from Inverell, makes fossicking relatively civilized. You get to sift through the wash on benches at waist height and the owners, Rhonda and Bill, offer their professional advice should you need it. There’s a café, BBQ and picnic areas, water tanks and toilets.

Billabong Blue promotes itself as ideal for the first time fossicker or the seasoned expert, and guarantees every visitor will go home with some coloured gems in their pocket. Cost is $20 per day, or $40 for a family (two adults, two children).

http://www.billabongblue.fossickingpark.com.au/

Phone 02 6721 0500

Poolbrook Gems Fossicking Park, Inverell

Poolbrook is another private property where visitors can fossick for a day for a fee. Located at Frazer's Creek, 26 kilometres from Inverell, visitors must stop at Kottage Kiya Gallery, 8 km from Inverell on the Nullamanna-Emmaville Road, to pick up sieves and get directions from Louise Walburn, one of the park's owners. Louise also gives first-time fossickers some helpful hints. Cost is $10 per day, children under 12 free.

Phone 02 6722 2781

Free Fossicking Sites in Inverell

There are three free areas to fossick around Inverell: Pindaroi Lake, Bukkulla; Frazer Creek, Nullamanna and Swanbrook Creek, Swanbrook Road.

Stannifer Fossicking Area, Tingha

Many of Tingha’s streets are named after the gems found in the district. In this free fossicking area, you may find jellybeans (water worn quartz crystals) quartz and grass stone. Tingha is about 17km south of Inverell.

Glen Rest Tourist Park, Glen Innes

Resident caravanners and visitors to Glen Innes can enjoy the privilege of fossicking through a bucket or bag of soil, with equipment and tuition supplied, along with shaded picnic tables. Cost is from $10 per bucket.

www.gleninnes.com/glenrestpark

Phone 02 6732 2413

Wellingrove Fossicking Reserve, Glen Innes

A peaceful and secluded spot for a fossick, Wellingrove is 19km north west of Glen Innes where you can hope to find sapphires and zircons.

A permit is required from the Visitor Information Centre and it costs from $5 per person a day but children under 12 are free.

Boolabinda Holiday Homestead, Glen Innes

Fossicking is just one of the activities available at this farmstay. You can search for sapphires and zircons in Reddestone Creek for $8 per day, plus $3 equipment hire.

http://www.boolabinda.com.au/ (closed June July & August)

Phone 02 6732 2215

Bullock Mountain Homestead

Bullock Mountain is also a farmstay, where you can fossick through buckets of wash from a disused mine or try your luck in Reddestone Creek. Fossicking park buckets costs $15.00 (includes sieves) while creek fossicking is $10.

http://www.bullockmountainhomestead.com/

Phone 02 6732 1599 – please book ahead.

Three Waters High Country Holidays, Glenn Innes

Fossicking for sapphires, zircons in Reddestone Creek at $8 per day, with equipment hire $3.

www.gleninnes.com/3waters

Phone 02 67 32 4863

Guided Field Tours – Baptist Church Fossicking Club, Glen Innes

This is a group visit to private land sites that occurs most Wednesdays. The group leaves at 9am from the Baptist Church, New England Highway and travels in convoy. A small charge per person.

Other areas to remember for free fossicking around Glen Innes Severn Council shire include Kookabookra, Glencoe, and Torrington State Conservation Area.

Three Creeks Gold Mine, Bingara

Three Creeks Gold Mine is a working mine that re-opened to the public in 2015 after a six-year closure. Owner Paul Myer guarantees that every visitor who pans will find some gold here, from a reef that has been mined since the 1800s. He provides full instruction on gold panning and equipment. Quartz crystals are also dominant here. Gold panning is $25 per day (this includes a mine tour), $15 for kids under 12 and under 5’s free.

There are a limited number of campsites available here as well as an on-site van.

Phone 02 6783 2224.

Iron Bark Creek and Woodsreef Fossicking Areas, Barraba

The Barraba area was known for its gold mines and mining villages in the late 1800s, and these areas are still most worthwhile for a fossick. You may find gold and other minerals such as copper, pyrites, jasper, garnets, zeolite, as well as opaque red, brown and yellow quartz. There are no facilities at Woodsreef Reserve but it is open for camping.

Phone 02 6782 1255

Further Information phone:

• Inverell Tourism: 02 6728 8161
• Glen Innes Tourism: 02 6730 2400
• Bingara Visitor Centre: 02 6724 0066

Both Inverell and Glen Innes Visitors Centres have their own fossicking brochures, which provide detailed information and maps.

Entry point for the Fossickers Way series.

President Obama, please be bolder

Both Brad Delong and Mark Thoma have it right today, when they suggest the need for another round of stimulus--with particular aim at helping states--right now.

But President Obama needs to be bolder when it comes to solving the mortgage mess too. Last March I wrote:

Details of the Obama plane to help mortgage borrowers were released this morning. The order in which the mods will happen: interest rate reduction, term extension, principal reduction.

This is backward. Suppose a $100,000 loan has a 7 percent coupon, and its rate is modified down to 4 percent. The payment drops from $665 per month to $477 per month. This helps, but leaves the borrower underwater, making it difficult for her to sell if she needs to move to a new job.

But a $477 payment, at 7 percent annual interest, has a present value of $71,759. So if the interest rate remained the same and the loan balance was written down by 28 percent, the payment would be the same as an interest rate write-down to 4 percent, but the borrower would have her head above water. If she later sells for more than $72K + selling costs, she can split the proceeds with the lender, who would now basically be a shared equity owner.

I think the people in the Obama Administration are very smart. Why aren't they doing this?

The President's rescue program has not taken off. The redefault rate on modified mortgages is high--because they don't solve the negative equity problem. I am not alone in thinking some wort of debt-for-equity modification would make sense. John Quigley has supported such an idea. The Milkin Institute has supported the idea. I was on a radio program with Ken Rosen last week, and I am pretty sure he supported the idea.