February 2009 Archives

Subprime reading

I've read two good pieces on the subprime crisis this week:

1) Gary Gorton's "The Panic of 2007" provides detailed statistics on the mortgage market and a nice (albeit technical) description of how the mortgages were securitized.  He documents the incredible increase in subprime and Alt-A mortgages (going from 3% and 1% of the MBS in market in 2001 to 12% and 13% in 2006).  And the increasing securitization of mortgages (50% of subprime mortgages were securitized in 2001- this grew to 80% in 2006).  While Gorton certainly isn't making this point, you could see how that in real time, someone stuck in an office in New York or DC would be very excited about these new ways to package debt and the increasing ease with which people could buy a home.  Think of Greenspan's quote from 2005;

"Innovation has brought about a multitude of new products, such as subprime loans and niche credit programs for immigrants. Such developments are representative of the market responses that have driven the financial services industry throughout the history of our country ... With these advances in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers."

2) "The End", by Michael Lewis, is also about the mortgage market but is more a story of the characters behind it.  I particularly liked Lewis' description of the work Steve Eisman and his colleagues put in to see what was going wrong.  They saw the numbers that Gorton presents, and thought something must be out of whack, but at first they weren't exactly sure why these things were happening.  To reaffirm what they were seeking in the data, they made visits to South Florida (to see the housing bubble first hand) and talked with those who were securitizing mortgages.  Both highlighted the insufficient regard for the risks being taken.  Although Lewis doesn't explain exactly why things went so wrong, he'll make you wish you were in the trenches trying to figure it out back in 2005-2007. 

Charity multiplier dwarfs all

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Arthur Brooks, President of the American Enterprise Institute, gave a fascinating talk today at Brigham Young University about the effects of charitable giving. He started out with a quote from John D. Rockefeller who seemed to think that charitable giving was the source of his financial success, rather than a function of it. In trying to disprove Rockefeller's hypothesis with data, Brooks explained that he found more and more evidence in support of it.
Here are some of my favorite cartoons about President Obama's nominees and their tax problems. (Thanks to Mary Hokanson for sending these to me.)

WhitehouseTurboTax.png

Underemployed or Overeducated?

A good one from the New Yorker:

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Why Economists Use So Much Math

Given Greg's comment a couple weeks ago and the comments from my students before their first intermediate macro exam last week, I've had to explain why economics relies heavily on math a number of times recently.  I see two major reasons:

The Stimulus Game

Long or Short Capital make an excellent analogy.
The only significant policy difference between the current period of global recession and the Great Depression is monetary policy and financial market intervention. The government spending part is looking like it will be the same. The annual deficit is projected to rise from its current 2008 level of just under 3% of GDP to potentially 10% of GDP in 2009. However, this rise in the deficit is also similar to the early 1980s and 2000. (The big blip is World War II.)

DeficitGDPFY2009graph.png
Back in October 2008, I was a member of a panel discussion hosted by the BYU Economics Department that was tasked with explaining different aspects of the financial crisis up to that point and answering questions from the audience. Each member of the panel, myself included, supported the government's role in bailing out U.S. banks and financial companies citing the systemic role they play in the world economy (see my post 1 and post 2). However, since the crisis began in October 2008, two of my colleagues have consistently made what I see as the only good argument against the TARP financial bailout program--the slippery slope costs will outweigh the systemic risk reduction benefits.

Unemployment in China

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As I wrapped up a chapter on labor markets today, a student asked what the labor market in China was like.  I couldn't give her precise numbers regarding the unemployment rate, so had to look back on some work that students of mine did last semester when they wrote about the macroeconomic experiences of different countries.  Here is a graph of the official rate of unemployment in China:

China_UE.png



More mean reversion?

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I posted a graph a while back showing how home prices for the 100 years leading up to the mid 1990s showed no growth, but fluctuated around a mean.  Seems home prices are heading back there now. 

And the fall in the price of oil from mid-2008 levels ought to put a lid of the "peak oil-ers".

So maybe mean reversion is the best way to model and forecast home and commodity prices.  Is it also the best way to forecast the growth in the value of equities?  Mankiw posts the following picture:

stock_gdp.gif


Habit persistence in 415 B.C.

(Kerk Phillips made my morning when I arrived at work today by telling me his discovery of the earliest example of habit persistence that he has ever heard of. The following is taken directly from Kerk's blog.)

"Habit persistence is a relatively new idea in economics and finance which argues that people's utility or sense of well-being rises with a rise in consumption only in the short-run. In the long-run, people become accustomed to higher levels of consumption and these new higher levels yield the same amount of utility as the lower ones did in the past."

"This is not a new concept, however. Last night while reading The Trojan Women, a play by Euripedes dating from 415 B.C., I ran across the following lines spoken by Andromache, Hector's wife, who is discussing the death of another woman, a former princess of Troy."

Andromache: But if the choice is between a miserable life, mother, if it is between a miserable life and death, death is preferable. Because the dead feel no misery and they know nothing of grief, whereas for the living mortals, if a happy woman falls into misery she must deal with the memory of the joy she previously enjoyed. Her soul seeks the joys of the past.
Following up on Jason's post today, I am a bit bewildered with the Obama administration's choice of, not one, but two tax evaders as cabinet members. Bad enough is that the Treasury Secretary, Timothy Geithner, allegedly didn't pay taxes. The I.R.S. is a department within the Department of the Treasury. How can you appoint someone to oversee the Treasury and the I.R.S. who didn't pay taxes? In Geithner's defense, the amount of unpaid taxes was only about $17,000, so maybe this was an oversight.

However, adding an exclamation point to the Geithner appointment is now the Daschle appointment to head the Department of Health and Human Services.

Hope and Change?

First Geithner, now Daschle.  Those now in power want to spend more money, but not their own.  Those who last had control want "family values", just not for themselves.  I'm not sure I see the "change"- politicians still say one thing and do another.

And it looks like the stimulus package leaves little hope that there has been a change in rent seeking behavior.

Authors

  • Richard W. Evans is an Assistant Professor of Economics at Brigham Young University

  • Jason DeBacker is an Assistant Professor of Economics at Middle Tennessee State University

  • Kerk L. Phillips is an Associate Professor of Economics at Brigham Young University