Friday, March 30, 2007

Off the deep end

The usually excellent and entertaining Tanta goes off the deep end in this post on Calculated Risk.In the NYTimes, Austan Goolsbee (one of my favorite professors at U Chicago) writes that innovations in the mortgage market have helped people who wanted to and could own houses, own houses, by making lending more efficient. Tanta disagrees. She thinks that mortgage lenders are a better judge of how able an individual is to carry a loan than the individual.

To support his argument, Austan refers to the dramatic increase in homeownership amongst Blacks and Latinos, thanks to subprime loans. Tanta thinks Austan is being "revolting disingenuousness" and "dishonest".
In other words, CRL is suggesting that a pattern of finding subprime loans given to minority borrowers with similar credit, income, and equity profiles to non-Latino whites who get prime loans may imply a certain “inefficiency” in the mortgage market somewhere. For Goolsbee to use this data to buttress an unregulated free-for-all by claiming that it helps out the traditionally disadvantaged is, well, dishonest.
Tanta does not know what she is talking about. Just because the CRL finds a pattern of Latinos and Blacks getting subprime loans when, by credit, income and equity profiles alone, this does *not* means that lendors are being racially discriminatory. To find evidence of racial discrimination, you would have to show that a portfolio of subprime loans given to a Black or Latino was *more profitable* than a portfolio of loans given to a white person. Racial discrimination is like yogurt, you buy it where it's cheapest, and given how Tanta's been going on and on about how the subprime market is collapsing, how subprime lenders are losing their shirt, etc. etc. etc. I doubt she thinks that subprime portfolios have higher profits because they only made loans to the highest quality subprime borrowers.

Sunday, March 25, 2007

Nice quiet design

My wife works in an ER, and therefore our house is filled with many medical pens. I just noticed the tiny point on the tip of the EMP pen pictured above. At first I thought it was a manufacturing defect, but it's actually a stylus for a Palm Pilot (for ePocrates, the only eMedicine app to actually work).

Sometimes the best designs are those you hardly notice.

Friday, March 23, 2007


Watched Frank Miller's 300 last night. It rocked.

I have not yet read the comic, I intend to pick it up this weekend.

I first read about the battle of Thermopylae in Herodotus, I guess after the English Patient came out (hated that movie, but read Herodotus anyway) (yes, I know, it is not cool to read Herodotus after the English Patient made it popular, but you know, it's a good book, and easy to read, and people should do it no matter how cool/uncool it is). A friend of mine once remarked that the Greeks just seemed to "live closer to the flame". 300 captures that spirit well.

Good commentary at 2blowhards.

Thursday, March 22, 2007

More geeky musings

winterspeak reader DL responds to my recent post on interest rates vs. time preference discount rates:
A future consumption good is always discounted to a present value by a rate of time preference independent of whether borrowed money is involved or not.While the discount rate involved is not identical to market interest rates, they cannot be truly independent of one another.
This is exactly right, and leads to the question: what is the relationship between the discount rate and market interest rate? It is true they cannot be truly independent, as to a certain degree your willingness to wait for something depends on how much you are compensated for waiting. On the other hand, they clearly are not the same thing either -- market interest rates bounce all over the place, whereas people's patience to wait for something is more constant.

It is also true that behavioral finance shows that people have inconsistent time preferences -- delaying between right now and later is a bigger deal than delaying between later and even later.

What happens when the interest rate is below the time preference discount rate (so the bank pays 1%, but you are discount at 5%). Do you move consumption forward? Alternatively, if the positions are reversed (the bank pays 10%, you still discount at 5%) do you delay consumption? And how much can you really shift consumption forward?

It's easy to delay consumption -- you just save and buy what you were going to buy anyway, later. But to move consumption forward it harder -- you cannot eat dinner twice today and not need to eat it tomorrow. Eating dinner twice today is increasing consumption, but not moving it forward. Apart from buying durable goods earlier, I'm not sure what else you can do.

Wednesday, March 21, 2007

Geeky musings

Should the interest rate (cost of borrowing) effect the price of a long lived asset?

This probably has a simple answer, but I'm not sure how to think about it. If the long lived asset is, say, a coupon bond (a stream of predictable cash payouts) then it's pretty clear that the interest rate (cost of borrowing) impacts the price -- as a matter of fact, the interest rate (cost of borrowing) *is* the price of a bond.

One the other hand, I'm not sure if the price of an stock should go up if all of a sudden my bank decides to lower the rate on my margin account. Is a company really more valuable if a bank is more willing to lend me money to buy it? It produces the same goods as before, exists in the same competitive environment, is subject to the same market forces, etc.

My thinking here, of course, relates to the run-up in housing prices, which almost certainly was driven by low interest rates lowering the monthly payment on people's mortgages, enabling them to take on bigger loans. But they are living in the same house.

Thursday, March 08, 2007

TED 2007

I'm at TED listening to John Doerr talk about how he's really concerned about CO2 emissions and global warming. He's talking about how him and 50 of his rich and powerful friends flew around the world in jets, discussing this issue, and how Brazil has successfully switched from gasoline to ethanol. He also spoke about how him and his friends lobbyied the California Congress to pass a cap and trade law to reduce CO2 emissions in the state. He says this will create jobs and wealth. He mentions that better bio fuels will be important, and how Kleiner Perkins is putting $200M into this area.

I'm skeptical about all of this. Firstly, flying around the world in jets is not a good way to reduce CO2 emissions.

Secondly, I would bet that Doerr's CO2 footprint rivals Al Gore's. Getting rich people like Doerr and Gore to live in small poor-people homes sums up the issues with the de-industrialization solution overall. Rich people don't want to live like poor people. Industrialized countries don't want to go back to poor agrarian societies.

Thirdly, I am willing to bet that Doerr's calculations on the economic benefits of cap-and-trade legislation do not take into account dead weight loss -- almost certainly the net effect of it is poorer Californians overall. The potential economic upside would come if it actually did reduce whatever negative effects may come from global warming, but California is too small to have any impact on this.

Fourthly, bio fuels work by burning carbon as well. They are also less efficient than gasoline powered cars, so I cannot see how a move to biofuel or ethanol would do anything other than *increase* CO2 emissions.

He left the stage weeping. (Businessweek on the same talk here. The old TED did not have reporters, the new TED is crawling with them).