Monday, April 28, 2008

Mega projects in the UAE

It's worth checking out this slideshow of two massive developments in the UAE. One is of an all new city in Dubai (which I guess will be called "new new Dubai") and the other is of an eco-city in Abu Dhabi. The artist renditions of Dubai are all taken from 30,000 feet -- you see no people, and get no sense of what it will actually be like to live there. Dubai just not into that kind of detail.

By contrast, the pictures of Abu Dhabi's eco-city are much closer in. You see actually people walking down actual shaded streets. I have a feeling that it will be much nicer, although I also think they're going to end up sealing the whole thing and air-conditioning it (assuming it ever gets built). Abu Dhabi thinks it can also avoid filthy commerce, and run the entire city off museums and universities. Abu Dhabi is just not into that kind of detail.

Tuesday, April 22, 2008 sucks

Is it just me, or does suck? Here's a segment with two folks whom I like, on a topic that interests me, and I find it completely unwatchable. Clay and Will look awful with those headsets on, and uncomfortable as they squirm around on their chairs. The misalignment of the camera and the computer screen means that they are either gazing off into some corner, or under the screen, which just looks weird. The severe stereo left/right production also is distracting.

I cannot think of any way in which this segment would not be improved by running it as an audio only stream, except simply posting the text transcript. I'm betting that this is true for every segment on

Google's impact on the Bay Area economy

This remarkable note on on job growth in Silicon Valley highlights how Google is completely dominating the market.
Google added over 5,592 jobs in Mountain, representing over 50% of the growth in "Internet Services."

5,592 net new local jobs represents 77%(!) of the reported 7,300 total Santa Clara County jobs added in 2007!!

As an aside, assuming a typical 10,000 share option package vested over four years, every Google employee in-place at or before the IPO collects 2,500 shares time ~$450 for a gross of ~ $1,125K per year. (It was "only" $922K before last week's 20% short squeeze.)

This steady cash infusion amost certainly served to sustain local house price growth. After all, who cares about "overpaying" by even a few-hundred thousand dollars when you "know" you're going to get another million next year, and the year after, and...

This month marks four years since Google's April, 2004 IPO. To the extent Google's stock price declines further, or even just flattens below it's ~$711 peak, Google-driven liquidity and its impact on local house prices should start to work in reverse.
So, Google is driving three quarters of job growth in the area -- amazing! Google does not have stock options, it has restricted stock units, but assuming they were there at IPO, 2000 area employees are going to be about $1M richer this year.

Sunday, April 20, 2008

UK Bailout

The Bank of England, like the US Fed, is putting taxpayer money at risk to prop up housing prices and protect banks. A friend of mine who lives in the UK quipped that in the US, employees spend their time on job sites, while in the UK they spend their time on housing sites.

Monday, April 14, 2008

Lower prices needed

Ed Leamer gets his time in the sun.
Well, not entirely. When it comes to housing, lower prices don’t inevitably cause sales to rise. Why? Because lower housing prices create the expectation of still lower prices later, causing buyers to wait for a better deal. Left alone, a weak market therefore overshoots with prices too low and construction too little.
Given that housing in the US is still dramatically above where it has been historically (yes, here is that graph again) it seems premature to worry about price mechanisms not working, and/or undershooting.

Leamer is keen to offer taxpayer money (of course) although the timing has to be exquisite:
Timing is important. If the rebate is offered too early, it will delay the adjustment we need to make, and push the problem into the future. If it’s offered too late, we risk creating another episode of overbuilding. The right time to do the stimulus is when the adjustments have been substantial but not quite complete.
Given that all government intervention, from mortgage regulation to interest rates, has been completely wrong so far, I'd be interested to know why Leamer thinks this latest handout will be different (if it happens).

Friday, April 11, 2008

Money well spent (we promise)

Former vice chairman of the Federal Reserve board, and DC fixture Alice Rivlin gets some quality time in the Grey Lady.
ONE benefit of the Federal Reserve’s rescue of Bear Stearns is that public outrage has aroused the political system to action in mitigating the foreclosure crisis.

Never mind that the supposed conflict between Wall Street and Main Street is a false one — Main Street runs on credit and cannot prosper if the financial system is in shambles and credit dries up. Never mind that the supposed Fat Cat “bailout” was a disaster for Bear Stearns stockholders, and that the idea of a “moral hazard” risk — that other investment banks will be tempted to emulate Bear Stearns — is preposterous. Never mind that if markets head back up and the collateral can be sold at a profit, taxpayers may lose nothing.
Just the two opening paragraphs make my mind boggle. Has there been public outrage over the Bear Stearns bailout? Apart from some crank postings on the Internet, I don't think Joe Q Public has any idea what did, or did not happen, with BS.

And is there really no conflict between Wall Street and Main Street? Do we really think that Main Street digs these ludicrous Wall Street financed swings in the business cycle? Loaning money is Main Street firms is a small, thin margin business, and not an accurate description of what Wall Street does, and why it gets paid the big bucks.

Senior ex-Fed officials calling the idea of moral hazard "preposterous" raises interesting, and troubling questions about the Federal Reserve.

The whole thing meanders on, and it even includes a "what about the children" crie du couer. I'm not sure who the article is written for, but she's arguing that investment banks should let themselves be regulated by the Fed (but not too much) in exchange for the Fed giving them taxpayer money.

End game

Macroman often has interesting things to say, even though he is an insane chartist. Here is his position on the end game for all the ridiculous financial tricks the Fed keeps rolling out on a fortnightly basis:
Macro Man isn't sure what is wrong with the TSLF, but he's pretty sure that something is wrong with it; the participation rates have, in aggregate, been much lower for the TSLF than the TAF. Moreover, this week's TAF was heavily oversubscribed and awarded at a level ABOVE prevailing LIBOR rates. What that means is that banks were so desperate for liquidity that they were bidding for secured borrowing, with a haircut, from the Fed at a higher rate than they could ostensibly borrow sans haircut and collateral from each other.

Macro Man stands by his view that the endgame here is the US and other governments writing a bit fat check to buy all the unwanted crap off of banks' balance sheets and holding it til maturity.
Bingo. The US government will give banks tax payer money in exchange for duff mortgages. I also think it is likely they will take tax payer money and give it to homeowners, because, lord knows, they haven't been given enough money over the past 5 years, or the past 50.

Tuesday, April 08, 2008

Hedge Fund Manager

Nice interview of a hedge fund manager. He's not sure what the recent turmoil will mean for the industry overall:
The investors pay pretty rich fees to invest in a hedge fund. Often it’s 2% per year, and 20% of the profits—which is why it’s great to be an HFM.

But to justify those fees you have to give people something they can’t get from more cost-effective investment vehicles. What hedge funds claimed to be providing was returns that weren’t correlated to major market indices, returns that were superior to what you could get in other asset classes, and that you’re getting the best talent and risk management and superior returns with lower risks. What we’re seeing this year is that it’s becoming a very risky asset class very quickly, and that it became an asset class with a high degree of correlation among funds.
Much of the money pouring into hedge funds these days are from pensions funds and sovereign wealth funds, tired of lousy rates on treasuries. A friend of mine, who is much closer to all of this than I am, thinks this will end badly for them. He says that they're simply paying a lot of money to hold equities.

This point about the fundamental link between bad financial prices, and bad real investment decisions is critical, and lost on people like DeLong who just look at (near term) aggregate employment.
In the situation we have today, where people have made bad investment decisions, where people built houses they never should have built, there’s a misallocation of resources. The loss has already happened. The loss isn’t what happens on a balance sheet: the loss is what happens when someone cuts down a tree, makes cement, builds a 6,000-square-foot house in a place it should never be built. So the loss has already happened. The question is: How do you allocate that loss? And if you don’t allocate the loss, if you pretend it isn’t there, then this has really baleful consequences for the economy. So what we’re going through now is this process of loss allocation. It can be done swiftly, fairly, and intelligently, or it can be done slowly and messily, and inefficiently, and also it can be not done at all
An awful lot of political noise is being made about doing whatever it takes to keep people in houses they cannot afford, in locations they do not like.

This point about the destruction of real wealth that accompanies investment booms echoes points Steve Waldman has been making for a while, but here's his latest post on the subject:
Private, profit-seeking actors would not have generated the corrosive financial flows that have characterized this millennium. "Financial imbalance", a euphemism for real resource misallocation, would have quickly been corrected, had Wall Street and the City of London not learned that the official sector could be their best customer.
But how wisely can resources be allocated in a monetary environment where savings are forced into investment/consumption through endless cycles of dilution. The US$ has lost over 90% of its value in the last 100 years. It's done phenomenally well economically. Does this make any sense?

"Excess" jobs

Brad DeLong mocks the easily mockable Lawrence Kudlow for claiming that having "excess" or "incorrect" jobs go away is good:
Yes -- Kudlow thinks recessions are good things as the job you just lost was an "excess." In fact, he is calling for economic policies that would make the recession worse:
Personally, I cannot square the concept of a bubble without the notion of "excess" jobs, or jobs that should never have been created in the first place.

Monday, April 07, 2008

Inequality and excess

Arnold Kling says that "America's political class [has] a ridiculous excess of power, and yet they only want more".
Montgomery County, Maryland, has an annual budget of $3.8 billion. This sum is under the control of a County Council with nine members. On an average per-politician basis, each County Council member controls just over $400 million a year in spending.

To put an annual spending figure of $400 million in perspective, consider this: if you had $8 billion in assets and earned 5 percent per year on those assets, that would give you $400 million in annual income. And few Americans have that much. The world's wealthiest person is Warren Buffett, with $62 billion (admittedly he has often been able to earn more than 5 percent per year from investments). Bill Gates has $58 billion. Fewer than 40 Americans have more than $8 billion in assets, and their names are largely familiar to us--the Waltons of Wal-Mart, Sergie Brin and Larry Page of Google, and so on.

Can you name the members of the County Council in Montgomery County, Maryland? I can't name very many of them, and I live there. Still, getting elected to the County Council in Montogmery County, which is pretty far down the ladder in terms of political power in the United States, enables you to control more annual spending than the wealth of Donald Trump or Steven Jobs.
The County Council in Montgomery County, Maryland, is certainly associated with a large annual budget, although I'm not sure if it's accurate to say that they "control it" anymore than a hood ornament controls a car.

For example, how much discretion does each Montgomery County Council member really have over their $400M? I assume that some of the budget goes to pay school teachers. Can a Council member change the salary of a school teacher? Can they decide to half the number of school teachers? Can they even fire a school teacher if they really want to? What about firefighters or policemen? How about employees in any number of the state and local agencies who are paid out of the Montgomery County Council budget, or the various outreach and good works efforts that, while not officially government entities, nonetheless exist almost entirely on tax, or tax subsidized dollars?

I'm pretty confident that if the Montgomery Country Council decided to take 2008 off, there would be no perceptible difference in the operation of Montgomery County, and the vast majority of their $3.8M would find its way to the same agency that it always finds its way to.

While elected politicians are the most visible parts of a government, the vast majority of actual governmental operation is carried out by the hundreds of thousands of dedicated civil servants who toil away in the various agencies. And since they are lifers, they can outlast, bamboozle, and thwart any elected newcomer who dares to tangle with them. That is where political power really lies.

Friday, April 04, 2008


Arnold Kling points out the first straightforward bailout in the US housing bubble pop: developers.

The Bear Sterns bailout is more complicated: Bear equity holders were not bailed out, Bear bondholders were, and JP Morgan was given a fat payout also. While the taxpayer is technically on the hook for "just" $29B, in truth, the Fed will pump in whatever amount of money is needed. I'm struck by the amount of informality this entire episode has had so far, the rules are just there to be changed.

Wednesday, April 02, 2008

Yves responds to Brad elaborating on why he thinks having taxpayers prop up bad banks and bad mortgages can avoid a serious financial meltdown. Essentially, Yves asks "what part of bubble can you still not understand?" The model Brad offers where we begin with a "good" equilibrium and then move to a "bad" equilibrium does not have room for an asset price bubble, for an equilibrium that is good from a short-term employment perspective, but bad from a short-term efficiency, and medium-term employment perspective (since the employment was being created by bogus jobs in a false, bubble economy).

As the issue of asset price bubbles is central to thinking through how to deal with the mortgage crises. It's worth looking again at just how out of alignment prices got with incomes:Prices have a seriously long way to fall until they realign with rents and incomes.

I thought the questions were 1) how fast would this happen, and 2) would it happen in real or nominal terms, while Brad seems to think we can avoid it altogether. He is not alone in this. Here is the Economist arguing that
Mr Samuelson's other concern is equally misguided. Let the market collapse, he says, and homes will then be affordable. Moreover, lenders will have no fear that they're putting money up on inflated properties. But Mr Samuelson has no idea to what extent fundamentals played a role in the recent run-up in housing prices. Neither does he seem to recognise that prices may well overshoot on the way down, just as they did on the way up.

But the fundamental error is that he fails to see how a collapsing market might deter new entrants, no matter how low prices go. If banks believe that price declines will continue to fuel defaults and defaults will continue to fuel price declines, they will not lend. If they do not lend, willing buyers cannot buy. Even the cheapest homes aren't "affordable" if no one can borrow to purchase them. In both the financial sector and housing markets, moral hazard concerns are important to consider. But right now, in this crisis, a bad equilibrium has been reached that harms good and bad homeowners alike. Now is no time for the government to sit on its hands.
I struggle to understand where the Economist is coming from. I think we have a pretty good idea to what extent fundamentals played in the recent run-up: none. Pick your ratio, it's clear that the run-up deviated from every historical norm. And also, while I appreciate their concern over prices overshooting on the way down, I find it a tad premature given that they are currently 50% higher than they should be. The Economist also seems to think that the US mortgage market has seized up, which is simply not true. If you look at transaction volumes, they are lower than they were in the past, but people are still buying and selling houses, just not as much as they used to. Certain kinds of mortgages are no longer available, but good riddance to them. The problem with housing in the US remains affordability, not cheap financing.

Tuesday, April 01, 2008

April Fools

Brad DeLong has a long post how to handle financial crises where he states that the capitalization of financial intermediaries drives their demand for risk assets. If they are well capitalized, they are happy to take on risk (because they don't fear a bank run), and if they are poorly capitalized, they will not want to take on as much risk (because they want to avoid a bank run). Of course, if we ditch the fractional reserve system, and maturity mismatch, we do away with bank runs altogether, but that's a post for another time.

He then connects these two states with a, frankly ludicrous, cross line, making an "S" shaped demand curve. I personally see this bizarre supply curve crossing the demand curve on 3 separate occasions, but Brad focuses on just the top and the bottom. Basically, this curve says that when banks have money they take on risk, and when they don't, they don't.

The Fed increased demand for risky assets by making safe assets (Treasuries) yield a paltry 1%. The risky assets of choice (this time) turned out to be mortgage backed securities, and low and behold, banks are now undercapitalized as the highly levered securities turned out to be worth zilch.

Banks, now undercapitalized, no longer want to buy risky assets, and so have switched to the low equilibrium. The Fed will once again reduce interest rates so safe investments are worthless, hoping to get banks to start buying risky investments again. BUT, if they don't have enough money to buy risky investments even when the safe investments are worthless, Brad says that they can simply be given tax payer money (be re-capitalized by the government) and the lending binge can begin again.

Yves calls BS on it. He argues that the "good equilibrium" that DeLong wants to spend tax payer money to get us back to was bogus, it was a just the peak on a frothy bubble, and trying to get us back there is like trying to get revalued at $1T (or whatever).

I certainly would love to talk about bubbles, and prices being out of alignment and needing to return to historic norms. Does he do this? Well, let's see:
The fundamental value of any risky asset--housing, say--depends on (a) per-period value or profit, (b) the time profile of safe interest rates, (c) the quantity of risky assets that the private financial sector must bear, (d) the amount of risk associated with each tranche of risky assets, and (e) the risk-bearing capacity of the private market. All of things are things that can be high or low--and that the government can affect:
He then goes on to list how a competent government can do all of those things. He dismisses "over production" arguments
It says that the root problem is overproduction--that we have too many houses. Attempts to change fundamentals will mean that those who build more houses will continue to earn more profits, and so we will have more and more and more houses, and we will have an even greater overproduction crisis some time in the future. So we must make sure that housing prices are so low that nobody builds another house for a long time to come, and that is the only way to minimize the misery coming out of the collapse of the housing bubble.

I have never been able to make this "overproduction" argument make sense. If the government provides a subsidy--like a mortgage insurance subsidy--then we will indeed have more of whatever the government subsidizes, but there is no reason to think that this is in any way a big problem or an unsustainable situation. It may well be a waste of the government's money to provide the subsidy: taxpayers might rather endure a housing crash and a depression than be forking out extra taxes to pay mortgage guarantees.
At this point, I'm completely baffled, and call BS on Brad. I'm thrilled that "per-period value", "time profile", and "risk asset quantity" makes sense for him, but I'm also sad that simple supply and demand no longer do. If you build more houses than people need, and those houses are priced higher than people can afford, then the prices have to fall until people can afford them again. This is not complicated, and I don't see why Brad thinks the government can handle any of this in a way that does not penalize savers, tax payers, and renters.

All of the strategies that Brad's "competent government" can employ are simply different ways to print money. And while it is true that the government can literally print money via it's printing press, it cannot actually create value, and those new dollars dilute the value of the old dollars, transferring wealth from people who have old dollars (aka. savers) to people who have new dollars (aka whomever the government hands its newly printers dollars to. In this case, banks and investment banks).

This is not surprising. If a number of firms are under capitalized and need money, then that money has got to come from places that have it. Right now in the world, that would be the few benighted individuals in the US who decided to save for a down payment in 2002-2007 instead of jumping into what was clearly an unsustainable bubble (except to Brad, who thinks we can sustain it) and China/GCC.

Given that their hard saved dollar holdings are being diluted to save wealthy bankers, it looks like the jokes on them.


A funny, non-April Fools joke.

A kinda funny April Fools joke, funny because Blogger actually does let you do this.