Sunday, October 27, 2013

Jumbo Speculation?

From the WSJ:
But borrowers are undeterred. During the first eight months of the year, 75%, or 5,656, of private jumbo ARMs that were originated for home purchases had a fixed rate period of just one year...Homeowners are also refinancing with 1/1 ARMs. In August, 96% of the private-investor jumbo ARMs were for a 1/1, up from 84% in January, according to LPS.
The article does not say what % of jumbo loans were for ARMs vs fixed rate. But 1/1 ARMs are a flip/speculation vehicle, not for long-term homeowners.

No Conspiracy Needed -- the debt ceiling is Sound Finance

SRW is spinning out conspiracy theories in trying to understand why the Government may not raise its debt ceiling and therefore, begin to default (or delay) on its financial obligations.
A common narrative about the debt ceiling is basically a Frankenstein story: businesspeople funded these Tea Party crazies, and now despite pulling all their levers, they just can’t control the monster they have created. And maybe that’s right. 
But suppose, plausibly, that the Jamie Dimons of the world know what Treasury has assiduously ensured the rest of us do not, which is exactly what Treasury is capable of and planning to do when George Washington bumps his head. And suppose it is debt prioritization plus delayed payments. Is it too much to wonder whether some quarters of the business community — you know, the ones who own the place — may not be pushing quite as hard as they pretend to raise or eliminate the debt ceiling? 
I hope that it is too much to wonder. I hope it is evidence only of my own paranoia that I do wonder.
I have an alternative, which requires no conspiracy. The government is resisting raising the debt ceiling because all members of government feel that the government ought to "spend within its means", just as a household should. They may differ about exactly where that line lies, and how much spending is prudent, and what the timing is, but everybody is basically on-board with the idea that there is a budget constraint that needs to be adhered to.

The reason they believe that a Government is like a household in this respect is because 1) it makes intuitive sense, and 2) economists, who control the debate on this, also share the same intuition. Also, prior to the Great Depression when the US was entirely on the gold standard, this was the right intuition to have, and it remained at least partially correct until Nixon took the country entirely off the standard in the 70s.

But economists do not understand what money is, or the role of it in Government, and the textbooks have not been updated, so Fama may say "spend never" and Krugman may say "spend now, but you'll need to pay it all back later" but these are differences of degree, not differences of kind.

The difference of kind is functional finance, which stands opposed to "sound finance" and sees Government spending is something entirely different in function and role from household spending. If the intuitions of functional finance were dominant in the academic community, then the debt ceiling would be abolished but of course and we would move on to other things.

The revulsion that Lerner spoke about remains strong at Harvard and DC alike.
[The] government should borrow money only if it is desirable that the public should have less money and more government bonds…. This might be desirable if otherwise the rate of interest would be reduced too low… and induce too much investment, thus bringing about inflation…. 
The almost instinctive revulsion that we have to the idea of printing money, and the tendency to identify it with inflation, can be overcome if we calm ourselves and take note that this printing does not affect the amount of money spent…. 
Functional Finance rejects completely the traditional doctrines of "sound finance"…. [It] prescribes… the adjustment of total spending… to eliminate both unemployment and inflation… the adjustment of public holdings of money and of government bonds… to achieve the rate of interest which results in the most desirable level of investment… the printing, hoarding, or destruction of money as needed…. 
[The] result might be a continually increasing national debt…. [This] possibility presented no danger… so long as Functional Finance maintained the proper level of total demand for current output; and… there is an automatic tendency for the budget to be balanced in the long run as a result of the application of Functional Finance, even if there is no place for the principle of balancing the budget….
Responsible Governance means spending what the economy needs, it has nothing to do with budgets.

Monday, October 14, 2013

Go Chicago!

Booth does it again : ) Very proud!

Friday, October 04, 2013

Breaking Bad

Forgive me this brief excursion.

Breaking Bad was a fantastic show, competing perhaps only with The Wire in its depth, characterization, and flawless execution. One of the core questions in the show was whether Walter White was a narcist or psychopath. To me it was obvious, but Walt made it clear in the pitch perfect finale:
I did it for me. I liked it. I was good at it. And I was really... I was alive.
His family were props in his personal movie. Walt cared about how he was seen. He felt no guilt, only shame. So when at last even he could not deny that fact that the story he was telling himself was a false one, and that his motives were selfish, could he make things right. Skylar and Flynn are lucky Walt didn't off them to preserve his self image.

A psychopath would not have cared. To him, people are tools, not mirrors. But Walt wanted to be seen in a particular way and did what he could to reenforce that image. Compare and contrast to Gus.

Wednesday, October 02, 2013

A Bank is still not a financial intermediary: Part 2

Lots of wonderful comments on Part 1 of my post on this topic. I want to address them and highlight some that I thought were particularly interesting and though provoking, but before that let me finish what I set out to suggest.

In part 1, I spoke about:
- How the word "intermediary" is vague, and I'm using it in a specific sense -- namely a market maker that matches buyers and sellers and therefore can be safely abstracted away when modeling the system.
- How this understanding of the word "intermediary" is a problem in the specific economic context we find ourselves in today -- 5+ years of an extended recession, which high unemployment, and a host of conventional and less conventional monetary policy responses which have not worked well and which also, frankly, seem weak on theoretical grounds.

So, Tobin, who knows that banks generate loans which in turn create desposits, does on to say that once banks have those liabilities on their balance sheet, they undertake additional steps to reconstitute that balance sheet in ways which make sense for their business and also reflect the portfolio preferences of their non-bank counterparts. For example, they may actively manage the duration of their liabilities to better match their assets. They make take an active role in managing reserve levels to avoid having to use the OIB market. And of course, they stand ready as a counter-party to the non-bank sector -- if a corporation wants to issue paper and collect cash, a bank will assist in that, moving the cash from the paper purchasers accounts to the bank's account etc.

It is this counter-party role which in turn reduces a bank's function to being a safely ignorable match-making style intermediary, and means that the overall composition of bank assets and liabilities reflects the non-bank sector's preferences. To close the argument: focus on buyers and sellers in the market and safely abstract the banks away.

I actually agree with all of the above, but I also think it begs the question and that is: what non-bank sector portfolio desire can banks not be a counter-party to? And the answer to that is: money! I'm being glib, but when most people think of money they think of what's in their savings account without a corresponding non-equity liability (or rather, what's in their savings account that they are not under any obligation to pay back). If you want to move your money from checking to savings, or savings to CDs, or CDs to stocks, the banking system stands ready to move the numbers from one cell in the spreadsheet to another. If you want to take out a loan, which will increase your bank account, and then someone else's bank account when you buy that car or house, the bank will do that as well.

But suppose you want to simply have more money? And suppose you want to have more money as a sector? Well, sector-accounting, or paradox of Thrift if you prefer, means that you cannot get it and this is a portfolio desire, the desire for a bigger portfolio, that banking cannot help with. This is why increasing "reserves" is not "printing money" in the sense that people think and it is this understanding of what banks can and cannot do which is missing in mainstream macro.

In some comment somewhere, I think it was JKH but it may have been someone else, said: "Tobin is not to blame for Paul Krugman's misunderstandings. Krugman is to blame for Krugman's misunderstandings".  I wish that were true but it is not. Krugman did not come up with his misunderstandings all by himself, he inherited it from the norms of his academic discipline, since mainstream macro is all wrong in exactly the same way. Paul points to Tobin as a reference, but seems to claim that Tobin says something different from what he actually said. So the problem is elsewhere, but it is still environmental in origin, not specific to Krugman. Nevertheless, you need to meet people half way, and if Krugman points to Tobin, but gets Tobin wrong, then we can begin there.