Monthly Archives: December 2014

Nick Rowe on Money and Expectations

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He writes,

The value of any financial asset, like money, is always and everywhere about expectations of the future. All financial assets are just promises, written on bits of paper. They are commitments about the future, and nothing more, and those commitments create expectations, and those expectations are what determine the demand for those financial assets. What happens right “now”, in the “current period” is always irrelevant, except insofar as it affects expectations of the future.

For monetary theorists who write down models, this creates another degree of freedom. You can say that a Fed action/statement of X will have an effect on expectations of Y, and this will have consequence Z for the economy. You can get just about any sort of result that way, and if you review the literature you will see that theorists have, indeed, gotten all sorts of results–one theorist can say that policy X will raise prices, and another theorist can say that policy X will lower prices.

Personally, I would use that degree of freedom to say that, to a first approximation, any Fed action/statement has zero effect on expectations. My view appears to be clearly false, in that investors hang on every word of the Fed, and Fed announcements often move markets–for a day or so. Then they go back to looking at other news. Whether there is any durable effect on markets is something you can believe or doubt, as you wish. I doubt.

Mortgage Servicers Bite Back

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Laurie Goodman writes,

Average foreclosure timelines, or the length of time between the first missed payment on a loan to its liquidation, have continued to increase, particularly in judicial foreclosure states, where a court order is required to evict a borrower. This increase reflects a number of factors: borrowers are being given more opportunities to stay in their home through mortgage modifications, state attorneys general have imposed various foreclosure moratoriums to increase consumer protections, and courts are backlogged.

Pointer from WSJ’s Joe Light.

A mortgage servicer is a company that operates in a specialized niche in the securitization process. The loan originator approves the loan, which is sold to a securitizer, who packages the loan and sells it to investors. But once the loan is originated, none of those folks actually want to have any contact with the borrower. That task falls on the loan servicer, who takes your monthly payments and distributes them to where they need to go–taxes, insurance, and payments to the securitizers, who pass them through to investors. The servicer also deals with you when you become delinquent, and if appropriate, takes you to foreclusre. Servicing has been traditionally a very low-margin business, with the whole ballgame about keeping costs low.

Back in 2009, policy makers treated mortgage servicers like a piñata. They beat on servicers to provide foreclosure relief, loan modifications, and so forth. They told them to administer new programs that combined loan origination procedures with loan servicing procedures. They sought to punish servicers for noncompliance.

Well, guess what. Now servicers do not want anything to do with any loan that might become delinquent. The cost of dealing with such loans has skyrocketed, thanks to Washington’s piñata-bashing. So if you originate a loan to someone with a low credit score, the servicer charges a hefty premium. That in turn means that risky borrowers either have to pay that premium or get rationed out of the market altogether.

And so now policy makers are beating up on originators to be nicer to risky borrowers. It really is like something out of Atlas Shrugged.

I could see all of this coming back in 2010. When I testified on HAMP (I start about 90 minutes in), I was the only one who focused on the plight of mortgage servicers.

We are Re-living 2003

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Describing the latest Fed pronouncement, David Andolfatto writes,

how new are these buzzwords? They’re not new at all. Consider this from the December 09, 2003 FOMC statement

I have said before that the economy resembles 2003. Output has recovered more strongly than employment. Long-term bond rates are puzzlingly low. House prices have been rising (quite rapidly near us in suburban Maryland). Policy makers are trying to loosen mortgage credit.

UPDATE: See also Mark Thoma/Tim Duy.

The Silver Lining in Obamacare

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Yevgeniy Feyman & Aobo Guo write,

The ACA’s limits on age-based rating, elimination of risk-based rating, and mandated generous minimum benefits have forced premiums to rise. Deductibles and out-of-pocket costs are higher now as well: cost-sharing offers insurers a sharp tool for varying the amounts that consumers pay.

Apparently, for all the hostility toward catastrophic health insurance voiced by Obamacare advocates, the way that competition is structured on the exchanges is leading health insurers toward policies with higher deductibles. For those of us who want market-oriented reforms, this is good news. American consumers need to get used to paying for at least some of their medical services with their own money, and this way the “blame” is placed on the government’s system of health insurance, not on the market.

Seeing the Cloud in the Silver Lining

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Carl Benedikt Frey writes,

The problem is that most industries formed since 2000—electronic auctions, Internet news publishers, social-networking sites, and video- and audio-streaming services, all of which appeared in official industry classifications for the first time in 2010—employ far fewer people than earlier computer-based industries. Whereas in 2013 IBM and Dell employed 431,212 and 108,800 workers, respectively, Facebook employed only 8,348 as of last September.

The reason these businesses spin off so few jobs is that they require so little capital to get started. According to a recent survey of 96 mobile app developers, for example, the average cost to develop an app was $6,453. Instant-messaging software firm WhatsApp started with a relatively meager $250,000; it employed just 55 workers at the time Facebook announced it was buying the company for $19 billion. All of which explains why new technologies throughout the 2000s have brought forth so few new jobs.

Pointer from Mark Thoma.

My thoughts.

1. Either IBM and Dell produced much more output than Facebook, or Facebook exhibits much higher productivity. Of course, valuing the output of IBM and Dell is difficult, and valuing the output of Facebook is impossible.

2. Without saying so, Frey is complaining about high productivity growth.

3. Frey does not point out that the official productivity statistics do not show high productivity growth. Not that I am a proponent of the official productivity statistics.

4. Frey does not point out that most economists view high productivity growth as a good thing.

5. I think that most non-economists (and maybe even some economists) do not realize that Thiel-Cowen stagnation is incompatible with Summers stagnation. The former is a story of disappointingly low productivity growth, and the latter is a story of “excess” productivity growth. I personally do not buy either stagnation story.

6. If you think that the media likes bad news, then they are bound to like either stagnation story (or both simultaneously, even though they contradict one another). The media deck is stacked against optimists. I would say that it is even stacked against realists.

Levin and Capretta Propose Health Care Alternative

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They write,

The first step is to introduce legislation that would allow any state to opt out of all of ObamaCare’s mandates, regulations, taxes and requirements, and instead opt into a far simpler and more flexible alternative system. In that system, state residents not offered health coverage by their employers could receive a federally funded, age-based credit for the purchase of any state-approved health-insurance product—including those bought outside of any exchange and regardless of whether they meet ObamaCare’s coverage requirements.

And if the legislation is vetoed?

Rules, Discretion, Principles, and Incentives

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Timothy Taylor excerpts from a book on macroprudential regulation.

Paul Tucker: “Legislators have typically favoured rules-based regulation. That is for good reason: it
helps to guard against the exercise of arbitrary power by unelected officials. But a static rulebook is the meat and drink of regulatory arbitrage, which is endemic in finance. Finance is a ‘shape-shifter’.

Rules do not work, because banks figure out a way to manipulate the rules. Tucker gets this. So does Wolf Wagner, also quoted by Taylor.

Also, discretion does not work, in my opinion, because discretion tends to be procyclical, doing exactly the wrong thing at the wrong time. In good times, regulators ease up, and in bad times, they tighten up. Just look at how regulators behaved before and after the housing crash. Or compare Ben Bernanke’s discussion of bank supervision before and after he knew about the crisis.

I think that principles-based regulation might work better. That is, pass a law saying that managers and directors of financial institutions are responsible for prudent management. Require auditors to flag questionable practices.

Also, I think that incentives are important. Casual observation suggests that investment banking was more cautious when investment banks were partnerships rather than limited-liability corporations. We should look for ways to give bank executives more skin in the game in their institutions. Suppose you have a bank that goes bust in 2025. All of its top executives over the preceding 10 years would be held personally liable those losses, in proportion to the compensation that they received over that period.

(For each year, take the five most heavily compensated executives, and put their total compensation into a hypothetical pool. Add these to get a company total for fifteen years. Then divide each executive’s total compensation over the 10 years by the company total to get the fraction of losses for which that executive is liable.)

Actually, I don’t think that the formula needs to be perfectly “just.” The point of any such system is to make executives manage banks as if they were risking their own money, because they would be.

Will the Swiss Support a BIG Welfare State?

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From Newsweek,

Despite tentative bipartisan support for basic income in the U.S, the concept has gained greatest traction outside America. Switzerland has become the first country to hold a referendum on basic income at a national level; in 2015, the Swiss Parliament will vote on whether to extend a basic income of 2,500 Swiss francs (about $2,600) per month to every Swiss resident.

The article discusses radical versions of the Basic Income Grant for the U.S., in which $15,000 per household would be provided instead of Social Security as well as means-tested programs such as food stamps. It was hard for me to tell whether Medicaid would have to go, too. One commenter even thinks that Medicare would be axed to help pay for the income grant.

Anyway, although political judgment is not my specialty, it seems to me that tying a basic income grant to getting rid of Social Security would make it much harder to pass.

Meanwhile, if Switzerland pulls it off, it will be another victory for small states having better government/

The Cuba Opportunity

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The WSJ writes,

The country has been hit by economic crises in its major patrons, Venezuela and Russia. The net oil importer has depended heavily on subsidized energy imports from Caracas. But Venezuela’s economic turmoil is deepening, making it increasingly unable to afford its subsidy of Cuba. Russia, as one of the country’s largest creditors, is facing its own financing problems. And Europe, whose open trade with Cuba made it the second-largest export market for the country, has struggled to avert a third recession in five years.

I was struck by the fact that the opening to Cuba came at a point where Russia is reeling. It seems to me that this is an opportunity to pull Cuba out of Russia’s orbit. Free trade with Cuba seems to me like a great idea. But I am not running in any Republican primaries.

Plus, I bet that the Marlins and the Rays would draw better if they played some of their home games in Havana.

How Computers Might Conquer the Game of Go

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MIT Technology Review writes,

thanks to the work of Christopher Clark and Amos Storkey at the University of Edinburgh in Scotland. These guys have applied the same machine learning techniques that have transformed face recognition algorithms to the problem of finding the next move in a game of Go. And the results leave little hope that humans will continue to dominate this game.

Pointer from Tyler Cowen. As I read the article, they have been following a strategy very similar to what I proposed six months ago.

If they are as close to success as the article indicates, then the world of Go is about to be completely upended. With Othello or Chess, most of what is knowable had already been articulated by humans by the time that computers came along. At least as far as Othello is concerned, computers did not come up with any new strategy or tactics. They just got more skillful than humans at making the best choice in close situations. With Go, my guess is that there may still be a lot left to be discovered about the game. If so, then computers will soon be in a position to make the discoveries. Even if there is nothing new to be discovered, once computers start making fewer mistakes than humans, human Go players will soon be studying computer games.