Monthly Archives: May 2017

Wal-Mart and Banking, Once Again

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Lawrence J. White writes,

it is exactly this demographic group—low- and moderate-income households—that is most in need of reasonably priced financial services. The percentage of U.S. households that are unbanked (i.e., do not have a bank account) or underbanked (i.e., have an account but rely on non-bank providers for some financial services and products) has been a longstanding policy concern. The most recent data (from a FDIC report that covers 2015) in this regard—based on a survey of more than 36,000 households nationwide—show that 7% of all households were unbanked and an additional 20% of all households were underbanked. Unsurprisingly, the percentages are substantially larger for low- and moderate-income households

Pointer from Mark Thoma. I wonder, though, whether Wal-Mart really has an advantage in serving these households as a bank. It is one thing to develop a great logistical system for moving products from far-flung suppliers to stores. It is another thing to deliver financial services to people with relatively low transaction sizes and more difficulty avoiding default.

Land prices in San Francisco

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Robert L. Cutts writes,

Homes… now sell for 15 times the average salaried worker’s annual gross wage. Even small condominium units… sell for nearly 10 years’ pay. First-time buyers would have to contract 50- to 90-year mortgages to make the payments, even at … relatively low interest rates…It is clear that, once leases begin to expire, steady rent increases will have to ameliorate that impossible pressure. The result: inflation and a downward trend in home ownership for first-time buyers are being built into the … economy for decades to come.

The article appears in the May-June 1990 issue of the Harvard Business Review. It is about Japan at that time. Any resemblance to land prices in major American cities today is strictly coincidental. After all, the ratio of median house prices to median income in San Francisco is only 14.7

Yuval Levin on Conservatism

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He says,

I think of alienation as a sense of detachment from one’s own society. It’s looking out at the society you live in and thinking, “That’s not mine” and feeling no connection, no links—seeing it as distant, as hostile, even seeing it as boring. We should never underestimate the power of boredom in social life. That kind of alienation was very much on display in the last election and in some people’s—especially early on in the Republican primaries, in the most devoted Trump supporters—there was a sense that “This society isn’t ours. We have got to blow this up and try again.” I think that’s dangerous in general, but it’s particularly dangerous to conservatism because conservatism in a sense is a sense of attachment and ownership and defensiveness of one’s own society.

…I think America doesn’t deserve that. We have a lot of problems, our institutions are in real trouble, but things are not nearly as bad as the way in which Trump described them.

Later in the interview (conducted by James Pethokoukis):

I think Twitter encourages the worst of our instincts and habits in modern America, especially in our political culture. My inclination to respond to the speeding up of everything by slowing down.

I agree. I let most of my posts sit for several days before they appear. Sometimes I wish commenters would do the same (although lately the comments have been better than they used to be).

In the article to which the interview refers, Levin writes,

The vague feeling that what had become of our society was somehow remote and incomprehensible—that it was insane, or at the very least not America as we knew it—was a prominent feature of the kind of frustration that many early Trump supporters articulated. The idea that there was something fraudulent about our social order and its institutions was everywhere in Trump’s rhetoric—directed at various points to the electoral process, the media, the political parties, the legal system, the judiciary, the IRS, the FBI, and on and on among our institutions. The sense that this incomprehensible fraud perpetrated on the public by its own elites had robbed America of hope was key to the willingness of many on the right to overlook Trump’s own shortcomings and welcome the potential for disruption that he introduced.

…The sense of lacking a stake in the nation’s governing institutions—the feeling that those institutions are remote and unresponsive—makes it difficult to know what to do when they fall into your possession.

here is a concise version of the conservative creed:

we value long-standing institutions and practices. They have stood the test of time, which is a trial-and-error process carried out across generations confronted with essentially the same kinds of problems rooted in the nature of the human person.Change and adaptation in response to new circumstances is best carried out through the institutions and traditions formed by that process rather than around them so as to give us a chance to build incrementally on what works in order to address what does not.

A sentence to ponder:

shifting emphases of our two broad political coalitions suggest an underlying shift in our common life from an American politics that expresses above all a yearning for freedom to one that at least alongside that expresses a powerful yearning for solidarity.

Think of what the left’s yearning for solidarity as expressed on college campuses. Think of what the right’s yearning for solidarity as expressed in hostility to immigrants. Is there a more constructive way to channel a desire for solidarity?

Matching GoFundMe Health Care

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Tyler Cowen writes,

It turns out we value health care for others more in rhetoric than in reality.

As a thought experiment, imagine that government support for health care consisted of a matching grant for GoFundMe solicitations, up to half the cost of a procedure. So, if you want other people to pay for your medical procedure, you use GoFundMe. If you can get enough money to pay for half the procedure, the taxpayers will fund the rest.

This changes the model from one of getting insurance company approval for a procedure to one of getting peer approval. Think about the pros and cons of this.

Bike Lanes and Fruitcake

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Dave Mabe writes,

If a cyclist doesn’t ride in the bike lane (for as simple a reason as making a left turn!) a lot of drivers view this as law breaking or just arrogance.

Pointer from Tyler Cowen.

I had a driver yell at me, including four-letter words, in exactly this situation. I was making a left turn, and I stayed in the street for about 100 yards with my left arm out in order to do so. I guess he thought I should have stayed in the bike lane on the right and not made my turn or cut somebody off to make my turn.

Humorist Jim Gaffigan has a joke that goes. “Fruit: good. Cake: good. Fruitcake: nasty cr@p.”

That is the way I feel about most bike lanes. The worst is when they paint a picture of a bicycle on a lane that is 99 percent used by cars. I feel like the painting says “you are welcome to smash bicycles on this road.”

In my opinion, the safest places for bikes are, in order:

1. Bike paths that have very few pedestrians (“rails to trails” tend to be like this).

2. Wide shoulders along roads.

3. Roads that have no bike lanes but few cars.

Bikes and cars are not meant to coexist. Bikes and pedestrians are not meant to coexist. And I will admit that bikers tend to be the offenders more often than the victims.

Urban bike lanes are green religious monuments.

Non-bank Mortgage Lending

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Greg Buchak and others write,

the market share of shadow banks in the mortgage market has nearly tripled from 14% to 38% from 2007-2015. In the Federal Housing Administration (FHA) mortgage market, which serves less creditworthy borrowers, the market share of shadow banks increased by a staggering seven fold during the same period, from 20% to 75% of the market. In the mortgage market, “fintech,” lenders, have increased their market share from about 5% to 15% in conforming mortgages and to 20% in FHA mortgages during the same period.

Pointer from John Cochrane, who writes,

Maybe we want the crisis-prone traditional banking model to die out where it is not needed!

My thoughts:

1. Traditional banks do not have to hold loans. They can sell the loans they originate to FHA, Freddie, and Fannie just as easily as a “shadow bank” can. The ability to sell loans to the agencies cannot be the source of the advantage of the non-bank originators.

2. Using a web site to source loans is not a brilliant new innovation. Using a computer algorithm to approve loans is not a brilliant new innovation. An originator does not need to develop such an algorithm–Freddie and Fannie have been letting originators use their algorithms since the early 1990s. I doubt very much that technology is the source of advantage of the non-bank originators.

3. Ed Pinto, who follows the mortgage data closely, says that credit quality standards have been loosening dramatically, particularly in the “back-end ratio.” It used to be that you would not want to have a borrower whose total monthly debt obligations (mortgage payments, car payments, interest on credit cards, etc.) exceeded 30 percent of income. According to Ed, we are now seeing at the agencies, particularly at FHA, borrowers with back ratios of 50 percent or more.

4. If I were a traditional bank, and credit standards were loosening, I would let that business go to the non-bank originators. When the market tanked in 2007-2008, subsequently banks were shaken down by government officials for their “predatory lending” and hit with large “settlements.” Who needs to go through that again?

5. Non-banks need not fear a shakedown so much. They do not have nearly as much in assets for regulators to go after.

So my hypothesis is that the big advantage non-bank originators have in today’s market is that they have less to lose in a shakedown if another bust takes place.

Bank Lending and Non-bank Lending

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Daniel Nevins, in Economics for Independent Thinkers, a book I mentioned the other day, thinks of non-bank lending as coming from savings and bank lending as created by fiat. I do not think in those terms.

Think of an economy that includes fruit tree growers, households, and banks. The fruit trees represent risky, long-term investments.

The fruit tree growers finance their investment with a combination of debt and fruit-tree equity. Households may purchase some of the fruit tree debt directly. This would be called non-bank lending. Banks purchase the rest of the fruit-tree debt and fund it with a combination of bank equity and liquid deposits. The fruit tree debt that the banks fund is owned indirectly by households.

In the aggregate, households hold everything. Not every household is identical, but in the aggregate they hold the fruit tree equity, the direct fruit tree debt, and the indirect fruit tree debt that comes to the household in the form of bank equity and liquid deposits.

Now, fruit tree growers are households, just like anyone else. So you can think of an increase in bank lending as a bank creating a deposit at the household of a fruit tree grower in exchange for more debt issued by that fruit tree grower. That may be the way that Nevins wants to think of it,, and he thinks that this makes it much different from non-bank lending, because the bank can create a deposit seemingly out of thin air. He would say that it does so without prior saving, although he adheres to the identity between current saving and current investment.

In contrast, I think of bank lending and non-bank lending as doing the same thing, namely funding the debt issued by fruit tree growers. The only difference is that with non-bank lending, households have a direct ownership of the debt, while with bank lending their ownership is indirect.

Households may have a limited appetite for direct holding of fruit tree debt. And they may have a less limited appetite for holding that debt indirectly. In that case, if fruit tree growers and bank managers become more risk tolerant, you may get an expansion of fruit tree investment along with an increase in bank lending. Conversely, if fruit tree growers and bank managers become more risk averse, you may get a contraction.

The bottom line is that I think that bank credit matters, just as Nevins does. But I am not comfortable with his semantics.

The outlook for today’s young adults

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Joel Kotkin and Wendell Cox write,

They have entered an economy where the most rapid job growth for their generation has been in generally low-paying professions, such as leisure/hospitality and healthcare, while jobs in higher-paying fields such as information, finance, manufacturing and construction have declined for them. More than 20 percent of people 18 to 34 live in poverty, up from 14 percent in 1980.

The main point of the article is that California housing regulations are harmful to young adults. You can regard the consequent high house prices as a wealth transfer from the younger generation to their parents’ generation.

A Provocative Health Care Proposal

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Karl Denninger proposes legislation, including

No government funded program or government billed invoice will be paid for medical treatment where a lifestyle change will provide a substantially equivalent or superior benefit that the customer refuses to implement. The poster child for this is Type II diabetes, where cessation of eating carbohydrates and PUFA oils, with the exception of moderate amounts of whole green vegetables (such as broccoli) will immediately, in nearly all sufferers, return their blood sugar to near normal or normal levels. The government currently spends about 25% of Medicare and Medicaid dollars on this one condition alone and virtually all of it is spent on people who can make this lifestyle change with that outcome but refuse. If you’re one of the few exceptions and it doesn’t work in your case you have the burden of proof. Nobody has the right to light their own house on fire on purpose and then claim FEMA benefits for same. This one change alone will cut somewhere between $350 and $400 billion a year out of Federal Spending and, if implemented by private health plans as well, likely at least as much in the private sector. That’s more than three quarters of a trillion dollars a year that is literally flushed down the toilet due to people being pigheaded and refusing to do things that would not only save the money but also save their limbs, eyesight and ultimately their life.

Pointer from Glenn Reynolds. This is not representative of the entire post. Most of his proposals are intended to bring about more market-based decision-making. Denninger especially wants to improve transparency and eliminate price discrimination in medical billing.

There are many industries in which fixed costs are high relative to marginal costs. Charging everyone the same price would mean either that the price is too low to cover average cost or it is too high relative to marginal cost. Price discrimination can actually be helpful in some cases. In fact, charging lower drug prices in Europe and Canada may actually help lower costs of selling drugs in America, because foreign buyers help to cover the fixed costs of developing drugs. So I disagree with Denninger that ending cross-border price discrimination for drugs would necessarily make us better off.

On the other hand, for hospitals and doctors, price discrimination is not used to find the people most willing to pay but instead is used to punish people with the least negotiating leverage. So there I tend to agree with Denninger.

Overall, I come back to the cultural roots of our health care mess. One of the points in that post is

Americans, and especially health care providers, do not want to think of health care as a commodity. The providers want to be paid, but they do not want to think of themselves as selling their services, so the payment comes from third parties and the price is hidden to consumers.

I believe that helps explain why pricing is opaque in health care, and why Denninger’s attempt to bring market discipline would not be well received, even by patients

Here is another of his proposals that I think would run into cultural problems:

All surgical providers of any sort must publish de-identified procedure counts and account for all complications and outcomes, updated no less often than monthly. Consumers must be able to shop not only on price, but also on outcomes.

The doctor is not supposed to be fallible. This sort of reporting would draw attention to the fallibility of doctors, making them and their patients unhappy.

What will fix the Palestinian economy?

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Timothy Taylor summarizes two recent reports.

What are some potential areas on which economic growth in the West Bank and Gaza might build? One possibility is to seek to build ties of trade and migrant workers with Arab countries across the Middle East. Another is to emphasize better conditions for businesses to operate in the West Bank and Gaza. For example,the World Bank report notes at one point, “[I]t is vital for the PA to address institutional reform to ensure that energy suppliers are paid for their service – which is critical for both energy imports and investment in generation.” That advice hits at a deeper problem for any business thinking about operating in the area.

I would say it’s the kleptocracy, stupid. And just as in many countries having natural resources strengthens kleptocracy, I would say that in the Palestinian territories the large sums of foreign aid have created a situation that rewards success in the struggle for political power much more than success in enterprise.

I think that this is clearly a case where the GiveDirectly model would work much better than existing aid approaches.