Subprime loans in Judaea

Jesus gives good advice on subprime loans.

Paul “Jeremiah” Krugman, today:

As Ms. Morgenson reported in yesterday’s Times, Countrywide seems peculiarly unwilling to work out deals that might let borrowers hold on to their homes — even when such a deal, by avoiding the costs of foreclosure, would actually work to the benefit of both sides.

Jesus of Nazareth, ca. 30 CE, Luke 16 (RSV):

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Northern Fudge

A classic bank run in Britain.

The latest casualty of the global credit crisis is a middle-sized British mortgage bank, Northern Rock – which until last week had almost 20% of the new mortgage market in the UK. It financed its aggressive expansion by borrowing from the money markets and securitising its loans. The credit windows of other banks have suddenly shut in its face, though its loan book is sound according to the regulators. Northern Rock has had to go to the Bank of England as lender of last resort. The Bank’s line of credit is at a penal rate, so Northern Rock will have to quit the market for new mortgages, its share price has collapsed and it’s up for sale.

It’s more or less irrelevant to the failure, but Northern Rock has been the object of a classic run by retail depositors. Classic, but very unusual in recent times. The last retail bank failures in Britain were in 1973-74, and the secondary banks in question – such as Slater Walker – were niche players that were obviously riskier than the High Street ones. But Northern Rock is a High Street bank, and the run has meant highly visible queues of depositors trying to withdraw their money.

Any lessons of general application?

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Just kidding!

I was, when I said that if Americans wanted to buy toxic toys from China that was their right as consumers. But Erin Burnett of CNBC said the same thing with a straight face: if China is going to make toys without lead in them, that means prices at Wal-Mart will go up, so we should be careful what we wish for.

Of course, I was snarking (at libertarian idiocy) when I wrote in this space a week ago:

Shouldn’t the Chinese government be praised for freeing pet-food and children’s-toy entrepreneurs from the deadening hand of regulation? How do we know that the buyers of those products weren’t making perfectly sensible decisions to accept somewhat higher risk of poisoning their pets or kids in return for somewhat lower prices?

But apparently Erin Burnett of CNBC was perfectly serious when she told Chris Matthews (about 2:40 on the clip):

People should be careful what they wish for … if China … is to start making, say, toys that don’t have lead in them, or food that isn’t poisonous, their costs of production are going to go up. And that means prices at Walmart, here in the United States, are going to go up too. So, I would say China is our greatest friend right now. They’re keeping prices low.

Words fail.

h/t: Hunter at Daily Kos, via Ezra Klein.

(And yes, this is the same clip where Matthews acts out the part of a dirty old man. Of course, there’s no excuse for that sort of sexist behavior, and I hope Burnett sues. Still, if this clip is any sample, leering at Burnett is certainly more rewarding than listening to her.)

The future of failed communities

A conversation on a bloggers’ listserve and with a visiting colleague raises a generic policy question we should have much more debate about, and in public. It comes in two distinct sizes that may have different answers.

“What should be done about places that have lost their economic reason to be populated?”


“Is there a humane way government can help obsolete regions to grow small gracefully?”

I’m thinking about places like Atlantic Canada, the Northern Great Plains, New Orleans, some swathes of the rust belt at the large scale, and poverty-blighted urban neighborhoods at the small (most of inner Detroit).

One answer, of course, is “bus tickets”. This is how the collapse of Southern agriculture was handled in the 20s and 30s. Of course it shreds all the social capital of the places that get depopulated. Another is unemployment checks, which I believe is what the Canadians are doing. This too may ruin the culture that one wants to preserve. Still another is one or another kind of subsidized economic development, high-tech labs and factories and training for residents; this almost certainly will cost a fortune and fails the all/any test (you can ‘save’ any county in Nebraska from depopulation with an Intel or Toyota plant that gets a really nice tax break forever, but not all of them).

Politically, one can understand why those who [claim to] speak for communities like this would oppose dispersion: if your constituents get speckled out as a diffused minorities in a lot of different places, what happens to you?

Serve fewer courses to nourish more; let the diners in the kitchen and give them aprons.

Bob Frank exhibits the factor most highly correlated with student evaluations of teaching, which is manifest enthusiasm for his subject matter. Like many of us, especially those of us who teach and preach more technical content, he’s perplexed by the failure of so many students (and, I bet, cocktail party interlocutors) to see how great this stuff is or to retain much of it. Like few of us, he’s taken this failure as a challenge to his teaching of introductory economics and thought seriously about how it could be done better.

Modern psychology has boiled down being really smart to a couple of core traits. One is knowing a lot about a lot of different things; the other is being wired up so these different things jump out of their usual cognitive boxes and connect in unusual ways. Frank is smart in this way, so his exploration connected his experience with learning languages and his general education knowledge of why male and female albatrosses look alike while bull and cow seals don’t.

The result is three very solid insights, consistent with a lot of what others are discovering about how people learn. The first is the difference between (i) recall and repetition of a recipe, formula or fact on cue and (ii) really knowing something. The second is the principle articulated by Bob Behn thus: “If you’re teaching someone to use a computer, you should never touch the computer.” The third is the difference between the few important basic principles that experts use all the time without realizing it, and the many abstruse and frontier-pushing results they get with them. Put these together and you get a teaching model with:

1. A few big ideas, looked at from many directions and dressed up (but not hidden) in many guises.

2. Students getting their hands dirty using these ideas to solve problems they know they have (this is always better than letting the ideas look like new problems they didn’t want).

3. Displacement of the concept of being right by the concept of being useful (Nelson Goodman explains this in Ways of Worldmaking).

The central exercise of such a course is to assign the students the role of naturalist (this is where the birds and seals come in): Find a situation that surprises you, that you can understand better (or even explain completely) using the core concepts of economics. Your explanation doesn’t have to be complete, or even right, but it has to be interesting and reasonable. Five hundred words, once in the middle of the semester and again at the end.

I have generalized his exercise this spring in my introduction to public policy course to a “policy naturalist” assignment with excellent results (though I’m not sure I did such a good job of distilling the course down to fewer big ideas and less showoffy arcana), and I intend to do the same next fall in an introductory probability and statistics course. This model really has legs.

The result of Bob’s experiment is, obviously, a drawer full of these exercises, which he has assembled into a book that presents both the core ideas we need to concentrate on and a batch of “naturalist” exercises, from his students and from real live professional economists. It’s called, of course, The Economic Naturalist, ISBN 046500217X, and if you’re not putting on your coat to repair immediately to your local physical bookstore, or mousing over to your favorite online merchant to buy it, you are reading the wrong blog.

Greg Mankiw on Trickle-Down Theory

Robert Frank claims that trickle down economics receives little support from economic theory and even less from empirical evidence. Greg Mankiw disagrees. The two textbook authors duke it out.

During his tenure as Chairman of the Council of Economic Advisers in George Bush’s first term, Greg Mankiw invoked trickle-down theory to help sell the massive Bush tax cuts for top earners. In my “Economic Scene” column in the New York Times last Thursday, I argued that trickle-down theory’s central claim that higher taxes curb economic growth is supported neither by economic theory nor by empirical evidence.

Mankiw quickly challenged my argument. But his challenge misinterprets the empirical evidence I cite and completely ignores the relationship between perceived well-being and relative consumption. The Bush tax cuts led top earners to build larger houses, the main effect of which was to redefine what counts as an adequate dwelling. But the resulting revenue shortfalls led to cuts in the Energy Department’s program for helping to lock down loosely guarded nuclear materials in the former Soviet Union. This was a bad trade.

Mankiw titled his critique of my column “Frank Needs To Read More Widely.” On that point, he is surely right. I don’t know Mankiw well enough to presume to know what he needs. But as I explain in the essay below the fold, he would be in a much better position to offer sound policy advice if he employed economic models that incorporate current scientific knowledge about human behavior.

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Positive feedbacks and the subprime meltdown

Rising defaults lead to tighter credit lead to more defaults lead to distress sales lead to lower housing princes lead to still more defaults and still tighter credit lead to falling homebuilding and consumer spending lead to an economic slowdown which further depresses housing prices.

Both the New York Times and the LA Times have stories on the subprime meltdown. There seems to be a positive feedback loop at work now: rising default rates have led to credit tightening, and credit tightening (by making it harder for people to refinance their way out of loans whose teaser rates are about to reset) is going to further increase default rates.

Lurking in the background is another positive-feedback possibility: defaults lead to distress sales, distress sales force down prices, falling prices lead to even more defaults. Lurking behind that is the BIG positive-feedback threat: falling home prices plus a tighter market for refinancing puts a crimp in consumer spending while also depressing homebuilding, leading to an economic slowdown which further increases default rates and depresses home prices.

So far, I couldn’t buy back in to the LA housing market at a profit. But I’m glad I sold out in the summer of ’05 and get to watch this one from the sidelines. Seems safer here.

Footnote “Creative” mortgage finance seems sure to be the next big financial scandal. But the Times story has a reminder of the previous financial scandal, the one about “sell-side” securities analysis.

Why hasn’t Bear Stearns fired the analyst who was touting New Century Financial just before its lenders cut it off? Does that have anything to do with the fact that Bear Stearns was one of the outlets for mortgage-backed securities based on New Century’s loans? And if, as seems likely, New Century turns out to be insolvent, leaving the buyers of those MBS’s stuck with the bad loans New Century made, will Bear Stearns do anything to make its customers whole? No, I don’t think so, either.

“Values” and trade

If you don’t want to defend the claim that we should keep a billion Chinese hungry to avoid changes in the mix of economic activity in the U.S., you can just call it a “values issue.” Much easier than thinking, isn’t it?

Have you noticed that when someone on the Religious Right says that something is a “values issue” that means “I have no good argument for my position, which if adopted will lead to needless suffering, so instead of reasoning I’ll call everyone who disagrees with me a Bad Person”?

You have? Good.

And have you also noticed that when the Populist Left uses the same phrase, it means exactly the same thing?

I can understand why Brad DeLong invented an imaginary Lou Dobbsian opponent for his pro-trade position and gave him a name which means “false.” What puzzles me is how he got his sock-puppet onto TPM. But then Brad is obviously much cleverer than I am.

€1 = $1.33

The nightmare scenario of a panic run on the dollar.

The slide of the dollar seems a matter of indifference to most Americans. (Visiting Washington a few years ago, I was surprised to find that the dollar-euro exchange rate could only be found deeply buried in the financial pages of the WAPO; in France, it’s included in the hourly financial news bulletin on the main radio news channel. This is absurd, but shows the sensitivity bred by the decades of pre-euro vulnerability.) Even an expert like Brad DeLong highlights the one-hand fact that the fall has raised the dollar value of American assets abroad by $400 billion. Me, I’d worry a bit more about the other-hand consequence that the value of foreign assets in the USA has gone down by even more, and the holders are in a position to do something unpleasant about it: sell.

Is a run on the dollar possible?

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