Relevant and even prescient commentary on news, politics and the economy.

What Caused the (Next) Housing Bubble? (Six Graphs)

Political Calculations gives us this chart of median new home prices versus median incomes over the last 46 years. The rising tip at the upper right (!) is May 2013. What do you think: sustainable?

Here’s the zoomed-in version of recent years, from inside the red dashes:

As they say,

…new homes are, virtually by definition, at the margin for all real estate markets. Their prices are therefore especially sensitive to changes in the levels of both supply and demand in the overall market.


They suggest it was “money leaving the U.S. stock market” and flowing into the housing market, which is no doubt somewhat true. But:

1. A great deal of that dot-bomb money didn’t “go” anywhere; it simply vanished. You gotta ask: this would result in more money going into real estate, with the off-the-charts results we see above?

2. Have we ever seen a stock-market crash causing a real-estate bubble? I can’t think of an instance, but I could be wrong…

3. That’s your typical lump-of-money/loanable funds incoherence, ignoring the fact that the financial system creates new money and lends it to the real sector to buy houses.

I’d suggest that there was a sudden increase of availability of new money. Yeah, Greenspan spiked the punch bowl at the same time, so the money was cheaper. But I’m thinking that lending standards plummeted starting in 2001.

The Fed asked loan officers if they were loosening their standards in that period. They said no:

Screen shot 2013-06-27 at 8.32.12 PM

But — surprise — the rate of loan denials tells a very different story:*

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This is in the midst of a massive stock-market crash. Denials declined? Those loan officers apparently didn’t even know they were loosening their standards.

Here’s another Fed graph that’s less dramatic, and that doesn’t seem to match the ’99-00 Conventional Mortgage numbers in the data I graph above, even though they’re drawing from the same data set. (Je ne sais pas.) But the 2001-2003 trend’s the same, and even more pronounced for refinancing:

Screen shot 2013-06-27 at 8.20.00 PM

So what could possibly cause this sudden decline in lending standards? I’ve got a guess; again, it’s about the fundamental rules of the game being changed. Nothing else could cause such a radical shift. Here’s my guess:

Wikipedia: Commodity Futures Modernization Act of 2000

Pushed through by Lindsey Phil Graham in the dark Christmas-recess nights and signed over Clinton’s powerless, almost-dead body in the midst of the Lewinsky crisis (signed December 21st, 2000), this act empowered and deregulated all the collateralized debt vehicles that stood behind the runup, and emasculated any putative regulators. (It apparently took the financial players most of a year to take advantage of the new rules.)

AIG and its ilk were given free rein to sell any default-insurance contracts (CDSes) on banks’ bundles of mortgage loans (CDOs) that contributed to their personal bonuses– no matter that they could never fulfill those insurance contracts if the S hit the F.

The ratings agencies (for their pieces of silver) issued their blessings on those CDOs, which meant the CDS insurance on the CDOs was ridiculously cheap.

The main-street loan-shark mortgage brokers had no problem foisting their shitty loans off to the banks for bundling into CDOs, which were “insured” by AIGers who  never intended to pay off anyway. They figured they’d never have to, based on their self-serving models, crafted under intense pressure from their sales and executive (what’s the difference?) teams.

Is it any wonder that lending standards plummeted? I’ve heard it said that incentives (and institutions) matter.

So where are we now, with the home-price/income ratio trending up off the charts again, and even higher now? Maybe it’s just that home builders aren’t building any inexpensive homes anymore, because the people who buy those homes have been eviscerated:

If that’s true, that scary runup in the upper-right corner of the first graph is the top .1% — having extracted everything they can from the 90% who have no money, really — finally going all Willy Sutton on us and going where the real money is: the top 10%. I wonder: how will those ten-percenters will feel about the glory and wonder of “free markets” a few years from now?

* You’d be amazed how hard it was to dig up these numbers. Even though the Fed’s been collecting this data for decades, the report I found it in didn’t include the data in the tables (and said so, explicitly, in the text). The micro-level data is available through the FFIEC interface to the HMDA data, but you have to be a serious wonk to download and crunch it. And nobody else seems to have compiled this time-series on percentage of loans denied. All the research is about comparing denials for different income classes and races. Liberals are looking at just one thing (the wrong thing, for what I’m describing), and conservatives are just ignoring the whole thing.

Cross-posted at Asymptosis.

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Poetic Justice for Justice Alito. Maybe.

U.C.-Berkeley law professor Goodwin Liu’s nomination to the Ninth Circuit Court of appeals was killed a couple years ago by Senate Republicans upon the pretext that Lui had trashed Alito to the Senate Judiciary Committee in testimony during Alito’s confirmation hearing.  Lui predicted that Alito as a justice would be exactly what Alito as a justice is.  Now that Lui’s prediction has proven spot-on*, Obama should nominate him, not for the Ninth Circuit but for Supreme Court upon Ginsburg’s retirement in a year or two.

It would be at least some small poetic justice for this justice.

But Alito’s demeaning, denigrating treatment of litigants and counsel is emblematic of a veritable hallmark of the Federalist Society-affiliated appellate judges.  Certainly not all of them do that, but also certainly, several high-profile Reagan/H.W. Bush-era appellate appointees have made that type of conduct a mark of peer prestige, and others, who don’t naturally have that personality—including some appointed by Clinton—emulate it.  Something about being in with the in-crowd.  It is, or at least for a long time was, the cool thing for them to do.

*The link is to a terrific article in Slate today by Mark Joseph Stern.  But credit also must be given to the Washington Post’s Dana Milbank, who in a column published earlier this week was, I believe, the first of the now-several commentators to report on this. 


UPDATE: I posted a similar comment to Stern’s article in the article’s Comments thread on Slate.  In response, a commenter called Bigmouth wrote:

While I’d love to see Liu on the Supreme Court, I’d like to see the President pick fights he can actually win lol.

To which I responded:

This is one he would win if he chose to pick that fight. The high profile of the matter, coupled with the under-recognized importance of the generational change among voters–particularly the growing importance of the Millennials–and the overdue, very public highlighting of Alito’s votes and his conduct on and off the bench, would win it for Obama.

Not that I expect that lackluster, gutless wonder to actually pick this fight. But if he does, he’ll win it.

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Robert Pollin is Professor of Economics at the University of Massachusetts in Amherst. He is the founding co-Director of the Political Economy Research Institute (PERI). This is via Real News:

I want to refer to an article that was in the global–the leading global financial newspaper The Financial Times last week by one of their columnists, Gavyn Davies. And Davies tried to explain why the U.S. stock market seems to be going up so quickly even though the economy is basically still limping along. Very, very small improvements in unemployment and GDP growth, but the stock market keeps going up. And Davies says, well, actually, there’s a fairly clear explanation for that, and that is that the share of the total output in the economy, the share of the total GDP or the pie, even if the pie isn’t growing that fast, the share going to the rich in terms of profits is growing very rapidly because the share going to everybody else in terms of wages is going down.

Now, I’m saying that this is coming not out of a leftist kind of publication; this what’s in The Financial Times. And Davies’s own column referred at length to a blog by a well-known financial market blogger, and the title of the blog itself was “Where Karl Marx is right”–not the kind of thing you usually read from financial market type analysts.

So we have–number one, we have this story about regulations of the financial markets not getting implemented, that the tough regulators are getting replaced. On the other hand, we have this notion of the recovery, such as it is, is taking place mainly in the financial markets. That’s what recovering quickly. And that’s due to a redistribution of income where profits are getting a bigger share, everybody else is getting a smaller share.

And then the third piece, very unlikely source, the past few days, the International Monetary Fund, which for basically a generation had been the center of advocacy of austerity-type policies, it has now published an article saying that the U.S. should ease off on austerity. The U.S. should ease off on austerity. The IMF is saying it.

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Health Care Thoughts: Cap per Procedure

by Tom aka Rusty Rustbelt

Health Care Thoughts: Cap per Procedure

Some employer health plans are experimenting with a cap-per-procedure system, allowing $X for a certain procedure and forcing employees to pay any difference.

This is not as harsh for employees as it first sounds, as the plans are using this as leverage to cap fees from providers, in effect pre-negotiating the fees within the employee cap. This is directed mostly at hospitals, which have wildly differing charge-masters.

This could be favorable for lower cost providers, and we were using this strategy for ambulatory surgery centers a decade ago (ASCs generally have lower prices and better patient satisfaction).

Experimentation is good, but this is gonna be a wild ride for the next few years.

HT: NYT 6/24/13


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Ms. Wendy Davis Goes to Austin, TX

As if the scene was taken out of “Mr. Smith Goes to Washington”, the 13 hour filibuster by Texas State Senator Wendy Davis succeeded in killing SB537 by minutes. The vote failed to happen in the allotted time killing the bill for the time being. While filibustering the passage of the bill, Texas State Senator Wendy Davis could not visit bathroom facilities, take a sip of water, lean on any pedestal or desk, receive assistance from anyone else, and had to remain on issue.

“On Monday, the Texas State House voted overwhelmingly to pass a draconian proposal Texas SB537 that would ban all abortions after 20 weeks, as well as adding stringent new restrictions on how clinics get licensed. The intent was clear: Supporters of the bill, known as SB 5, openly acknowledged that the law would have closed 37 of the state’s 42 clinics, leaving hundreds of thousands of women in Texas and neighboring states like Oklahoma with no way to access abortion care. With a conservative majority in the State Senate and the support of Governor Rick Perry, the measure seemed certain to become law.”

The vote happened at 12:02 PM two minutes too late to be passed. Attempts to postdate the time to earlier than 12:00 PM by Republicans met with challenges from the Democrats and the Media until the time was conceded.

Raised by a single mom and at 19 a single mom herself, Texas State Senator Wendy Davis has been leading the charge for women’s choice. The impact of her challenges has been felt with her offices allegedly being fire-bombed due to her support on Planned Parenthood. 31% of the women in Texas are uninsured. The passage of this bill would have closed down 37 of the 42 abortion clinics in Texas leaving residents of Texas and Oklahoma with few places to turn to.

The closure would not only place an undeserved economic burden on pregnant women who would have no place else in which to turn. The closures would have come on top of state-directed counseling designed to discourage them from having the procedure, a mandatory ultrasound where the provider describes the fetal image and a mandatory 24-hour wait.

It is not too often we see a person with the courage literally take a stand in a hostile environment for what they believe is right.

Mr. Smith: “I always get a great kick out of that part of the Declaration of Independence. Now you are not going to have a country that can make these kind of rules work, if you do not have men that learned to tell human rights from a punch in the nose.”

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The DOMA Opinion

Now the shoe is on the other foot, and it is time for the court to strike down a federal statute in order to advance a liberal policy goal rather than a conservative policy goal. Justice Scalia’s paean to the democratic process* in his dissent sounds a little hollow, coming in the wake of his votes to strike down affirmative action programs and Section 4 of the Voting Rights Act—both of them the result of the democratic process, as much as DOMA was. Meanwhile, none of the liberals pipe in to explain how to reconcile the outcome of this case with the concerns about democracy that they expressed in dissenting opinions in the other cases. (Ginsburg, in Shelby County: “That determination of the body empowered to enforce the Civil War Amendments ‘by appropriate legislation’ merits this Court’s utmost respect.”)

But this is a trite point, and never mind. The problem faced by opponents of DOMA is that there was no clear constitutional hook for striking it down. The Equal Protection Clause does not seem to apply because gay people (unlike, say, African-Americans) have not been regarded as politically weak enough to be a “suspect class,” justifying heightened review. That means that only a rational basis is necessary to uphold DOMA and a rational basis is easy to find (uniformity, efficiency, blah, blah, blah). The Due Process Clause does not seem to apply because that clause protects only rights that are rooted in history and tradition, and the right of same-sex marriage, however compelling a moral issue it may seem today, is not such a right. Federalism says that (under ill-defined conditions) the U.S. government cannot trump state law, especially in an area like family law, but in fact there are plenty of federal laws that regulate marriage, at least along the margins.

— Eric Posner, There was no clear constitutional reason to strike down DOMA, but the court did it anyway. Slate, today

I don’t understand why Posner thinks there is a conflict between the liberals’ position in Shelby County (yesterday’s 5-4 opinion gutting the Voting Rights Act) and their position in joining Kennedy in Windsor without reconciling the two.  Why does he think Ginsburg’s statement in Shelby County—“That determination of the body empowered to enforce the Civil War Amendments ‘by appropriate legislation’ merits this Court’s utmost respect.”—conflicts with Kennedy’s use of equal protection in Windsor?  DOMA surely was not intended to provide equal protection to same-sex couples.  And the liberals surely did not say in their dissent in Shelby County that democratically enacted laws are fine even if they violate constitutional equal protection guarantees.

And I’m not sure why Posner and many other commentators today complain that Kennedy’s opinion doesn’t identify the specific level of equal protection scrutiny that gay people are entitled to.  He establishes a separate, new class of people, including but not limited to gays, who are entitled to heightened equal protection: people targeted by laws or policies whose very intent and whose effect is to disadvantage them. “Discriminations of an unusual character especially require careful consideration” of the motive and effect–in other words, heightened equal protection scrutiny by the courts–he says.   That’s new, and not all that specific, but it’s certainly a level of scrutiny that’s different, and higher, than the rational-basis level of scrutiny. Kennedy clearly was saying that under this new type of scrutiny, there very much is a constitutional reason to strike down DOMA.

And I think it will play a role in next term’s affirmation action case challenging the constitutionality of 2006 successful Michigan ballot initiative that amended the state constitution to prohibit state-sponsored race-based affirmative action in employment and college admissions.  The Sixth Circuit Court of Appeals struck it down on the basis that, for equal protection purposes, constitutional amendments were different than ordinary legislation because the targeted groups can’t simply lobby the legislature to change the law; they must instead go through the lengthy, difficult and expensive ballot-initiative process.  The Supreme Court agreed to hear the case.  The case is Schuette v. Coalition to Defend Affirmative Action.  Linda Greenhouse had some interesting comments about it in the NYT a couple weeks ag0.


*Scalia’s paean comes at the opening of his dissent.  He says, stupifyingly:

We have no power to decide this case. And even if we did, we have no power under the Constitution to invalidate this democratically adopted legislation. The Court’s errors on both points spring forth from the same diseased root: an exalted conception of the role of this institution in America.

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The Solution to the Economy: Raise Social Standards and Social Efficiency

Guest post by Edward Lambert as taken from his Blog Effective Demand

Yes, the economy is a concern. There are problems to sort out. The problems run deep. What is the solution?

The solution to the problems of the economy will be found through “Social Efficiency” and raising the social standards that have been declining through the years. I will present 3 examples of lowered social efficiency, grade inflation in schools, the minimum wage and finally low interest rates. My purpose is to show that nominal interest rates need to rise, but that real wages must rise in unison too. 

Grade Inflation at Yale University

Let’s go to Yale University and see an example. Yale is currently working on a solution to its grade inflation. Grade inflation is when more students get A’s than before.

“…a full 62 percent — nearly two-thirds — of grades awarded in Yale College, the university’s undergraduate school, are A or A-. (That wasn’t case four decades ago, when just 1 out of 10 grades awarded fell in the A range.)”

Grade Inflationb

This quote is taken from an article about the problem of grade inflation at Yale. There is a comment below that article by Adam Glover. . .

“What do they call the person who graduates first in their medical class? Doctor
What do they call the person who graduates last in their medical class? Doctor
Rather than worrying about grades, I’m more concerned that students are sacrificing real learning for a better GPA.”

The problem is that standards, and more importantly, Social Standards of quality have been lowered. The issue of grade inflation at Yale is just one isolated example of declining Social Standards around the world. Just this week we see cheating in the schools of China is rampant, even as parents try to bribe teachers so their children get better grades.

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One way zipping around town

From the New York Times comes this note a way to rent a car for short time periods and convenience. I am not personally acquainted with this system, although I have used Zip cars.

Car sharing has been around for decades in Europe and has caught on in the United States with Zipcar. These station-based car-sharing services require members to pick up vehicles from a particular place, which may or may not be convenient. Users usually need to reserve cars in advance for prearranged, prepaid blocks of time and, when they are done with the car, they have to return it to the same place — all factors that have limited car sharing’s attractiveness.

Berlin, though, has become the largest one-way, car-sharing city in the world. One-way or free-floating services, which recently started in the United States, use GPS and smartphone apps for far more flexible car sharing. Cars are parked on city streets, and users pick up cars parked nearest to them. Instead of bringing the car back to a lot, users leave it wherever they find parking near their destination. They are charged for the amount of time they spend driving.

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Remarkably Stable GDP Growth – Part 3

Part 1

Part 2

First off, I want to thank Mark Sadowski for contributing, in a gadfly sort of way, to my thinking on this issue with his comments in Parts 1 and 2.  So, this is not the part 3 post I had intended to write.

Mark suggested using a different transformation of the FRED NGDP series I’ve been looking at.  Instead of taking YoY % change, he suggests using what FRED calls Compounded Annual Rate of Change [henceforth CARC.]  Check the linked graphs and you’ll see there’s both more fine grain movement and swings to greater extremes in the CARC graph, and, as expected, the Standard Deviation values are higher.  This is a different way of looking at the data.  But is it a better way?  I have no idea.  If you have a convincing argument either way, let’s see it in comments.

Graph 1 shows the 13 Qtr Std Dev of CARC.  It’s gross features are generally similar to the those of the graph of Std Dev of YoY Change.  There’s the steep fall bottoming in 1964, the rise into a broad double peak in 1981-3, followed by a steep drop to a bottom in 1987. Then we see the humps caused by the ’91 and ’01 recessions, and finally the sharp rise and fall due to the Great Recession. [In the YoY graph some of these extremes are displaced by about a year.]


Graph 1 – 13 Qtr Std Dev of CARC


The major difference between the two graphs occurs after the 1987 bottom.  While the YoY  Std Dev graph continues to slope down, the CARC Std Dev graph moves in a generally horizontal direction between the two red lines drawn from the Q4 ’90 high of 2.95 and the Q3 ’12 low of 1.17.  Note however, that if the ’91 recession had been worse or the ’01 recession milder, we would still perceive a downward tendency to the peaks.

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Redistribution and public production of public goods–not "let the markets handle it"

by Linda Beale

Redistribution and public production of public goods–not “let the markets handle it”

In recent posts, the Importance of Distribution and Markets, Minimum Wages, and the Sins of Friedmania,  I have noted the centrality to sustainable democratic institutions of corraling the market so that the power and wealth of the elite few does not work to impoverish the many.  That means that government either rungs many programs for the benefit of the many itself–such as Medicare, Veterans’ Care, public education, public utilities–or government ensures that it has systems in place to counter the power of the elite–such as redistributionist tax policies, social welfare policies that satisfy important needs such as health care and retirement security, with a good measure of “required self-help” through mandatory savings mechanisms.

Mark Thoma has a recent piece in the Fiscal Times that reflects the same ideas, from a slightly different perspective.  He enumerates 7 ways that markets don’t work and require government intervention: retirement savings, health care, carbon emissions, labor support, financial sector, government contracting, and economic and political power.  See Mark Thomas, 7 Important Examples of How Markets Can Fail,, Fiscal Times (   2013).

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