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

Modernizing the html

This weekend I will be changing AB from classic blooger to New Blogger, along with template and design changes.

Nothing should be noticed if all goes well except for the new look next time you log in. Please send corrections, broken links, and advice to my link at rdan instead of in comments so as to not deluge the flow.

Any praise should be posted in comments however. 🙂

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Kash in 2004 and blowing bubbles

Kash added this note in 2004.

Friday, December 10, 2004More on House Prices
Stephen Roach is apparently unconvinced by those who argue that there is no housing bubble. From today’s Financial Times (subscription required):
Five years after the bursting of the equity bubble, America has done it again. This time, it is the housing bubble. But this speculative excess may be the cruellest bubble of all – and has already led to a sharp compression of national saving, a record current account deficit and an ominous overhang of personal indebtedness. The US was fortunate in avoiding the perils of a post-bubble carnage in 2000-2001. It may not be so lucky this time. The debate over a US housing bubble is now over. The recent US house prices report for the third quarter was a shocker – an 18.5 per cent annualised surge from the second quarter and a 13 per cent increase from year-earlier levels, according to the Office of Federal Housing Enterprise Oversight (OFHEO). That represents a stunning acceleration from the 9.8 per cent year-on-year increase of the second quarter, and pushes nationwide house price appreciation to a 25-year high.

Housing analysts and central bankers are typically reluctant to draw macro conclusions from a highly fragmented US property market. The risk is they focus on the trees and miss the forest. The latest OFHEO tally shows house price inflation has run at double-digit rates over the past year in 25 of 50 US states plus the District of Columbia. Housing is an asset class just as prone to excess as stocks, bonds, currencies and commodities. If it feels like a bubble and acts like a bubble, it probably is one.I tend to agree with Roach — this seems like a bubble, so Occam’s Razor (i.e. common sense) suggests that it probably is one. The specific arguments in the paper I cited yesterday that argued that there is no bubble in house prices still bear some attention and further thought… but I still don’t believe that the sort of increases in house prices that we’ve seen over the past couple of years can be explained away by quality adjustments. Instead, I think that the FRBNY paper is a classic example of Stage Three of Rudi Dornbush’s famous “Five Stages of Currency Overvaluations,” which Brad DeLong wrote about in a recent piece for Business World Online. Simply replace “currency overvaluation” with “house price overvaluation” and it seems quite applicable to housing markets in many countries today:
First, short-term speculators seeking higher returns, or investors overanxious for safety, drive a currency’s value to unsustainable levels.

Second, trend-chasers keep buying because the returns have been so good in the recent past, thus pushing the overvaluation to a height and duration that orthodox economists cannot explain.

Third, highly intelligent economists, puzzled by the duration of the overvaluation, evolve theories of why things are different this time, and why this time the overvaluation is perhaps sustainable after all.

Fourth, market bulls, encouraged by theories of a “new economy” that justify the extraordinarily good returns seen in the recent past, keep buying and keep the currency suspended above economic fundamentals even longer.

Fifth, the supply of eager purchasers and trend-chasing investors comes to an end, producing a crash that resembles the collapse of a Ponzi scheme.

posted by Kash at 10:19 AM Comments (16)

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Two weeks of health care

MA Health Connector hooks people up to health plans as part of the mandatory aspect of Romney’s health program. As far as I can tell, the prices are simply what is currently being offered. The following premiums are for a family plan, with and without Rx.

Find Insurance: Individuals & Families
Step 3 of 6 – Choose Type of Plan
Using your information, we found 20 Health Connector plans for you. Click the plans that you want to see. You can click “Show Selected Plans” to see some plans. You can also decide to see all plans.

Low premium. Most have deductibles and co-payments. Prescription drug coverage included. 5 plans $1,126.00 – $1,533.19/mo

Moderate co-payments. Some have no deductible. Prescription drug coverage included. 10 plans $1,492.00 – $2,179.48/mo

Low co-payments. No deductible. Prescription drug coverage included. 5 plans $1,985.88 – $2,759.90/mo

One school system carries a chart of costs/rates currently, with premiums expected to rise 15-20% or more. A friend had a Blue Cross/Blue shield premium go from $650/mo last year to $834/mo this year through the small business network.

My $600 rebate for the stimulus package will pay for less than two weeks of health care insurance.

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Red and Blue foreclosures

Forbes Magazine has an article on the top twenty counties suffering from large per centages of house foreclosures. Cleveland was not part of the stats. Most counties were in California, Florida, then GA, AZ, and CO. Interesting.

The usual suspects top the list. Wayne County, Mich., home to Detroit, is first, with 10,622 homes in foreclosure with negative equity, 176 of which have more than $100,000 of negative equity. Clark County, Nev., where you’ll find Las Vegas, has 4,278 homes in foreclosure with negative equity and lands at No. 2.

Rounding out the top five are Maricopa County in Arizona, and Riverside and Los Angeles counties in California.

Of course, not all foreclosures in a given area fit the same profile. In Wayne County, for example, almost 40% of all current foreclosures are on properties with negative equity. By contrast, of foreclosures in Miami-Dade, another area hard hit by the subprime crisis, only 11.6% have negative equity.

Florida had a problem of selling but with “positive” equity, perhaps from inflated appraisals.

Also note that there were a portion with $100,000 or more with negative equity. I cannot be as thorough as DolB, but worth following as well.

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Angry Bear writes in 2004

Housing Bubble revisited

Saturday, December 11, 2004Housing Bubble, Revisited
After reading Kash’s first housing post, I read the paper he cited, “Are Home Prices the Next Bubble?” (FRBNY Economic Policy Review, Dec 2004). While there is a lot to chew on, I share Kash’s skepticism. In particular, the authors rely heavily on quality adjusted housing prices to reach their conclusion that there is no housing bubble. For example, consider their Chart 6:

The numerator is the total payment, including interest, for a “quality adjusted” house, meaning that they use hedonic regressions to deflate the numerator to adjust for factors such as larger and newer homes, more appliances, lot size, and so forth. The denominator is just median income. As the graph clearly shows, after adjusting for quality, housing is clearly consuming less — not more! — of families’ income. So there’s no bubble. Or, as the authors write at one point, “Perhaps we should be asking why home prices did not rise even more under the circumstances.”

But then I thought about my friends who own really nice, fancy, homes. For the most part, they all moved to the suburbs, often the outer suburbs, in order to afford their fancy homes. In the typical case, a new child created need for more space and a large home was simply not affordable in the close-in parts of the city. Hence the move to the suburbs.

If the authors are going to rely upon quality adjustment, they should also at least account for the corresponding increases in commute times. In fact, the value of an hour of commuting time is usually estimated to be about $15.00. If moving to the suburbs entails an extra 10 minutes of driving to work each way, for 250 days per year, that adds up to 5,000 minutes, or about 83 hours, which is valued at roughly $1200, per year. Depending on the discount rate, that dollar amount has a present discounted value of roughly $10,000 to $15,000, which should be subtracted from the quality-adjusted price. A change of that amount in the quality adjusted home prices used in the above figure would, I suspect, notably alter the above figure. In particular, it would offset much of the decrease. Without their income numbers, it’s impossible to tell exactly how large the effect would be, but I can ballpark it. Median income in 2003 was about $43,300; using that in the denominator implies a quality-adjusted monthly payment of $505 at the end of their sample, where the ratio is around .14 ($505 is not the actual payment, it’s the quality-adjusted payment; the actual payment is some larger amount). Adding $10,000 to the principal to incorporate the higher commuting time implies an increased monthly payment of about $62, for a commute-adjusted monthly payment of $567. Using that number increases their end of sample ratio to 15.7%. Even higher commute times, or accounting for two commuters, would increase the ratio even further. (Of course, not all home buyers move to the suburbs.)

Also, read the note below the figure: “Authors’ calculations assume an 80 percent loan-to-value ratio.” I believe that putting 20% down on a house is now the exception, not the norm. With less than 20% down, the payments are higher due to both a larger loan size and mortgage insurance. In terms of Chart 6, to the extent that families are in fact putting less money down, the numerator used to construct the series will be larger, and the decline even less pronounced. Overall, I’m not convinced that the authors are wrong, but I’m even less convinced that they are right. In fact, the stage 3 of a bubble theory, described in a follow up post by Kash yesterday, seems like the most compelling explanation for the evidence in the FRB study:

Third, highly intelligent economists, puzzled by the duration of the overvaluation, evolve theories of why things are different this time, and why this time the overvaluation is perhaps sustainable after all.AB P.S. Long time readers will, apparently, appreciate the absence of mentions of TV shows in this post.

posted by Angry Bear at 2:31 PM Comments (7) Trackback (0)

You can obtain the graph from the link. Calculated Risk advised AB in 2005 that the bubble would not pop until later, about a year or so. There are a number of posts worth revisiting as we change to a new look. I was advised recently by CR that where he lives the ROI of a million or two was also a part of the sub-prime delusions. Just saying.

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Generic drugs and devices part 2

The GAO has a report on quality control of high risk devices (pacemakers for example) for US manufactured and foriegn made. The report also mentions dilemmas faced in drug manufacture from another report done last November on the issue of quality control for all drug manufacturing.

A simple adage to remember is that “the quality of a device made anywhere by anyone is not self-policing, especially when done globally”.

Since I am busy adding to the new site, I am not up to commenting much. It is worth reading however.

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Bruce Webb caught this item

…in the course of responding to a linked Fallows piece in the
Atlantic in comments at Ezra’s I ran across a very intriguing chart
from Treasury

Fallows was putting out the standard line: We buy toys from China,
China turns around and finances our deficit, ultimate end result
trainwreck. Well oddly enough the numbers don’t support that at least
for FY2007. Our key Asian import trade partners were not net buyers
of treasuries. In some cases they were very large net sellers.

Country Nov 2006 Nov 2007 $Change
Japan $622 bn $580 bn -$42 bn
China $393 bn $386 bn -$7 bn (-$34 bn since March 07)
Taiwan $59 bn $49 bn -$10 bn
Korea $64 bn $41 bn -$23 bn

Korea liquidated a full third of holdings and no one noticed.

Who bailed out the market?

U K $76 bn $315 bn
Oil Exporters $106bn $127 bn
Brazil $52 bn $120 bn

I’ll try to get a piece up on my site. But to say that this swing is
under reported doesn’t begin to touch this. At this rate we are only a
month from having the UK replace China as second largest holder of US
Treasuries. The world looks a lot different when your future
financing is the hands of the Bank of England rather that the various
central banks of Asia.
This one by Bruce Webb.

rdan here. Bruce became involved in a project on Social Security for a candidate so has not developed the post. I am posting this as a good catch.

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Constitutional law and Padilla

Paul Craig Roberts [former US Assistant Secretary of the Treasury; co-author (with Lawrence Stratton) of The Tyranny of Good Intentions]: writes

The only case the DOJ was able to manufacture against Padilla was that he was a “terrorist-wannabe.”

Padilla was thus indicted on the Benthamite grounds that he might commit a terrorist act in the future. By the time Padilla went to trial, he had been demonized for years in the media as the “dirty bomb” terrorist. In the Washington Post, August 17, 2007, Peter Whoriskey described the Padilla jury as a patriotic jury that appeared in court with one row of jurors dressed in red, one in white, and one in blue. As Lawrence Stratton and I write in the new edition of The Tyranny of Good Intentions: “It was a jury primed to be psychologically and emotionally manipulated by federal prosecutors. No member of this jury was going to return home to accusations of letting off the “dirty bomber.”

The main “evidence” introduced against Padilla was an unrelated 10-year old video of Osama bin Laden, which served to arouse in jurors fear, anger, and disturbing memories of September 11.

The prosecutors also claimed to have a form that Padilla is alleged to have completed in 2000, prior to September 11, 2001, to attend an al Qaeda training camp in Afghanistan. At that time Al Qaeda and the Taliban were fighting against a remnant of the Northern Alliance containing elements of the old Soviet regime to unify Afghanistan as an Islamic state.

Although it is far fetched that al Qaeda sent out applications to attend its training camps, any such application by Padilla predated the 9/11 attack and was related only to domestic affairs in Afghanistan. Any such application has no relevance to any act of terrorism.Padilla was convicted on all counts.

In handing down a 17-year sentence, US District Judge Marcia Cooke denied the prosecutors’ request for a life sentence and observed: “There is no evidence that these defendants personally maimed, kidnapped or killed anyone in the United States or elsewhere.”Under Blackstonian law, the basis of the US Constitution, the Padilla case has no crime and no intent to commit a crime.

Judge Cooke vaguely recognized this, but US law has been pushed off its Blackstonian basis and is being reconstructed on a Benthamite basis.Benthamite law is the great ally of tyranny. It permits people to be arrested on the suspicion that they might commit a crime in the future, to be tortured, and to be held indefinitely.

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A new look for AB

Hi folks.

I have the basic shell and template set up for AB, including our colors. I have the beginning link categories, a link in each, and the start of putting in more widgets.

The corners will be fixed at the end of the process.

There are “mistakes” in that I was inserting data to make it show up so was not as careful as I will be for finishing.

Please send feedback on titles for the categories of links as I add them, eventually other site links we do not have (wait for now, I have a long list), and possible widgets etc. Remeber it is rough but the hard part is done. Posters can let me know preference for stage name (capitalized etc.) It is a working site which I can change and perhaps have my own minor blog when done.

Thanks. The construction is at Angry Bear 22 until converted to AB.

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