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

Are Refis Contractionary?

Update: David Rosnick of CEPR questions this analysis. Update to come when I have Internet access again–which probably will be Saturday at the earliest.

Brad DeLong got me thinking a few days ago, and not in a good way, when he quoted the brilliantly (and brilliantly-named) Cardiff Garcia:

Thus far the surging mortgage origination business at banks has been concentrated in refinancing rather than purchases. The refi boom is great but can only last so long, as Dudley writes, and from a macroeconomic perspective has less of an impact than a housing purchase and construction rebound…

I’m thinking that rather understates the case.

There are at least two of us on this blog who have benefitted from recent refis. (I won’t out the other one, save to say they got better terms than I did.)  In my case, the net savings in payments was about $700/month—not exactly chump change, unless you’re Tagg Romney.

But let’s follow the flows here, pretending that all transactions are with two banks for reasons that will be clear.  My refinancing means that Bank A receives a lump-sum payout of the balance of my mortgage. But then they have to put that money to work—and they are not going to receive my old interest rate on those replacement loans (if any).

Bank B is receiving current market rates on the refi. So it’s new lending to them. But that’s neutralized on the supply, replaced by Bank A having “freed up” my old loan. 

Similarly, on the demand side, my demand is satisfied—and my demand now is $700/month less than it was before.

So the S-D lines are stable for the assets—or even reduced due to the decline in demand.  Meanwhile, the flows into financial institutions (assets to them) are reduced.

So if A = L + E and A is reduced, what happens to Liabilities?

If you assume standard economic theory, I save that $700.  (Realistically, I spend it and someone else saves it, but the net savings in the economy still goes up $700.)  That savings is a Liability, let us say to the Bank A.

Bank A’s Balance Sheet is now:  Assets down $700/month, Liabilities up $700/months.  To balance that equation, Equity has to go down $1,400/month.

Bank B has Assets up $700/month, Liabilities unchanged, and therefore Equity up $700/month.

Net for the system is that Assets are unchanged, Liabilities are up $700/month and Equity is down $700/month.

Ceteris paribus, refinancing reduces the inefficiencies in the banking system (the above-market asset valuation is replaced by an at-market asset). In doing so, it reduces Bank Equity and increases Bank Liabilities.

Unless lending to other sectors of the economy increases, refinancings that do not take cash (“equity”) out of the property appear to be contractionary.

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It’s a Good Day

The Big C finally got rid of the inept hedge fund “manager” who finished destroying their franchise.

Of course, maybe this time they will replace him with Timmeh, instead of just pretending they will so he swallows more and harder.  Just in case Orszag isn’t enough.

Still not buying, but I would seriously consider closing a short position.

Update: Ben Walsh chez Felix says everything I tried to imply, except the one thing that has been outstanding for years: WTF took the Board so long?

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The Female Troops Are Returning, Too


The Obama Administration—driven by Senior Democrats such as Rush Holt and, one suspects, Michelle—has been very attentive to the needs of veterans.

On of the big initiatives of 2011 from the Obama Administration was Joining Forces, an effort to retrain, reeducate, and re-employ America’s veterans. It lead to the Vow to Hire Heroes Act in November of that year, which offers employers subsidies when they hired returning veterans.

There are quibbles—the military’s own tendency to “dishonorably discharge” people wounded in battle has been recorded elsewhere. But between Vow to Hire Heroes in November of 2011 and the Veteran Skills to Jobs Act in July of this year, you might think Veteran Unemployment has been addressed.

Certainly, the Republicans in the Senate do.  The effort to address not one but two problems—the need to repair infrastructure and the need to employ veterans (who have spent the past eleven years rebuilding infrastructure and managing logistics)—would seem ideal.  Apparently not:

Senate Republicans blocked legislation Wednesday that would have established a $1 billion jobs program putting veterans back to work tending to the country’s federal lands and bolstering local police and fire departments.

Republicans said the spending authorized in the bill violated limits that Congress agreed to last year. Democrats fell two votes shy of the 60-vote majority needed to waive the objection, forcing the legislation back to committee….

“(With) a need so great as unemployed veterans, this is not the time to draw a technical line on the budget,” said Democratic Sen. Bill Nelson of Florida, the bill’s lead sponsor, who faces a competitive re-election battle.

Republicans said the effort to help veterans was noble, but the bill was flawed nevertheless.

Sen. Tom Coburn of Oklahoma said the federal government already has six job-training programs for veterans and there is no way to know how well they are working. He argued that making progress on the country’s debt was the best way to help veterans in the long-term.

To believe Senator Coburn, you would have to believe veteran re-employment is going well.  But that pesky data thing interferes.

Veteran Employment Nov 2011 to present 

Note that this is all Veterans 18 and over, not just recent returnees. Since employed veterans tend to remain employed—or, as Tim Kane notes, become entrepreneurs—overall veteran employment is relatively stable.  Large fluctuations, therefore, are more likely to be related to the ability of returning troops to assimilate into the marketplace.

Female Veteran Unemployment (dashed line above) has gone from 7.0% in November of last year to 13.2% in September.  While male veteran employment has responded to the initiatives and bills (declining in line with the national rates), female soldiers returning to the States and the workforce have received rather another reaction.

The Obama Administration doesn’t hate the troops.  Why do Senate Republicans?

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The Devil’s Greatest Trick is Convincing You He Doesn’t Exist


Felix Salmon (26 Sep 2012):

[Secretary of the Treasury and former leaders of the FRB of New York Timmeh] Geithner just isn’t that Machiavellian: his biggest weakness is that he isn’t political enough, rather than that he’s some kind of master puppeteer.

Brad DeLong (24 Nov 2009):

Geithner is where he is because for thirty years everyone who has dealt with Tim…has found that when Tim is on your side, you tend to win.

If Niccolò himself had been as good at “the business of government” as Timmeh is, The Prince would never have been written.

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About That 47% Figure…

Back in October of 2011, I blogged a bit and Tweeted Chrystia Freeland’s interview with Jeff Immelt. (Thank you again, Felix.) What I didn’t mention, apparently,* is that one of the questions from the floor was a, er, gentleman who declared in No Uncertain Terms precisely what Willard Romney said at that sexcapade on Lon GislandBoca.** The meme has been going around a long time. (And I’ll wager someone reporting that meeting covered the exchange.) The problem, as Scott Thomasson noted (and got from Don Marron and the Tax Policy Center) is that the large majority of that 47% are from States that vote Republican. Willard just insulted his natural constituency; as Brad DeLong finally notes (burying the lede better than Albert Brooks in Broadcast News):

Romney does not say: “I will never convince them to vote for me”. Romney says: “I will never convince them they should take personal responsibility and care for their lives”.

Alabama, Mississippi, Texas, Georgia, Arkansas, South Carolina, Louisiana, and New Mexico: the Republican candidate has issued you a challenge. Will you take personal responsibility and care for your lives, or will you continue voting for the Republican Presidential candidate and his minions?* *New Mexico, I know you guys are trying.

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Outsourcing, Education, and Thinking about the Future

I was hopeful that some of our better-known companions would be smart enough to ignore the attempt by McMegan (University of Pennsylvania, Bachelor’s in English Literature, mid-1990s) to argue, in a magazine that aspires to be People, that going to college—and most especially getting a degree in the Liberal Arts—is not cost-effective. We can forgive Felix; getting to write a riff such as this one is like fiddling with your guitar and coming up with “Sweet Emotion” or “Take Five” or “Pennsylvania 6-5000,” even with the occasional clunker conditional. Sadly, though, Brad did his imitation of Mark-Thoma-when-pressed-for-time, pulling greatest hits and writing a lede that is more analgesic than enlightening. So let’s think about the Big Employment Picture. What can you (1) study in college, (2) learn reasonably well in four years, and (3) still practice with a reasonable certainty that your job will not be outsourced in twenty years? Let’s start with eliminating the easy things: Technology. Think of all the people who have been programmers for a couple of decades, starting with Fortran or C or even COBOL. (Remember the jokes about the COBOL programmer who works in preparation for the millennium, has himself cryogenically frozen, and is thawed out in 9998? Ask anyone who works IT for, say, an Insurance Company if they don’t think it’s realistic.) Those people are already losing their jobs to Indians who aren’t paid the equivalent of US$40,000 a year who have IIT degrees. Engineering: Even less reliable employment than Technology and, again, already being outsourced. Mathematics: Anyone really want to claim this is non-rival good? Sure, if you’re Press and Dyson, maybe. But we already know that poor Indians have been competing with the rest of the world for a century. Anyone really believe that China, with twice as many secondary school graduates (as a percent of population, let alone overall) cannot produce chimera-Ramanujans, or even just multiple Morris Klines, in the next generation or two? That’s three-quarters of the STEM model that is supposed to Save American Jobs: all will face (at best) downward pressure and declining domestic futures under current tenets. What will be a stable career? My ex-roommate points to Tyler Cowen in the Globe and Mail:

[Q:]Can advances in AI create great numbers of jobs? [Cowen:]No. A lot of people will be hurt by it. Owners of intellectual property, and capital and manufacturing plants will do very well. Output will go up a lot. But in many areas, wages will fall and jobs will disappear. So the U.S. trend – falling labour force participating rates – will continue. But people who get quality education will be better off. [emphasis mine]

Not everyone will be born as the son of a Governor or a Captain of Industry; most of those people will have doors opened for them naturally, in the manner of this classmate of Barack Obama’s who has led his current company in the manner of his previous one. So the last two are out. That leaves us with the italicized section above. Who are the “owners of intellectual property.” Well—initially—it’s the creator of art. For all the films made in India, very few match the worldwide appeal and box office command of the U.S. industry. Similarly, while Lawrence Norfolk’s latest novel means I stopped reading everything else (well, except for Press and Dyson, above) on this New Year, it’s Amazon rank tells us that almost 23,000 other people are buying more copies of something else from them. Even musicians are finding that controlling their catalog is more important—and lucrative—than signing with a label in this era of pump and dump. Or, as Chris O’Leary noted:

Bowie had been built, in part, by RCA and EMI, by their worldwide sales channels, their sacks of promotional dollars. The labels had been irritated about putting out a Low or a Tin Machine, but they still bought trade ads and in-store promo material for them, they still made the records available for someone in Kankakee to buy, they still had pushed them on the radio, if indifferently. If clueless and occasionally corrupt, the dinosaur labels that had released the bulk of Bowie’s oeuvre had provided a level of patronage that’s inconceivable for a musician of Bowie’s bent today…he spent the Nineties as a free agent, jumping from label to label, sometimes going it alone, always on the hustle, and so offering a preview of the lot of the average pro musician in 2012.

The model has changed, with most songwriters and performers knowing better than—or learning quickly not—to sell “publishing rights” to a label that will attempt to treat them “as work for hire.” What are the jobs least able to be outsourced? Writer. Musician. Artist. Filmmaker. (It’s probably not coincident that Bowie’s son is making movies.) Exactly the jobs that McMegan is telling people to avoid. Perhaps speaking autobiographically, she declares:

“It’s very easy to spend four years majoring in English literature and beer pong and come out no more employable than you were before you went in,”

As Felix Salmon notes (also quoted by DeLong), “That’s only true if you somehow contrive to drop out of college at the very last possible minute.” Otherwise, to borrow a term from microeconomics, you have “signaled” that you can complete something you started, which makes employers who don’t want to sell half-finished products (that is, all of them) much happier than the alternative. McArdle’s piece wasn’t just bad analysis; it’s bad economics. You would think that someone with an MBA (even if it is from the University of Chicago) would know better.

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The Economics of Debt and Equity. with Football

It’s no secret I am a bad economist:  I don’t believe rent control is a bad thing, I consider most of the job-matching models to be ludicrous when someone tries to use them to claim unemployment compensation extends people’s period of unemployment, and I really, really, really don’t believe the equity premium is anything but a legacy of artificially-suppressed Government bond yields and fluke periods of excessive rents combined fortuitously with an absurdist survivor bias. Otherwise, Modigliani-Miller should be correct and when you start measuring corporate returns against Government bonds, the “premium” looks a lot like an overestimation of expected inflation (Πe)
But if I had to model why an equity premium might be possible, I would suggest that there might be a combination of undue pessimism (expectations of higher inflation and/or lower real growth) and clear indicators of companies that are more likely to be part of the survivor bias. Such as, for instance, management buying its own stock instead of paying out more in buybacks and dividends than it makes in profits. (You know, the “miracle of compound interest” and all that.)
One of the things that would make me hesitate to think a company was going to come out on the right side of survivor bias is insiders selling their stock.  Or not buying it when they have a chance to do so.  Especially if they buy something else.
Don’t get me wrong; I think employees who buy company stock for their own 401(k) are pawns at best, idiots at worst.  Even Upper Middle Management—defined as people with the authority to say “yes” to some things without asking higher-ups—will rarely have a material positive effect on the company’s stock price. (My father retired with three or four patents to his name; their bottom line effect on Ford stock was indistinguishable from zero—maybe negative, if you count “made a better product for a while and so stayed in a market they eventually left” as misallocation of resources.)  But the guy’s running the company—especially when they also own the majority of the company—those are the people who should be buying equity, not taking it out of the company as they cash out their stock options.
What does this have to do with football?  Well, the Glazer family happens to own a football team.  (Yes, I’m talking about real football, not “putting on forty pounds of protective gear to play rugby.”)  It happens to be an English team—a member in good standing of the English Premier League—that is very good for an English team.  Which means that this year it was the second-best team in its City, it lost in the early rounds of the Champions League, and it qualified for what many expect will be another “Early Exit”—this phrase should be trademarked as the standard of English Football teams since at least 1950—in next year’s Champions League.
But the Red Devils have many fans who would like to own a piece of the team just to say they do.  Many of those fans are in England, but apparently there are enough of them in the United States—I know several; generally nice enough people even with that character flaw—that the team will be listed not on the LSE, but rater on the NYSE.  So I expect that—as with Visteon—I will be able one day soon to wander down to the area near the Federal Reserve and see a bunch of people wearing shirts advertising Aon Insurance (previous sponsor: AIG) celebrating and giving away some swag—say, imitation Wayne Rooney hair plugs (warning: site NSF Self-Respecting Humans) or Ryan Giggs’s used condoms—or something else that will be arguably more valuable than a few hundred shares of stock that amount to a small fraction of the listing that is only about 10% of the company anyway.
Why am I disparaging the stock? Well, after the FT and the WSJ did—and probably Deadspin, Gawker, and maybe even Noah Smith’s favorite site, Zero Hedge (oh, come on, I really don’t need to provide links those five sites, do I?)—it would almost feel like piling on.
But then we come back to the Equity Premium.
You see, there’s one good reason that there should be an Equity Premium.  Despite the best efforts of the Delaware Chancery Courts, Equity is still subordinate to debt.  If you run low on cash, you’re supposed to pay your debt holders and reduce—or even forego—dividend payments.*
So equities should have a premium—it’s a risk-adjusted premium for the likelihood of the firm not being so much of a “Going Concern” in the future as it is now.  We may have modeled Expected Free Cash Flow (FCF), but those expectations might be wrong, too.  And the risk is asymmetric.**
Which means the worst thing for any equity investor would be to see the owners of their company selling the company’s equity and buying its debt.
Which, as my ex-roommate noted in email, is precisely what “what some of the Glazers themselves are doing.”
ManU’s stock offering is for people who thought that the Facebook founders gave up too much control.  And if you throw in that the team is incorporating in Romneyville, a.k.a., The Cayman Islands, so that the new shareholders can be even more subordinate than they would have been otherwise, it’s clear that their fans would be far better off investing their money by going to Ladbroke’s and taking 7:1 on ManU to win the 2013 Champions League.  Or the 16:1 currently offered for the double of the EPL and the Champions League.
At least then, even when if they lose, the winner wouldn’t be someone who was betting against the house while holding the mortgage.

*The end run of Stock Buybacks, not to mention the last twenty-five years of the court rulings, have rather eviscerated debt holders’s position in the queue, but we still at least pay lip service to the seniority.
**Short version: If you call the “equity premium” a “risk-adjusted return on capital,” it is much more likely that I will believe you might have a working model.  If you keep pointing to the U.S. from, say, 1937-1967 when the economy was growing and the coupon on Government debt was artificially low—looking at you, Prescott and Mehra—then I’m going to laugh at you.

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Merchants and Thieves Hungry for Power

Well, this is a politics and economics blog, so I need some rationalization for celebrating Sixteen years, sixteen banners united…

(I sadly note for the record that, unlike Brad DeLong, I did not try to avoid finding a Dylan version of a Dylan song—there just wasn’t one on YouTube.)

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