Will the Treasury’s Housing Report Be DOA?

The Treasury has produced its long-awaited (and late) report on reforming the housing market. Felix Salmon summarizes it:

The message is clear: what we have right now is unacceptable, and we need to do something big; the main choice facing Congress is between a modest government housing guarantee, a tiny one, or none at all.

Arnold Kling (who used to work for Freddie Mac IIRC) is more critical:

With so little detail spelled out, all we are left with is a proposal for the government to take unknown risks in an unknown way with unknown consequences. I assume that more information will be forthcoming.

He also puts in a pitch for Canadian-style 5 year rollover mortgages. Those make all the economic sense in the world but I’m skeptical that they will find a great deal of favor here either with consumers or bankers.

My guess is that this report will be all be DOA and that Congress will do a lot of huffing and puffing and give birth to a mouse. You?

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Hyperinflation Is Not Just High Inflation

While I’m airing pet peeves here’s another one. Hyperinflation is not simply high inflation. It’s caused by a collapse in confidence in the currency.

The chart above is of Argentinian inflation prior to, during, and after their bout with hyperinflation. As you can see prices were perking along at an acceptable level of increase when suddenly, as if from nowhere, bam!. That’s not the exception for hyperinflation but the rule. It was true in Weimar Germany in the 1920s and it’s true in Zimbabwe right now.

What sparked this particular reaction from me was this post at Econbrowser. After a lengthy exposition and some graphs illustrating very low CPI and PPI Menzie Chinn notes:

This suggests to me that those who fear a quick turnaround in actual and expected inflation must be anticipating — either implicitly or explicitly — a supply shock as well.

Dr. Chinn’s graphs don’t assuage my concerns at all. Indeed, they look to me very much like those of Argentina just prior to hyperinflation.

I don’t know what concerns other people but I’m concerned that all of the aggressive experimentation with spending and quantitative easing will rock confidence in the dollar sufficiently to produce hyperinflation. Contrary to the misconception that seems to be popular among economists it’s not simply a difference in degree with ordinary inflation, i.e. inflation gets a little higher and a little higher and a little higher over time and eventually you have hyperinflation, but a difference in kind, sui generis.

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How We Use Yellow Corn

I oppose all agricultural subsidies and have for more than 40 years. I oppose ethanol subsidies.

However, I sincerely wish that well-intended economists and reporters would stop parading their ignorance and making bogus arguments viz.:

That’s why this story in yesterday’s New York Times about size of corn reserves caught my eye. The story says that, because of increased use by ethanol producers, the demand for corn in the U.S. is so high that reserves are at their lowest level in 15 years and prices are going up significantly (Note: the ethanol folks deny this). This is expected to affect consumer prices both on products that include are corn itself — chips, creamed, on the cob, salsa, etc. — and those where corn is a major component like soft drinks and gasoline.

Consider the chart above which presents a breakdown of how we use corn in the United States and how that’s changed over time. The chart makes quite a number of things very clear.

First, by far the greatest amount of our domestic usage of corn is for livestock feed. It accounts for something like 50% of all corn utilization. Most corn that we export is also used as animal feed and when you add those two together it’s practically three quarters of the whole. Second, do you see that orange band innocuously labelled “FSI less ethanol”? That’s all other food uses for corn including high fructose corn syrup, corn as an ingredient, everything. Between them ethanol and FSI account for, maybe, 20% of utilization. Do the math. Demand for ethanol as vehicle fuel isn’t causing the price of corn to double. Worldwide increased meat production is the culprit.

If there’s increased lobbying for subsidies for corn, it will be due to rising costs of meat and, indeed, I think that’s pretty likely. How you reconcile calls for Americans to consume less meat with higher subsidies for corn production is beyond me but I’m sure they’ll find a way.

While we’re on the subject practically all of those fields of corn that you see covering the Midwest are yellow corn. White corn is the corn used for masa for tortillas and most human consumption and it’s much more expensive than yellow corn. We’d produce more white corn here if countries like Mexico didn’t subsidize their farmers to keep American white corn non-competitive.

My point here is that U. S. ethanol subsidies aren’t causing world food prices to rise. They’re dumb but not dumb for that reason. Food prices are rising because of bad weather in a lot of places, China consuming more, and bad laws in most places including here.

There’s a much better argument that European subsidies of biodiesel are causing food oil prices to rise worldwide. The rapeseed and mustard seed used in European biodiesel are actual human food and the EU produces a lot of them.

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Visualizing the Massachusetts State Budget

See here. Hat tip: Barry Ritholtz.

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It’s Not Just Bank Presidents

Following up on my post of earlier this morning take a look at Mish Shedlock’s analysis of Cisco CEO John Chambers’s stock trades vs. the performance of Cisco over the last ten years:

Chambers has not done a damn thing for shareholders for 10 years, cashing out hundreds of millions of dollars along the way. From the perspective of a shareholder of a publicly traded company, Chambers is not worth a damn cent.

I also note that Cisco has never paid a dividend although they plan to do so for the first time this year.

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Compensation, Incentives, Corporate Governance, and Looting

Simon Johnson neatly characterizes the competing views of the behavior of top management at the largest banks:

One view of executives at our largest banks in the run-up to the crisis of 2008 is that they were hapless fools. Not aware of how financial innovation had created toxic products and made the system fundamentally unstable, they blithely piled on more debt and inadvertently took on greater risks.

The alternative view is that these people were more knaves than fools. They understood to a large degree what they and their firms were doing, and they kept at it up to the last minute – and in some cases beyond – because of the incentives they faced.

The emphasis is mine. He goes on to describe the conclusions of a recent paper in which the authors found support for the latter view rather than the former. In very terse summary over the period of 2000 to 2008 the CEOs of the top 14 financial institutions netted $650 million through sales of their own companies’ stock while the market caps of these stocks declined from $74 trillion to $47 trillion over the same period. That’s exclusive of wages. The authors found that:

CEOs are 30 times more likely to be involved in a sell trade compared to an open market buy trade. The ratio of the dollar value of their sells to buys is even more lop-sided. The dollar value of sales of stock by bank CEOs of their own bank’s stock is about 100 times the dollar value of open market buys of stock of their own bank’s stock.

Their proposal is that sales of stock by top management be prohibited until two years (or more) after the end of their tenure.

Over the period of the past 40 years there has been something of a cyclic trend for large companies to give their top management part of their compensation in the form of stock. When the stock is unrestricted as is generally the case, the incentive of the manager is like anybody else’s: buy low, sell high. Or in the case of banking stocks, sell high and don’t buy at all. The incentive is for short term gains potentially at the expense of the health of the company—a perverse one.

Why do stockholders put up with this? Over the same 40 years an increasing amount of stock ownership has been on the part of large institutional investors, particularly pension funds. These funds have maintained unrealistically high assumptions about the returns they can expect which are coming home to roost.

The key problem here is that these funds have much the same incentives for poor stewardship as the managers of the top 14 financial insitutions: take the money and run. The problem with being unconcerned about the long term fate of a company whether it’s a bank or an automobile manufacturer is that the long term eventually comes. Here, today, the future is now and our growth prospects don’t look nearly as rosy as they did just a few years ago.

IMO we need more managers whose motivation is to build and run companies than those who want to make a big pot of money and retire to Majorca. The incentives are aligned the wrong way. However, I don’t think that the prescription of the authors of the paper is practical, either. Perhaps we should be looking to dividends rather than stock prices and dividends should only be payable from profits of a growing concern.

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The Council Has Spoken!

The Watcher’s Council has announced its winners for last week. First place in the Council category was JoshuaPundits Lipstick On A Pig – Whitewashing The Muslim Brotherhood.

First place in the non-Council category was TPM with Pakistan and the Mumbai Attacks: The Untold Story, for which I voted.

You can see the full results here.

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How Much Did the Stimulus Stimulate?

Brad DeLong takes note of a recent paper evaluating the results of the ARRA, the stimulus package. Quoting from the paper:

A cross state analysis suggests that one additional job was created by each $170,000 in stimulus spending. Time series analysis at the state level suggests a smaller response with a per job cost of about $400,000. These results imply Keynesian multipliers between 0.5 and 1.0, somewhat lower than those assumed by the administration.

to which Dr. DeLong responds that

All of these estimates are what we call “imprecisely estimated”: whatever your prior beliefs were, they should not move very much.

My “prior belief” is that a well-crafted stimulus package applied in a timely fashion might well have produced a higher multiplier and, if we were a compact country with a small, homogeneous population ruled by a totalitarian regime with complete power, we could have produced one. Unfortunately, as a large, sprawling country with diverse competing interests and serious political differences we’re incapable of producing a well-crafted stimulus package and applying it in a timely fashion. Consequently, we’ll see smaller multipliers here than theory might dictate.

On a related note I see that China has hiked interest rates again:

LONDON (MarketWatch) — China’s central bank announced Tuesday that it would raise its key interest rates for the third time since October in an effort to cool rising inflation pressures.

The People’s Bank of China said in a statement that it will raise its one-year yuan lending rate to 6.06% from 5.81% effective Wednesday, while boosting the one-year yuan deposit rate to 3% from 2.75%. Rates were previously hiked in October and December.

suggesting that China’s stimulus package might have produced some hard to tame side effects.

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Foreign Policy Blogging at OTB

I’ve just published a foreign policy-related post at Outside the Beltway:

Has a Military Coup Already Taken Place in Egypt?

In this post I consider an article from AlJazeera.net which, if its interpretation of events is correct, strongly suggests that the revolution is already over in Egypt and that the military won.

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My Obligatory Superbowl Post

For the first time in nearly a decade I actually watched the Superbowl last night. Congratulations, Packers.

I don’t think that I can improve on Business Insider’s take so I’ll, er, sample it here:

  • Christina Aguilera messed up the lyrics to the National Anthem
  • A bunch of companies spent a lot of money on a lot of not very good ads
  • Except for Chrysler who seemed to impress a lot of people, including Eminem
  • Groupon’s dumb ad just managed to tick everyone off
  • The Black Eyed Peas made heads explode (not in the good way) at halftime
  • And, oh yeah … the Packers won

Video links galore at the linked post.

We gave a young house guest—the daughter of some dear old friends who’s in town to interview for several of the culinary schools here in Chicago. Her reaction was terse: “I’m glad I didn’t waste my money by going to one of their concerts”.

The only ad I found even mildly interesting was the Chrysler ad. However, I also found it problematic. They managed to find a several block area of Detroit that showed off the city’s former glory. Wouldn’t a counter-ad showing the rest of Detroit have told a rather different story? Not that Toyota, Hyundai, or Mercedes-Benz would be tasteless enough to produce one. But it did seem rather desperate.

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