Archive for November, 2011
Raising Interest Rates to Help the Housing Market
Last week I offered a few proposals to help move along the housing market. Given the need for brevity, the rationales for each were short. As almost all of them were counter to the conventional wisdom, they do merit a little more explaining, in particular the suggestion to raise interest rates.
Before I could offer a further discussion of the fact that the mortgage market is driven by both demand and supply, Daniel Indiviglio at the Atlantic was quick enough to provide much of that detail. Rather than repeat his analysis here, which I agree with, let’s focus on a few other points.
David argues that “at rates like 4 percent, those loans had better be pristine if the bank wants to ensure that its default risk is covered by the small amount of interest it receives.” Let’s dig a little deeper. What lenders care about are real rates. With inflation running approximately 2 percent, the real return on a prime mortgage today, before credit cost, is around 2 percent. But today about 3.5 percent of prime loans are in foreclosure. Assuming a 50 percent recovery rate, 1.75 percent is needed to cover credit losses. Even in good times, prime loans foreclosure at about a 0.6 percent rate. With subprime foreclosures running about 14 percent, you’d need to charge at least 9 percent to break-even in real terms. At today’s rates, lenders are barely breaking even on prime loans, they’d bleed money if they charge similar rates to subprime borrowers.
But then why don’t lenders just charge higher rates for the higher risk borrowers? After all that’s what they did during the bubble years. Well a lot has changed since then. For instance, in 2008 the Federal Reserve, under the Home Ownership and Equity Protection Act (HOEPA), lowered the threshold for what is considered a “higher-cost” mortgage, from treasury +8 percent, which excluded much of the market, to prime mortgage +1.5 percent, which under current rates makes anything over 5.5 percent a “high cost” mortgage. When Congress passed HOEPA in 1994, it shut down that segment of the market, due to what is tremendous litigation risk. Now the Fed’s extension of HOEPA has done the same for much of the mortgage market. According to the Fed, 22 percent of the market was “higher-cost” in 2005. After the new regulation, that share had fallen to 2.4 percent in 2010. Yes the housing bubble and credit crisis would have shrunk that market, but by almost 90 percent? And yes, many of those loans we didn’t want to come back, but many we did.
The point here is that the Fed actually does impose, via legal risk, a de facto ceiling on mortgage rates. If we want to bring back housing/mortgage demand among higher risk borrowers, which were a significant source of demand, then the Fed would be wise to suspend its current HOEPA rules. If we don’t want to bring that demand back, then fine, just stop complaining about a weak housing market. As an aside, I was of the view in 2008 and still today that the Fed lacked legal authority for its 2008 HOEPA rule, but then the Fed has rarely let a lack of legal authority get in its way.
The Antidumping Lobby’s Power to Destroy Jobs
President Obama claims to support America’s exporting and so-called “green jobs” industries, but he also likes rules that restrict the importation of critical inputs to those industries. Austin Bragg and I produced a short video detailing how antidumping duties serve to nudge American manufacturers offshore or out of business. The examples we cite are American manufactured products that fall squarely into the category of “green.”
Facebook it. Tweet it. And read more of Dan Ikenson‘s heavy lifting on the antidumping issue here, here and here.
Three Libertarians Raise Concerns about the Stop Online Piracy Act
Two weeks ago, a new bill called the Stop Online Piracy Act was introduced in the House. The bill has attracted criticism from a wide variety of libertarian thinkers. In this post I’ll highlight three of the most compelling responses.
First, at Ars Technica, I interviewed Ryan Radia of the Competitive Enterprise Institute, who argues that SOPA threatens to undermine the legal “safe harbor” that protect sites like YouTube and Flickr from liability for the actions of their users.
Supporters of SOPA say it’s needed to combat “rogue” websites hosted overseas. Such rogue sites deliver infringing content to American consumers while remaining out of reach of American law enforcement. But Radia argues that supporters of the bill are being disingenuous when they claim the bill only targets rogue sites:
“The bill is written in a way that covers a far broader category of sites” than ordinary “rogue” websites, Radia told Ars. “I think this is intentional.”
“Many of the companies that have long wished that the DMCA imposed a greater obligation on online intermediaries to act against infringement see this bill as an effective means of accomplishing their end goals without opening the can of worms of revisiting the DMCA safe harbor,” he said.
Radia pointed out that “it’s entirely possible that an intermediary that is protected by the DMCA safe harbor could also fit within the category of sites dedicated to infringement.” So companies that build websites based on the rules of the DMCA might suddenly find themselves on shaky legal ground.
Radia notes that the legislation is broadly unpopular in the venture capital community and warns that the uncertainty it would introduce could chill high-tech investment.
Also today on Time’s website, the Mercatus Center’s Jerry Brito argues that SOPA is a “cure worse than the disease.” He focuses on a provision that allows the government to create a blacklist of alleged rogue websites and compel ISPs to remove them from their domain name servers:
At a moment when Secretary of State Hillary Clinton is urging world governments to keep their hands off the Internet, creating a blacklist would send the wrong message. And not just to China or Iran, which already engage in DNS filtering, but to liberal democracies that might want to block information they find naughty. Imagine if the U.K. created a blacklist of American newspapers that its courts found violated celebrities’ privacy? Or what if France blocked American sites it believed contained hate speech? We forget, but those countries don’t have a First Amendment.
The result could be a virtually broken Internet where some sites exist for half the world and not for the other. The alternative is to leave the DNS alone and focus (as the bills also do) on going after the cash flow of rogue websites. As frustrating as it must be for the content owners who are getting ripped off, there are some cures worse than the disease.
Finally, at CNet Larry Downes of Tech Freedom calls SOPA “Hollywood’s latest effort to turn back time.”
Larry, Jerry, and Ryan all believe that some kind of “rogue sites” legislation is necessary. I’m not so sure; I think Congress struck the right balance when it created the DMCA’s safe harbor in 1998. But either way, we’re all concerned about the detrimental effects that SOPA—and its Senate companion legislation known as the PROTECT IP Act—will have on Internet freedom.
Occupy the Elderly
The Pew Research Center released a study today on the growing “age gap” in economic well-being. Based largely on Census’ Survey of Income and Program Participation, the study compares household income trends, by age, from 1984 to 2009.
The main result is that those households headed by someone 65 and older did pretty well for themselves, while those under 35 did pretty badly. The number one driver of this trend? The housing bubble. Seems the elderly, in general, purchased long before the bubble and didn’t take a lot of equity out, while the young bought near the peak and took a bath.
The paper’s results suggest two policies messages to me (perhaps it will suggest different ones to you): given how well most of the elderly have done, relative to younger households, where’s the justice or even need for the young to continue to subsidize the elderly via medicare, social security, etc. These trends in wealth provides considerable justification for means-testing these programs. Secondly the Federal Reserve’s constant attempt to make us wealthier via a series of asset bubbles is actually adding to income inequality. Asset booms make those with assets, usually older and wealthier households, even more wealthy while doing little or even real harm to those without assets. If you really want to see more equal wealth, then demand that the government stop trying to push up home prices.
Of course there are other factors that also drive the difference in age wealth trends. Recall the data is for households, so the declining household size (rise of single parents, delay of marriage) will generate difference across cohorts.
Secretary General of the OAS Praises Nicaragua’s Election
Yesterday’s presidential election in Nicaragua that resulted in the reelection of Daniel Ortega was marred by widespread accounts of fraud and voter intimidation. Observers from the European Union called the process “less than transparent.” And election monitors from the Organization of American States (OAS) say they were prevented from visiting polling stations. Not to mention that Ortega’s candidacy was blatantly illegal: Nicaragua’s Constitution prevents a president from running for a consecutive term. By manipulating the country’s Supreme Court and Electoral Council, Ortega ran and won anyway.
However, according to José Miguel Insulza, the Secretary General of the OAS, “In Nicaragua democracy and peace moved forward.” [in Spanish]
Insulza has a record of keeping silent or tacitly supporting the region’s autocratic regimes as they violate democratic institutions and human rights. Do we need further proof that José Miguel Insulza is a pawn of Hugo Chávez and his authoritarian allies in Latin America?
Don’t Jump the Gun on IAEA’s Iran Report
It is unfortunate that an analytic frenzy has begun over a report that has not yet been published. It is impossible to analyze the contents of the IAEA report on Iran until we can read it.
Even absent the document itself, however, two points bear repeating. First, even if the cultivated panic surrounding the report’s release is well founded, the suggestion that a military strike against suspected nuclear weapons sites in Iran would solve the problem lacks strong support. The net effect of such an action is difficult to judge beforehand. However, military action seems certain to convince the Iranian leadership that the United States and Israel are implacable aggressors. We should also wonder whether purchasing a delay in Iran’s nuclear program would be worth the cost of making its government—and possibly its people—absolutely certain that the only way to stop aggression against it is the acquisition of a nuclear weapon.
Second, while the consequences of military action are uncertain, so too would be the consequences of a nuclear Iran. These consequences would be different for the United States than for Israel. While one hesitates to advise the Israelis on their national security policies, the nature of the relationship between the United States and Israel means that Israeli action would likely implicate the United States. And it is far from clear that the Israeli leadership believes the Obama administration holds any cards that it could play to constrain Israeli behavior. For this reason, Washington may not hold its regional destiny in its own hands.
Cannabis Policy at Cato Unbound
This month at Cato Unbound, we mark a milestone in U.S. public policy. Last month, for the first time ever, the Gallup polling organization recorded 50% support for legalizing the sale of recreational marijuana to adults. (Medical marijuana has had majority approval for many years now.)
So why now? What’s changed lately to bring so many people around? And where are we going from here?
To discuss these questions, we’ve invited a quartet of marijuana reform activists to a roundtable discussion. Each will present an essay on a different facet of marijuana policy, and our conversation this month will be about political strategy, possible future trends, and the interplay among various sub-issues in the field.
Kicking things off will be Paul Armentano of the National Organization for the Reform of Marijuana Laws (NORML), writing about the biomedical aspects of cannabis and its prohibition. He will be followed by former Seattle police chief Norm Stamper, now with Law Enforcement Against Prohibition; Allen St. Pierre, the executive director of NORML, who will discuss public education and messaging; and Morgan Fox of the Marijuana Policy Project, who will discuss upcoming ballot initiatives and legislative developments.
Although each of the four is fairly well in the same camp on this issue, each also brings to the table different experiences, different perspectives, and different areas of expertise. We hope you will find a discussion among them educational and thought-provoking.
As always, Cato Unbound readers are encouraged to take up our themes and enter into the conversation on their own websites and blogs, or at other venues. Trackbacks are enabled. We also welcome your letters and may publish them at our option. Send them to jkuznicki at cato.org
Increasing the Energy Independence Ante
Three weeks ago, Cato released my policy analysis, “The Gulf Oil Spill: Lessons for Public Policy”. I argued that governmental intervention in the energy market was ill-advised and documented the depressingly numerous efforts to do more of just that by those who should have known better. On October 31, a working paper that went far further than any I had criticized appeared on the Internet. That paper — written by Robert Ames, Anthony Corridore, Edward Hirs, and Paul MacAvoy, who curiously label themselves the Yale Graduates Energy Study Group — argues for a Presidential proclamation ordering a moratorium on all oil imports save those from Canada. The withdrawal from global oil markets would be phased in over a decade.
As one might expect, there are many problems with their argument.
First and foremost, their case depends upon far greater certainty than is justified on the danger of foreign-supply disruptions, the effects of an embargo on domestic consumption, and the timely emergence of various domestic alternatives to foreign crude, particularly coal-to-liquid technology and biofuels. This ignores horrendous prior experience (something the authors tacitly recognize at the end of their paper by listing the bad energy initiatives of the past).
Their bottom line, however, is that the supply response will be so great that it will generate producers’ profits that far exceed the losses to consumers. The calculation, however, is Orwellian in its premises and is an analytically invalid measure.
Standard international-trade theory indicates that trade restrictions almost always harm the country that imposes them. Trade, nationally and internationally, arises because it is cheaper to swap other goods to get, say, petroleum, than to produce petroleum at home. The Yale Graduates’ calculation covers only the lesser part of the effect – the gains in the import-replacing industry. The larger cost of losses in export industries is ignored.
The Yale Graduates, moreover, effectively assume away the result possible in theory, but not in practice, of an astute level of import control that produces a net gain from lowering import prices without, as the Yale Graduates propose, severely reducing import volume.
In a country already burdened with enormous costs of ill-advised government policies, the last thing we need is such another governmental plunge into a fantasy world. The resulting waste would make Obamacare seem a bargain.
A second, related technical concern is that their calculation of embargo costs departs from standard practice by including the direct cost to oil consumers. Such costs are generally excluded from such calculations because, if import disruption were as probable as the authors assert, people would hedge against them. If they hedge, the cost will be zero.
The hypothetical indirect costs from alleged inflationary and unemployment effects are the usual concerns regarding foreign-supply disruptions. The standard method is to translate these costs into an estimate of the appropriate offsetting level of defensive import restriction. However, while the vast relevant literature is inconclusive about the magnitude of the impacts, it has never before produced figures that imply total elimination of imports. Regardless, Chantale LaCasse and André Plourde pointed out in 1992 that as long as the United States is engaged in any international trade, it will be affected by any oil shock. There is simply no way to wall-off the United States from major economic events abroad.
Objections also arise at several more fundamental levels.
First, the effort would be a horrendous policy initiative. Decades have been spent since 1933 trying to restore international economic integration to its 1914 level. So drastic a step as embargoing oil imports would set a very bad example.
Second, the exclusion of Mexico would violate the North American Free Trade Agreement and, almost certainly, U.S. obligations to the World Trade Organization. Examination of present and prospective patterns of oil imports indicate that the total ban would hurt clear friends as well as actual or possible enemies.
Third, even if the Presidential power to impose oil-import moratoriums (last exercised by President Eisenhower) still exists, its exercise is even more inadvisable that it was in the Eisenhower case. Critics of President Eisenhower correctly argued that the national-defense rationale for keeping foreign oil out of the United States was a fig leaf designed to disguise the real aim of the policy – to protect the independent oil producers who were the prime beneficiary of state production controls. The proposed phased-in embargo would restore the nightmare of quota allocation that messed up the initial Eisenhower program and its implementation by the Kennedy and Johnson administrations.
Fourth, a presidential moratorium would be another unwise assumption of executive power. No president can be trusted correctly to implement such draconian import restrictions or, for that matter, any similar interventions into industry. To make matters worse, no President could be in office for the whole ten-year phase-in period.
It’s hard to believe that serious people could propose such a thing. Exposure to modern economics has greatly reduced errors as gross as this, but obviously not completely.
Note: The cited paper has a peculiar history. A precursor was Robert M. Ames, Anthony Corridore, and Paul W. MacAvoy, “National Defense, Oil Imports, and Bio-Energy Technology,” Journal of Applied Corporate Finance 16 no. 1 (Winter 2004) 28-50. The latest version was posted on the Social Science Research Network, but in four different browsers, the link refused to access the paper. A Google search yielded access to a substantially identical article (with the author order reversed) presented in 2010 to the United States Association of Energy Economists.
President Obama: The Enthusiastic Drug Warrior
When Barack Obama became president, many people expected a new approach to drug policy. While running for the U.S. Senate in 2004, Obama said during a campaign event that he favored marijuana decriminalization. And the appointment of Gil Kerlikowske, then chief of the Seattle Police Department as “Drug Czar,” gave many people hope given Seattle’s emphasis on harm reduction policies instead of prosecution for drug offenses. In fact, one of Kerlikowske’s first acts as Drug Czar was to call an end to the term “War on Drugs.”
How people change. Today the New York Times has a story on how the Obama administration has deployed D.E.A. commando-style squads to Central America and the Caribbean to fight drugs cartels. These units were first created in the Bush administration to fight drug traffickers in Afghanistan linked with the Taliban. But in what is definitely an escalation of U.S. involvement in the region, the Obama administration has deployed these commandos 15 times to countries such as Guatemala, Honduras, Belize, Dominican Republic, and Haiti.
As the New York Times piece rightly points out, the deployment of D.E.A. squads in Central America and the Caribbean is “blurring the line between law enforcement and military activities, fusing elements of the ‘war on drugs’ with the ‘war on terrorism.’ So much for calling an end to “the war on drugs.” If anything, this development shows that President Obama is an enthusiastic drug warrior.
Some of these governments actually welcome greater U.S. involvement in fighting the increasingly vicious drug cartels. After all, they have even less institutional capacity than Mexico to fight these powerful criminal organizations. However, as professor Bruce Bagley of the University of Miami points out, the strategy could backfire:
“It could lead to a nationalist backlash in the countries involved. If an American is killed, the administration and the D.E.A. could get mired in Congressional oversight hearings. Taking out kingpins could fragment the organization and lead to more violence. And it won’t permanently stop trafficking unless a country also has capable institutions, which often don’t exist in Central America.”
Professor Bagley will be speaking about the effects of the war on drugs in Central America at our conference, “Ending the Global War on Drugs,” which will take place next Tuesday November 15 here in Washington. You can register to attend the event here.
Who’s Winning the Race to Fiscal Destruction: Europe or the United States?
Even though the unwashed masses decided that I didn’t win my stimulus debate in New York City, I continue my fight for the hearts and minds of the American people.
I’m now taking part in a debate for U.S. News & World Report on “Who Is Handling Its Debt Crisis Better: United States or Europe?”
This was a tough question. I asked the organizer whether I could vote none of the above, but I was told I had to pick an option.
As you can see, I said the United States was doing a better job – but only by default.
Our long-run outlook is grim, but at least we still have time to reform the entitlement programs and save America… The only major difference is that European nations are farther down the path to fiscal collapse. The welfare state was adopted earlier in Europe and government spending among euro nations now consumes a staggering 49 percent of economic output. This heavy fiscal burden, especially when combined with onerous tax systems, helps explain why growth is anemic. …the United States still can turn things around. Greece, Italy, and other welfare states have probably passed the point of no return, but it’s still possible for American lawmakers to fix the entitlement crisis by turning Medicaid over to the states , modernizing Medicare into a premium-support system, and transitioning to a system of personal retirement accounts for younger workers. If those reforms don’t take place, the consequences won’t be pleasant. To be blunt, there won’t be an IMF to bail out the United States.
For all intents and purposes, I contend that America can be saved if something like the Ryan budget is approved.
You can vote on this page on whether you like or dislike what I said, as well as what the other participants said.
Ilya Somin Debates ObamaCare’s Individual Mandate at New England Journal of Medicine
In this video by the New England Journal of Medicine, Cato adjunct scholar and George Mason University law professor Ilya Somin debates ObamaCare‘s individual mandate with Jack Balkin, a professor of constitutional law and the First Amendment at Yale Law School. Transcript here.
You’ve Got the Power; Now Use It
In the Washington Post, Dana Milbank urges President Obama to follow President Kennedy’s lead and use the power of the federal government to intimidate business:
Roger Blough, the U.S. Steel president, . . . defied Kennedy in 1961 by raising prices. “You have made a terrible mistake,” Kennedy told him. Subpoenas flew, FBI agents marched into steel executives’ offices, and Kennedy spoke about IRS agents examining “hotel bills and nightclub expenses [that] would be hard to get by the weekly wives’ bridge group out at the country club.”
Yes, that’s a great vision: a president using the far more powerful and far-reaching federal government of today to force every business, every union, every nonprofit in the country to fall in line. Is that really what journalists would like to see — a president deploying subpoenas, FBI agents, and IRS agents to effect political gain? This is just one of the problems with giving any government such powers.
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