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Europe Has Done Enough Harm to the IMF
With Dominique Strauss-Kahn (DSK to his friends and lovers) having finally resigned as head of the International Monetary Fund, the race has begun among those in Europe who wish to succeed him. First, the real debate should be over how soon can we shut down the IMF, not over who should be reaping the spoils. Its original purpose under Bretton Woods became irrelevant decades ago. And while it found a new role as bailout fund for international banks, this new role is not one we should be supporting.
Given we are probably stuck with the IMF, the question becomes who should run it. Europeans are now arguing that the European sovereign debt crisis displays the need for Europe to remain in control. In fact I believe it demonstrates the opposite: European politicians have time and time again proven they cannot be trusted with a large pot of taxpayer’s money, whether it is the Greek government or the IMF. To put another European in charge is the financial market equivalent of letting the alcoholic guard the liquor cabinet. Any European politician will likely hand out funds without any real strings attached. Just as a European-led IMF was all too happy to force restructuring on developing countries (rather than allow Western bondholders to take a loss), real reductions in government spending should be required of any country accepting IMF assistance. Else the losses should be imposed on those who gambled: the bondholders. If we fear such losses will push European banks into failure, then deal with those failures directly, honestly and transparently. Citizens around the world are tired of bank bailouts, backdoor or otherwise. As long as the political elite remained deaf to public objections to the bailouts, we should not entrust these same politicians with the IMF.
Is Housing Holding Back Inflation?
Today the Bureau of Labor Statistics released the consumer price index (CPI) numbers for April, which generally gives us the best picture of inflation. The headline number is that between April 2010 and April 2011, consumer prices increased 3.2 percent, as measured by the CPI. Obviously this is well above 2 percent, the number Ben Bernanke defines as “price stability.” Setting aside the reasonableness of that definition, there is definitely some mild inflation in the economy.
Also of interest in the April numbers is that if you subtract housing, which makes up over 40% of the weight of the CPI, then prices increased 4.2 percent — twice Bernanke’s measure of stability. What has always been problematic of the housing component is that its largest piece is an estimate of what owners would pay themselves if they rented their own residence. This estimate makes up about a fourth of the CPI. As the chart below demonstrates, for much of 2010, the direction in this number was actually negative, which held down CPI over the last year. The current annualized figure for owner’s rent is 0.9 from April 2010 to April 2011. Oddly enough, this is below the actual increase in rents, which was 1.3. For most homeowners, the real cost of housing — their mortgage payment — has likely been flat, not decreasing. So whatever benefit there has been to declining housing costs, most consumers are unlikely to feel any benefit from those declines, if they are actually real.
While the primary driver of CPI has been energy costs, food prices have also garnered considerable attention. Excluding food from the CPI does not change the headline number, although this is due to the fact that the cost of eating out has been rising considerably slower than the cost of eating at home. So as along as you’ve been eating out every night, you’ve apparently been fine. This touches upon what is one of the less recognized features of current inflation trends: the regressive nature of these prices increases. If you rent, then you’ve seen costs increase more than if you own. If you mostly eat at home, then you’ve seen prices increase more than if you dine out a lot. If you have a lot of leisure time, the you’ve gained by the decrease in reaction prices. While I don’t think one’s position on inflation should be driven purely by distributional concerns, the fact that working middle-income households have been hit harder by recent inflation trends than higher-income households should cut against the claims that inflation is somehow good for the poor or working class.
Are Higher House Prices Better for the Real Estate Industry?
I’ve long suspected that the primary reason much of the residential real estate industry supports subsidies such as Fannie Mae or the mortgage interest deduction is in the belief that such subsidies increase house prices. And when your income is commission based, higher prices do indeed sound pretty good from the perspective of the industry. Of course, we also hear that the industry supports these subsidies because they want everyone to be a homeowner, wave the flag and have plenty of apple pie. Yes, those seemingly industry subsidies are really for all of us. Perhaps the best one I heard recently was that homeownership subsidies promoted self-reliance. Here I was thinking subsidies are the opposite of self-reliance. Silly me.
But if the price of a good increases, especially relative to income, it can increasingly become unaffordable, with the result that few sales take place. No sales, no commission income. I think even the industry folks would agree something like a $2 million median house price, given current incomes, would be bad for business. So what is the impact of high prices, relative to income, on market turnover?
The chart below the jump presents a scatter diagram of the ratio of median house price to median household income by annual home sales as a percent of the occupied housing stock by metro area. 490 U.S. cities represented from the 2005 American Community Survey, conducted by the Census Bureau.
Some Thoughts on Federal Rental Housing Assistance
Last week I participated on a panel on federal rental housing policy, organized by Harvard’s Joint Center for Housing Studies in conjunction with the release of their new report on conditions in the rental market. In their defense, the report does attempt to avoid offering policy prescriptions. But the report does come pretty close to suggesting that we spend more on federal rental housing assistance. In the post-housing bubble environment, many, myself included, have dared suggest that there’s nothing wrong with someone being a renter, and that maybe we pushed too many into homeownership.
But saying we overdid homeowneship is not the same as saying we ignored rental. In fact the federal government has spent massive amounts on rental housing, yet according to the new Harvard report, rent burdens have gotten worse over the last 50 years not better. While the report doesn’t take this step, I think we have to ask: if you’ve spent hundresds of billions of dollars on an issue and it then gets worse, maybe there’s something wrong with what you are doing?
Perhaps my friends on the Left (and/or in the real estate industry) don’t believe we’ve spend all that much on rental housing. Consider these facts: in nominal terms the sum of all money spent by HUD, which is almost exclusively rental or “community development,” has been close to a trillion dollars. By my estimate (based upon the American Housing Survey and the Residential Finance Survey) the current value of all rental housing in the US is about $3.6 trillion. So the federal taxpayer has paid enough to outright buy almost a third of all rental housing.
Also consider that if we took the approximately $50 billion we now annually spend on rental housing, we could pay 100% of the rent of the almost 4 million households currently paying the lowest rents. This translates to being able to pay all the rent for every family earning about $22,000 or less. If we choose to only pay 50% of their rent, we could serve another 2.5 million.
My point here is not to say we should spend all this money, for I still don’t see this as the proper role of the federal government; the point is that we already spend a huge amount. Now why might all this money not have made a huge difference in helping renters? Maybe because most of it gets eaten up by the providers. For instance a recent paper in Real Estate Economics estimates that only a third of the value of the Low Income Housing Tax Credit actually makes it to the renter in the form of lower rents. The remaining two-thirds goes to benefit the developers, owners and others who live off the process. So before we even think about spending more on federal rental assistance, how about making sure what we do spend actually goes to help the poor and not the special interests?
Can We Rely on Inflation Expectations?
The Wall Street Journal has pointed out that in his recent press conference Federal Reserve Chair Ben Bernanke used the words “inflation expectations” (or some variation) 21 times. His argument is that we need not worry about inflation because we will see it coming, and then the Fed will do something about it. Such an argument relies heavily on the ability of inflation expectations to predict inflation. Which of course raises the question, just how predictive are inflation expectations?
The graph below compares inflation, as measured by CPI, and inflation expectations, as measured by the University of Michigan consumer survey, the longest times series we have on inflation expectations.
Clearly the two move together. For instance, the correlation between current inflation and expectations is almost 1 (its 0.93), while the correlation between inflation and actual inflation a year later is slightly less at 0.81. The relationship declines as we move further into the future. So yes, consumer expectations appear a reasonable predictor of the direction of inflation. However, they don’t appear to be a great predictor of the magnitude or the frequency of changes. For instance, the standard deviation of actual inflation is about twice that of expected inflation. As one can easily see from the chart, expectations are quite sticky and rarely pick up the extremes. During the late 1970s and early 1980s, expectations did move up, but then never reached the heights actually experienced, nor did consumers ever actually expect deflation during the recent financial crisis (if we are going to base policy on expectations, we should at least be consistent about it).
For about the last decade we also have market based measures of inflation, based upon inflation-indexed bonds. The TIPS measure tends to be less correlated with actual inflation, but does a better job of capturing the extremes. Although interesting enough, TIPS was already predicting that deflation would be short-lived before we even experienced any deflation.
The point is that while expectations are useful for qualitatively purposes, they do not have a strong record of recording the extremes. Given that most of us expect some positive level of inflation, the real debate is over how much. In this regard, either survey or market-based expectations are likely to be both a lagging indicator and an under-estimate of actual inflation.
The Ben Bernanke Variety Hour
April 27th begins a new chapter in Federal Reserve history: the Fed joins other major central banks in having a press conference after its monetary policy meetings (the Federal Open Market Committee). Apparently the record lows in public support for the Fed, along with rising gas and food prices, have driven Bernanke to attempt to change the narrative. After all, his appearance on “60 Minutes” did wonders for the Fed’s reputation. I’m excited to hear even more about his childhood in Dillon, South Carolina or his time working at South of the Border. Maybe an enterprising reporter could ask how much menu prices at South of the Border have increased since Bernanke took over the Fed.
Perhaps you’ve noticed that I don’t have high expectations for his press conference. It is probably fair to say that no Federal Reserve Chair has had as much public exposure as Bernanke. Yet with all those public appearances, he has consistently managed to avoid any real discussion about the costs and benefits of the Fed’s actions. Are we likely to hear concern about food and gas prices, and how such are being driven by loose money? Probably not…just more on how increasing world demand is to blame. Just like it was the “global savings glut” that drove interest rates earlier this decade, it is always somebody else’s fault — never the Fed’s. They are capable of only good.
Hopefully Bernanke will at least avoid the Obama line that it is those “speculators” that are behind the increase in energy prices. After all, if we believe the governments of Europe, those evil speculators brought down Greece too.
As per usual, I truly hope I’m wrong here. Bernanke has a real opportunity to be honest and straightforward with the American public. We don’t need another lecture. We need to hear that the Fed isn’t a slave to some imaginary Phillips Curve or that we can’t have inflation with slack in the economy (where was Bernanke in the 1970s?). The real risk is that Bernanke uses the press conference to drown out the many voices of concern and dissent on the FOMC. Which, of course, would be a real irony given all of Bernanke’s talk about “democratizing” the Fed when he first became chair.
Do We Need China to Fund Our Mortgage Market?
Earlier this week I repeatedly heard the claim that if the federal government does not guarantee credit risk in the mortgage market, foreigners won’t buy U.S. mortgage-related debt. Before we test whether that claim is true, let’s first determine just how important are foreign investors in the U.S. mortgage market.
For the most part, foreign investors do not hold U.S. mortgages directly, but either hold Fannie and Freddie debt and mortgage-backed securities (MBS) or hold private-label MBS. As the private-label securities lack a government guarantee, we can ignore that segment of the market. The chart below depicts the percentage share of foreign ownership of these securities in recent years:
The chart illustrates that, at times (particularly around the peak of the recent housing bubble), foreign investors have been large providers of capital to the GSEs. In 2007, over 20% of GSE debt was held outside the United States, double the percentage from only a few years earlier. The increase was driven almost exclusively by purchases by foreign governments (mostly central banks for the purpose of currency manipulation). In 2007, this amounted to just over $1.5 trillion.
However, if we went back and looked at a year prior to the super-heated housing market — say 2003 — then this total is about $650 billion. Given that U.S. commercial banks now have about $1 trillion in cash sitting on their balance sheets, it appears that domestic sources could completely fund the U.S. mortgage market without any foreign funds.
Homeownership and Mortgage Debt
One of the rationales commonly given for massively subsidizing our mortgage market is that without such homeownership would be out of reach for many households. Such a rationale implies that more debt should be associated with more homeownership. (Let’s set aside the obvious, how are you actually an owner without any equity?)
But is that the case. The chart below compares the homeownership rate with the average debt-to-value ratio of U.S. households. (Data on debt-to-value is from the Fed’s Flow of Funds and homeownership is from the Census Bureau).
By 1960, the homeownership rate was already over 60%, yet debt-to-value was less than 30%, half of the current value. Even in 1990, when homeownership reached over 64%, debt-to-value was still under 40%. From 1990 until today, the percentage of mortgage debt to value increased by over 50%, all to gain a 2 percentage point increase in homeownership. So it seems the story of the last 20 years has been a massive increase in home debt with very little increase in actual homeownership rates. The converse should also hold: reducing homeowner leverage should have little, if any, impact on homeownership rates.
Federal Reserve to Hold Press Conferences
Today Federal Reserve Chair Ben Bernanke announced he would hold four annual press conferences, after select meetings of the Federal Open Market Committee. The first such meeting will be on April 27 and will be webcast.
While I generally haven’t been a fan of Bernanke’s policy decisions, many of his “process” decisions, such as holding these press conferences, have been moves in the right direction of greater Fed communication with the public. The Fed took some bold moves during and since the financial crisis — often without a word to the public. Indeed, it is interesting that this announcement comes only a few days after the Supreme Court refused to hear the appeal of the Bloomberg suit demanding Fed disclosure of banks assisted during the crisis.
It remains to be seen, however, if these press briefings provide any real substance or explanation of the Fed’s actions. After all, I don’t think Bernanke’s appearance on “60 Minutes” really changed anyone’s mind. But then again, the interview was fairly devoid of actual substance. For these future press briefings to have any real value, the reporters involved are going to have to ask tough, insightful questions, rather than the fluff Bernanke is used to.
Then perhaps the real problem with the Fed’s communication strategy is that it has been only one-way. By now we all know that Bernanke didn’t want to be the Fed chair that oversaw “Great Depression II,” or that he’s just a simple guy from Dillon, SC. But how about some sense that Bernanke is not just lecturing, but listening? Where’s the evidence that he understands the squeeze that rising food and gas prices put on the middle class? Where’s the evidence that he gets that the “Phillips Curve” isn’t real?
I am going to hold out for the best. Maybe these briefings will provide some substance where previous appearances have not.
Fannie, Freddie: Late to the Party?
Debates over the causes of the financial crisis sometimes center on whether Fannie Mae and Freddie Mac were “late to the party” in terms of subprime lending. As it relates to the recent crisis, I address this question elsewhere.
The GSEs and their apologists do claim to have been big contributors to one party: the expansion of homeownership in the United States. Yet the facts suggest otherwise.
The chart below compares the GSE’s market-share, in terms of home mortgage lending (as reported in the Fed’s Flow of Funds data), with the national homeownership rate (as reported in the Decennial Census).
SEC Employees Hard at Work during Financial Crisis
Thanks to Denver lawyer Kevin Evans, who filed the Freedom of Information Act Request, we now know that several employees of the Securities and Exchange Commission (SEC) might have missed the financial crisis because their eyes were glued to their computer screens watching porn.
The chart below shows the number of incidents, as reported by the SEC’s Inspector General. What caught my eye was that the number of porn-viewing incidents shows a massive spike in 2008, when the financial crisis was at its worst.
It should, of course, be noted that the overall level of incidents was small in number, so we shouldn’t draw too many conclusions about the SEC overall. We should, however, be concerned at at least one of these employees was being paid $222,418 a year. I might be able to accept someone getting paid $20,000 a year spending their work time watching porn, but not $222,418. But then at least this employee has an excuse for missing the financial crisis; we are still waiting to hear the excuse for the SEC’s non-porn viewing employees (perhaps they were too busy on Facebook to keep an eye on Wall Street).
The Mortgage Industry-Government Revolving Door
The Washington Post is reporting that current Federal Housing Administration (FHA) head David Stevens, who only last week announced he was leaving FHA, is going to be the new head of the Mortgage Bankers Association (MBA).
When Stevens was first nominated to head FHA, I have to admit I was concerned. FHA has a long history of prioritizing the interests of the mortgage industry over that of the taxpayer. And here was a guy right out of the real estate industry (former Freddie Mac exec). My expectations weren’t exactly high. Maybe because of that, I’ve been largely impressed. As FHA Commissioner, Stevens has taken eliminating fraud seriously, as well as avoiding a taxpayer bailout of FHA (so far).
All that said, it is hard to imagine that in under a week’s time, he interviewed with and was hired by the Mortgage Bankers Association. So while there’s no evidence that he was looking at an MBA job while carrying out his duties running FHA, there is certainly the appearance of such. The appropriate thing to do would be to leave FHA before getting a job with the very industry that FHA regulates and subsidizes.
Again I think Stevens has done a far better job at FHA than many of his predecessors, and I don’t believe he played a role in the financial crisis, but I do believe the cozy relationship between the mortgage industry and our federal government did play a huge role in the crisis.
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