Housing Bubbles: America vs. Japan

The Economist compares Japan's real estate bubble with America's:

AS FALLING house prices and tightening credit squeeze America’s economy, some worry that the country may suffer a decade of stagnation, as Japan did after its bubble burst in the early 1990s. Japan’s property bubble was also fuelled by cheap money and financial liberalisation and—just as in America—most people assumed that property prices could not fall nationally. When they did, borrowers defaulted and banks cut their lending. The result was a decade with average growth of less than 1%.

Most dismiss the idea that America could suffer the same fate as Japan, but some of the differences are overstated. For example, some claim that Japan’s bubble was much bigger than America’s. Yet average house prices nationwide rose by 90% in America between 2000 and 2006, compared with a gain of 51% in Japan between 1985 and early 1991, when Japanese home prices peaked. ... Japanese home prices have since fallen by just over 40%. American prices are already down by 20%, and many economists reckon they could fall by another 10% or more.

What about commercial property? Again, average prices rose by less in Japan (80%) than in America (90%) over those same periods. Thus Japan’s property boom was, if anything, smaller than America’s. Japan also had a stockmarket bubble, which burst a year earlier than that in property. This hurt banks, because they counted part of their equity holdings in other firms as capital. But its impact on households was modest, because only 30% of the population held shares, compared with over half of Americans. ...

John Makin, at the American Enterprise Institute, a think-tank, argues that monetary and fiscal relief were necessary but not sufficient to revive Japan’s economy. The missing ingredient was a clean-up of the banking system, on which Japanese firms were more dependent than their American counterparts. ...

One advantage over Japan, says Mr Jerram, is that America is spreading the costs of its housing bust across other countries. ...

By learning from Japan’s mistakes, America can avoid a dismal decade. However ... experience in other countries shows that serious asset-price busts often lead to economic downturns lasting several years. Only a wild optimist would believe that the worst is over in America.

The worst is over in America. ;-)

More Banks in Danger of Failure

CNN Money reports that the FDIC's list of troubled banks is still growing and expected to keep growing in the future.

The number of troubled banks on the government's watch list grew dramatically last quarter.

The Federal Deposit Insurance Corp. reported Tuesday that the number of firms on its so-called problem bank list grew to 117 during the second quarter — its highest level since the middle of 2003. There were 90 banks on the problem list in the first quarter.

FDIC Chairman Sheila Bair expressed little surprise at the increase and warned that the number would grow.

"More banks will come on the list as credit problems worsen and assets of problem institutions will continue to rise," said Bair in a press conference.

The number of troubled institutions has moved steadily higher this year - nearly doubling from 61 at the same time a year ago - as banks across the country struggle to cope with the fallout in the housing market and rising loan losses.

Income-based affirmative action

Former U.S. Labor Secretary Robert Reich advocates income-based affirmative action. I agree with his suggestion:

Here's an idea Democrats probably won't endorse but should: Affirmative action based on family income.

The latest data from the Census tell us that inequality keeps growing. Most American families are now earning less in real terms than they did in 2000. More are in poverty. Meanwhile, the super-rich are taking home a larger slice of the economic pie than they have in 80 years.

At the same time, it's become harder for lower-income people to move upward. With wider inequality, the distance poor kids — whatever their color — has to climb to reach the upper-middle class is much longer. And the loss of millions of manufacturing jobs has removed many rungs in the middle of the income ladder, making that climb even harder.

In the new economy, education and connections mean more. Increasingly, lower-income people without adequate education and connections are competing for a smaller and smaller slice of the economic pie.

If there was ever a good time to offer affirmative action based on family income — giving kids from lower income families extra consideration in college admissions, for example — it's now.

Despite the fact that one of the great social achievements of the last quarter century is the emergence of a black middle and professional class, people of color are still over-represented among the poor and working class. The advantage of income-based affirmative action is it would address many of the same issues as race-based affirmative action, but it would also address the needs of low-income whites.

And income-based affirmative action would not create tensions between lower-income whites who don't benefit from race-based affirmative action and blacks who do. Demagogues would have a harder time using race to stoke the fires of economic resentment.

Finally, income-based affirmative action would lead to more economic diversity on our college campuses. And more economic diversity is a key to reversing America's trend toward widening inequality.

Income-based affirmative action makes sense. Democrats, as well as Republicans, should consider it.

Investors Dump Fannie Mae and Freddie Mac Stock

From CNBC:

Investors dumped the stocks of Fannie Mae and Freddie Mac after Barron's reported the increasing likelihood of a U.S. Treasury bailout that would approach nationalization of the two housing finance titans.

The weekly financial newspaper said such a move could wipe out existing holders of the largest U.S. home funding companies' common stock.

Preferred shareholders and even holders of the two government-sponsored entities' $19 billion of subordinated debt would also suffer losses.

Shares of Fannie and Freddie, the two providers of home mortgage funding, fell more than 16 percent and some of their bonds sharply underperformed Treasuries.

Welcome to the American police state

From The Washington Post:

The Justice Department has proposed a new domestic spying measure that would make it easier for state and local police to collect intelligence about Americans, share the sensitive data with federal agencies and retain it for at least 10 years.

The proposed changes would revise the federal government's rules for police intelligence-gathering for the first time since 1993 and would apply to any of the nation's 18,000 state and local police agencies that receive roughly $1.6 billion each year in federal grants.

Quietly unveiled late last month, the proposal is part of a flurry of domestic intelligence changes issued and planned by the Bush administration in its waning months. They include a recent executive order that guides the reorganization of federal spy agencies and a pending Justice Department overhaul of FBI procedures for gathering intelligence and investigating terrorism cases within U.S. borders.

Taken together, critics in Congress and elsewhere say, the moves are intended to lock in policies for Bush's successor and to enshrine controversial post-Sept. 11 approaches that some say have fed the greatest expansion of executive authority since the Watergate era.

The truth about biological weapons

From Stratfor:

While there has been much consternation and alarm-raising over the potential for widespread proliferation of biological weapons and the possible use of such weapons on a massive scale, there are significant constraints on such designs. The current dearth of substantial biological weapons programs and arsenals by governments worldwide, and the even smaller number of cases in which systems were actually used, seems to belie — or at least bring into question — the intense concern about such programs.

While we would like to believe that countries such as the United States, the United Kingdom and Russia have halted their biological warfare programs for some noble ideological or humanitarian reason, we simply can’t. If biological weapons were in practice as effective as some would lead us to believe, these states would surely maintain stockpiles of them, just as they have maintained their nuclear weapons programs. Biological weapons programs were abandoned because they proved to be not as effective as advertised and because conventional munitions proved to provide more bang for the buck.

In some ways, the psychological fear of a “super weapon” — undetectable, microscopic, easily delivered and extremely deadly — shapes assessment of the threat, more so than an objective understanding of actual capability and intent (not to mention the extreme difficulties of ever creating some sort of a super bug). Conventional weapons systems, and unconventional tactics, continue to be the most cost-effective and proven methods of warfare, whether between state actors or between state and nonstate actors. Nuclear weapons have also been shown to have true weapons of mass destruction power.

To help keep the cost-benefit calculation of a biological warfare program in perspective, consider that Seung-Hui Cho, the man who committed the shooting at Virginia Tech, killed 32 people — more than six times as many as were killed by the 2001 anthrax letters. John Mohammed, the so-called “D.C. Sniper,” was able to cause a considerable amount of panic and kill twice as many people (10) by simply purchasing and using one assault rifle. Compare Mohammed’s effort and expenses to that of the Aum Shinrikyo anthrax program that took years of work by a huge team and millions of dollars to develop but infected no one.

Now, just because biological weapons are not all they are cracked up to be does not mean that efforts to undermine the biological warfare plans and efforts of militant groups such as al Qaeda should not continue or that programs to detect such agents or develop more effective treatments and vaccines should be halted. Even though an anthrax attack probably will not kill huge numbers of people, as we saw in the case of the anthrax letters, such an attack can be quite disruptive. Cleaning up after such an attack is expensive and takes considerable time and effort. Like a dirty bomb, an anthrax attack will more likely serve as a weapon of mass disruption and not a weapon of mass destruction.

Due to the disruption and the potential for some deaths as a result of an anthrax attack, the threat against the United States does remain a significant concern. However, the threat it represents is not as great as that of conventional attacks using firearms and explosives against soft targets, and it certainly does not rise anywhere near the level of a threat posed by a terrorist attack using a nuclear weapon.

Homeland security resources are very limited and have been shrinking as we move further from 9/11 and as other items begin to take precedence in the federal budget. This means that an array of different programs is being forced to scramble for an ever-shrinking piece of the funding pie. In such an environment, it is often a temptation to overstate the threat. Such overstatements are harmful because they can sometimes prevent a rational distribution of resources and prevent resources from being allocated to where they are needed most.

Hat tip: Bruce Schneier

Banks Taking Bigger Losses on Foreclosures

From The Wall Street Journal:

Stuck with a growing glut of foreclosed houses, banks and investors are shedding them at increasingly steep losses, potentially adding to the banking industry's red ink this year.

Banks are selling foreclosed homes in some cases for less than half the price they fetched two or three years ago. The cuts are coming as the U.S. banking sector, slogging through its worst crisis in decades, bites the bullet out of fear that prices will keep falling. ...

The steep losses on sales of foreclosed homes are painful for banks and investors in the short run but should help clear the backlog. That would allow for an eventual recovery of the housing market and clean up the banks' balance sheets. ...

Banks and investors have grown more leery of the rising costs of holding onto vacant homes. Along with such expenses as insurance, lawn care and maintenance, banks are being hit with higher costs for complying with local regulations applying to vacant homes. ...

The pain may get worse before it starts to ease. A recent report from Barclays Capital estimates that there are 721,000 bank-owned homes nationwide, up from 112,000 two years ago. Barclays expects the total to rise 60% more before peaking in late 2009.

Financial institutions are acquiring homes through foreclosure much faster than they can sell them. Fannie Mae, a government-sponsored mortgage investor, disclosed last week that it acquired 44,071 homes through foreclosure during this year's first half but sold only 23,627, leaving a balance of 54,173 as of June 30.

Fannie said it is opening field offices in California and Florida to try to speed sales of such homes and is evaluating offers from unidentified parties interested in "bulk" purchases. ...

Local governments are adding to the pressure on banks to sell foreclosed homes faster. Providence, R.I., recently imposed a property-tax surcharge on vacant properties to discourage banks and others from leaving them empty for long periods. Many cities now require banks to register the vacant homes they own and pay registration fees ranging from about $50 to $1,000.

Former Treasury Secretary on Housing Outlook

Former U.S. Treasury Secretary Larry Summers on housing:

Several sources of evidence suggest that house prices will fall for some time to come, perhaps by 10 per cent or more. Big further declines would be necessary to restore their traditional level relative to rents, incomes or the price of other goods. There are growing signs that rates of default and foreclosure will rise considerably even well outside the subprime sector.

The Democracy in America Blog Bashes Martin Feldstein

In response to Martin Feldstein's criticism of the tax rebate checks, which I posted yesterday, the Democracy in America blog rips Feldstein a new one:

MARTIN FELDSTEIN wrote back in December of 2007 that a fiscal stimulus was needed, and that a good way to design said stimulus was in the form of uniform tax rebates. For once, Congress did just what an economist wanted it to do, introducing a tax rebate stimulus plan that sent cheques to millions of households in the second quarter of this year. Naturally Mr Feldstein is appreciative, no?

No. In today's Wall Street Journal, Mr Feldstein writes that of course the stimulus didn't work, and what's more, any old fool should have known it wouldn't. I believe this is what is known as a flip-flop.

To make things worse, when Feldstein testified before Congress advocating a tax rebate, he spoke out against policies which are known to be effective economic stimuli—namely more food stamps and unemployment benefits.

A short-term economic stimulus works by encouraging people to go out and spend money when the economy is weak. Therefore, you want to give money to people who will go out and spend it, rather than save it. It is well-known that the poor spend a larger percentage of their income than the middle class and wealthy. Giving money to the poor and unemployed is thus a much more effective economic stimulus than giving out money to everyone. This is not an issue of fairness or helping those in need. Instead, it is simply about what is economically effective as a short-term stimulus.

While encouraging people to spend money is a good short-term economic stimulus, encouraging people to save is better for long-term economic growth. It's a trade-off. Ideally, consumers should be encouraged to spend money when the economy is weak and save money when the economy is strong. Their natural inclination, however, is to do the opposite. This causes the boom-bust economic cycle.

The Tax Rebate Checks Were a Failure

I was opposed to the tax rebate checks as an economic stimulus, because economic history had shown that they failed the two other times they had been used (once under W in 2001 and once under either Nixon or Ford—I can't remember which). Now it appears that the data is in. Harvard economist Martin Feldstein says the tax rebates were a failure:

Recent government statistics show that only between 10% and 20% of the rebate dollars were spent. The rebates added nearly $80 billion to the permanent national debt but less than $20 billion to consumer spending. This experience confirms earlier studies showing that one-time tax rebates are not a cost-effective way to increase economic activity.