How to Live Beyond Your Means

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1. The WaPo reports,

Today, they struggle under nearly $1 million in debt that they will never be able to repay on the 3,292-square-foot, six-bedroom, red-brick Colonial they bought for $617,055 in 2005. The Boatengs have not made a mortgage payment in 2,322 days — more than six years — according to their most recent mortgage statement. Their plight illustrates how some of the people swallowed up by the easy credit era of the previous decade have yet to reemerge years later.

Living rent-free in a $600,000 house is a “plight” only in the sense that at some point you may have to stop.

2. John Cochrane relays,

80% of Greek debt is now in the hands of “foreign official.” Now you know why nobody is worrying about “contagion” anymore. The negotiation is entirely which government will pay.

I must be really old-fashioned or something. But paying taxes so that Greek governments can live beyond their means or that people can live in houses twice the size of mine rent-free is not really my idea of “the things we all do together.”

PG County Foreclosure Story Focuses on the N-word

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This WaPo story is long, but nonetheless incomplete.

Using court and land records, The Post analyzed 173 home purchases in Fairwood that wound up in foreclosure between 2006 and 2008.

In 43 of those home purchases, borrowers financed 100 percent of the cost of the home with loans that had high interest rates and reset periods within three years. The loans were of the type that Angelo Mozilo, the CEO of defunct subprime lending powerhouse Countrywide Financial, had called “toxic” because they offered such onerous terms. He warned his own company in internal e-mails that the loans were “the most dangerous product in existence.”

Nearly all the remaining loans The Post examined contained features associated with high default rates, such as low or no down payments, interest-only payment periods and higher rates than prime loans.

Only seven out of the 173 defaulters received the most favorable lending terms, known as conventional 30-year fixed interest rate loans. These “prime” loans are the least likely to fail, experts agree.

The neighborhood is described as primarily African-American, with a median income over $170,000.

Some questions that I have:

1. Why were so many loans made with zero down payment? If the median family income is that high, should there not have been higher down payments?

2. If the borrowers put nothing down to begin with, then foreclosure cost them nothing in terms of lost equity. Presumably, if they were affluent before, they are still affluent now. If not, why not?

3. Did anyone benefit from making these loans? The companies that ended up owning the mortgages took huge losses (taxpayers also may have been involved in some way, through bailouts). Companies that originated subprime loans but did not hold them (the “originate to distribute model”) picked up some small fees, but my guess is that they competed away a lot of profits by incurring marketing costs, and in any case enough of them went out of business that you can hardly envy their franchises.

4. When did borrowers start to fall behind on their payments? If it was within a year of buying the home, then you can be sure that even if the borrowers had gotten prime, thirty-year fixed rate loans they still would have defaulted.

Remember, it was the WaPo that said on January 1st that “narrative” is “out” and “facts” are “in.” Their story is instead all about narrative (the N-word, as I call it), and I think it could use more facts.

Topic of the Week: Secession

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First, on this week’s econtalk, Russ Roberts and Alex Tabarrok discuss private cities. Many interesting issues come up. Among them:

1. Alex endorses the idea of a region in which several governments compete to offer public services.

2. Whether you have a private city or a government-run city, it is possible to become imprisoned by legacy factors. Decisions that were undertaken years ago create rents that people want to protect, even if that means that decisions made today are very far from optimal. Alex says that some of New York’s features were planned nearly two centuries ago, when it was largely uninhabited. Today, it is one of the most difficult cities in which to build new housing, because of all the existing interests that have created hurdles for developers to cross.

3. They talk about the phenomenon of private government via neighborhood associations. This is a way in which small groups of homeowners partially secede from larger governmental units. I expect to see this phenomenon become increasingly important.

Next, we have a WaPo article focused on a conference of the Ludwig von Mises Institute at which Ron Paul and at least one of his aides promoted the idea of secession. I feel compelled to use this excerpt:

“If I were Ron, and my son were running for president, and we were in the same situation, I would shut up,” said Walter Block, an economics professor at Loyola University in New Orleans. He rated Ron Paul a 98 on his personal scale of libertarianism and Rand Paul a 70, and said he supported them both.

Here is another:

the speakers said that there were other ways to “secede,” beyond convincing your state to go it alone. Individual people could “secede” by doing such things as home-schooling their children, not going to mainstream colleges, owning gold and foreign currencies, and stockpiling food, fuel, firearms and cash (“seceding from dependency,” that was called).

Back in 1968, there was a schism on the left. Some wanted to “work within the system,” e.g., by supporting the campaigns of Gene McCarthy or Robert Kennedy for the Democratic Party nomination. Others wanted to aim for revolution or escape. For example, there were the Students for a Democratic Society and various offshoots. For those of you too young to remember, think of them as Occupy Wall Street. I think that SDS appeared less pathetic than OWS, but perhaps that reflects my own evolution.

Anyway, I think that there is a similar schism among libertarians. On the one hand, you have the bleeding hearts, who just want to smoke a little weed and redistribute income more efficiently. On the other hand, you have the folks who dream of secession.

I am in favor of increasing opportunities for secession. But meanwhile, I would rather see the established system reformed in a libertarian direction, rather than root for its collapse. If it collapses, I don’t think you get a libertarian utopia. I think you get Venezuela or Greece.

Yanis Varoufakis talks with Russ Roberts

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He says,

You and I would not be talking about Greece today if Greece in 1999 by some miracle of politics and rationality had stayed out of the Eurozone. That is the reason why it is such a disaster; and it’s why it’s so significant in the world economy and pipsqueak Greece has been dominating for three years. The headlines of [?] which is a sign that something is definitely wrong with the international economy. And the reason for that was that Greece was in the Eurozone. The tragedy of course is once you are in, you can’t get out. You are trapped. And so on and so forth.

The podcast is a year old. It is of interest now because he is now finance minister of Greece.

Tax the Big Non-profits?

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From the WSJ.

A recent budget plan by Republican Gov. Paul LePage calling for an overhaul of individual, corporate and sales taxes also would make Maine the first state in the nation to require colleges, hospitals and other large charities to go on the property-tax rolls in their municipalities.

I think this is a good idea. What is happening is that these New Commanding Heights enterprises are taking over the nation’s largest cities. That reflects in part the tax distortion.

If you have never encountered my skeptical take on non-profits, you should read this. Even if you are already familiar with my views, it’s an essay worth re-reading.

Wealth and Inequality

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1. Branko Milanovic:

There are very good reasons to study distribution of net wealth, globally and within countries. Even for those people in the rich world who are “anomalously” placed among the wealth-poor and who may lead nice lives despite owning nothing, a shock in the form of a medical emergency (unless there is public health care), or loss of job may have catastrophic consequences. There is just no wealth to fall back on to tide you over the bad times. A decline in the value of the main asset (housing) had similar consequences for many people in the US during the recent crisis. Finally, wealth, especially when we look at the rich, is the source of both economic and political power. It is not people who are running huge, and hard to repay, credit card debts, who are likely to be “players” by contributing to the political campaigns, influencing policy and setting legislative agenda.

It was hard to excerpt. Read the whole thing. Pointer from Mark Thoma.

2. The Washington Post:

Just over a decade ago, homeownership — the single biggest engine of wealth creation for most Americans — reached a historic high for African Americans, nearly 50 percent. Now the black homeownership rate has dipped under 43 percent, and the homeownership gap separating blacks and whites is at levels not seen in a century, according to Boston University researcher Robert A. Margo.

…For a substantial number of African Americans who remain homeowners, their properties only hurt their net worth. According to the Fed survey, 1 in 7 owed more on their mortgages than their homes were worth in 2013, a sharp increase from 2010.

By comparison, just 1 in 18 white homeowners was underwater, an improvement from 2010. Also, African Americans own fewer businesses, stocks and other equities than whites — assets that have all recovered sharply since the recession.

Some of us dare to suggest that the government should encourage saving, rather than home borrowership. The housing lobby drowns us out.

Andrew Gelman is Too Glib

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Not in general, but in this post, where he writes,

I’d like to flip it around and say: If we see something statistically significant (in a non-preregistered study), we can’t say much, because garden of forking paths. But if a comparison is not statistically significant, we’ve learned that the noise is too large to distinguish any signal, and that can be important.

Pointer from Mark Thoma. My thoughts:

1. Just as an aside, economists are sometimes (often?0 guilty of treating absence of evidence as evidence of absence. For example, if you fail to reject the efficient markets hypothesis, can you treat that as evidence in favor of the EMH? Many have. Similarly, when Bob Hall could not reject the random walk model of consumer spending, he said that this was evidence in favor of rational expectations and consumption smoothing.

2. I think that a simpler way to make Gelman’s point would be to say that passing a statistical significance test is a necessary but not a sufficient condition for declaring the evidence to be persuasive. In particular, one must also address the “selection bias” problem, which is that results that pass significance tests are more likely to be written up and published than results that fail to do so.

What’s In Alexis Tsipras’ Wallet?

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He is soon to be the Greek premier. The Independent reports,

A Syriza government would have to rely on taxes but tax revenues are down as people wait to see if taxes will be reduced by the new government. This means that Greece may only have the money – though this is disputed by Syriza leaders – until the end of February to pay state employees and pensions and service the debt.

As a far leftist, we can presume he wants to spend lots of other people’s money. Where can he get it?

1. Greek taxpayers. Greece actually was supposed to run a primary surplus this year, meaning that they would only have to borrow to pay interest on debt, not to fund ordinary spending. But apparently the Greek taxpayers do not see it that way. UPDATE: Tony Yates points out a problem even if you have a primary surplus and decide to blow off the interest on your debt. (pointer from Mark Thoma),

the Greek government does not have the funds to stand behind its own banks. They would be left insolvent by a Greek default [economically, they are already, really]. A run on Greek banks, either prompted by default or the threat of it, could not be stemmed by a credible guarantee of deposits.

2. Non-bank investors willing to invest in Greek bonds. Considering that Tsipras does not sound particularly eager to pay off such investors, they might be a bit shy.

3. Banks willing to invest in Greek bonds, since those bonds carry zero risk (according to capital regulations). Still, I can imagine that bank managers are a tad worried that the regulators who designated sovereign debt as risk-free don’t actually have any money with which to back that up.

4. The European Central Bank, which just announced a big “quantitative easing” program, so it needs stuff to buy. The question is how eager Germany and other European countries are to be Tsipras’ sugar daddies.

Pointers in (1) and (4) from Tyler Cowen. Possible outcomes, in order from highest probability to lowest:

1. Eurocrats devise a new elaborate shell game under which they funnel money from other countries to Tsipras while pretending not to do so, hoping that ordinary voters in those countries will not notice, or that even if people notice they will be powerless to do anything about it.

2. The European central bank goes ahead and buys bonds from Tsipras, because the alternative is scarier.

3. Tsipras ends up implementing austerity, because his wallet is empty.

4. Tsipras ends up printing a new Greek currency, as Greece exits the Euro.

Michael Shermer Scrambles the Axes

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You can listen to his talk at Cato.

In some respects, he sounds conservative. He seems to me to take a civilization vs. barbarism view of recent controversies regarding police, in that he believes that in a civilized society citizens must not threaten police. He insists that moral significance attaches to people as individuals, not as members of oppressed classes.

However, he breaks with conservatives in that he views religion as barbaric. He insists instead on science and reason. And in general, I think he would be happier earning the approval of progressives than earning that of conservatives. His main theme, that human beings are making moral progress (he speaks of a moral Flynn Effect), is one that sits more easily with progressives than with conservatives.

To the extent that he is libertarian, he sounds more like Rand than like Rothbard. He believes that the institution of the state is needed to keep individuals from using violence to solve disputes.

On economic issues, he offered thumbs-up for free trade and economic growth. But he said nothing about what I see as the most fundamental issue in economic philosophy today: how much can the emergent order of a little-regulated economy be improved by technocratic management? Clearly there are those who think that the answer is very much, while there are those of us who disagree. I suspect that Shermer is not on the libertarian side of this issue.