Big Shitpile
mikethemadbiologist | October 1, 2009I know I've posted about the misuse of the concept of irrationality before, but a recent Robert Frank NY Times column is a ridiculous exercise in irrationality storytelling. Frank writes:
A second problematic assumption of standard economic models is that people are properly attentive to all relevant costs and benefits, even those that are uncertain, or that occur in the distant future. In fact, most people focus on penalties and rewards that are both immediate and certain. Delayed or uncertain payoffs often get short shrift.
Given the conditions under which human nervous systems evolved,…
mikethemadbiologist | September 3, 2009Or at least until the next bestest legal opinion comes along. In the NY Times, there's a story about Judge Arthur M. Schack of New York State Supreme Court who has the crazy notion a bank shouldn't be allowed to foreclose on someone's home unless it can prove that it actually holds the mortgage. Nuts, I tell ya! As one observer noted, "His rulings are hardly revolutionary; it's unusual only because we so rarely hold large corporations to the rules."
So, in the vast multitude of suck that has become the U.S. political system, occasionally someone does right by people who happen to not be…
mikethemadbiologist | August 17, 2009What's $24 billion of potential losses among friends? If you want to know what a zombie bank is, the foreclosure situation in California is textbook:
Later on they add, "The increase appears to be primarily due to the fact that lenders are willingly postponing foreclosure sales." Why postpone? Keep reading, and the answer pops out: "The average California foreclosure has a total loan balance of $425,134 on a home that is now worth $236,739."
If the bank sells these homes now, at these prices, the bank will have to book the difference between the loan balance and the home sales price as a…
mikethemadbiologist | August 14, 2009...shitty. I don't see how the economy will substantively improve without getting rid of the zombie banks--those banks that are insolvent, that have more debts than assets. Since they are unable to make loans, they're essentially non-functioning banks. The federal government for the first time since the banking crisis erupted has decided to make banks report on a quarterly basis how much their loan portfolios are actually worth. Not the original value of the loans, but how much the underlying properties could be sold for:
Check out the footnotes to Regions Financial Corp.'s latest…
mikethemadbiologist | July 16, 2009One of the goals of several of the federal interventions was to keep subprime loans high. If the prices for these loans dropped too much, then the banks holding these loans would be insolvent (loans are counted as assets under the assumption that they will be paid back)--the amount of money they owe to stockholders and bondholders, and other debt payments would be greater than their assets.
That's why I call the pile of ridiculous loans Big Shitpile: these loans, due to plunging property values leading to defaults (or walkaways), are only worth only a fraction of their face value--and far…
mikethemadbiologist | July 8, 2009I've written before (here) about the problems I have with the new trend in economics to misuse irrationality and to wrongly credit it for phenomena. So, a long-time reader sent along a Conor Clarke interview with Paul Samuelson, in which he discusses irrationality (boldface questions; italics mine):
Okay, what's the distinction there? I'm curious what you think about some recent developments in economics, some of the movements that are hot right now -- like behavioral economics, part of which wants to challenge the notion of humans as utility maximizing rational agents.
In my view behavioral…
mikethemadbiologist | June 19, 2009Recently, I described how absurd it is to get excited over the second derivative when it comes to unemployment. A decrease in the rate at which unemployment is increasing is hardly good news (it beats the alternative, but "green shoots", this is not). Now, we're hearing similar noises about housing starts (building of new houses): they're increasing, we must be doing better! Admittedly, this is a gain--the first derivative. But Paul Krugman, using a really nifty St. Louis Federal Reserve site, puts this in context:
Let me help, just in case you missed it:
A seventeen percent increase…
mikethemadbiologist | June 16, 2009...and the Mad Biologist told you so. A while back, I looked at median incomes and median housing prices and concluded that housing prices had to drop twenty to forty percent from their highs. I also thought that, given the ARM recasts due in 2010 and that too many in the U.S. are already over their heads in debt, it would be much closer to forty percent than twenty. Well, by way of Calculated Risk, we find that Fitch Ratings concurs:
The projected losses also reflect an assumption that from the first quarter of 2009, home prices will fall an additional 12.5% nationally and 36% in…
mikethemadbiologist | May 19, 2009Admittedly, you won't hear credit card companies call Congress' failure to cap credit card interest at 15% annually (which is what credit unions are forced to do) that, but, as Ian Welsh notes, that is exactly what Congress' inability to enact a cap means:
The Senate just stopped limits on credit card rates. Sometimes it takes a socialist to say the obvious:
"When banks are charging 30 percent interest rates, they are not making credit available," said Mr. Sanders, who noted credit unions are limited to 15 percent. "They are engaged in loan-sharking."
The banks have been given, loaned and…
mikethemadbiologist | May 9, 2009Between around 1999-2007, I never understood how so many people appeared to have so much money. Yes, some were actually rich and earned a lot of money, but I knew many people--too many people--who just didn't make that much money, but somehow were able to afford a home, payments on two nice cars, lots of nice clothes, and child care expenses. Then I ran across this piecever at the Irving Housing Blog, IrvineRenter describes the mentality that led to and fed upon the housing bubble:
...Southern Californians (with a little help from their own Big Brother, David Lereah, president of the…
mikethemadbiologist | May 3, 2009One of the disturbing trends over the last decade, give or take, has been how ethical behavior has become synonymous with "a conviction overturned on appeal." Just because something is legal, doesn't mean it's ethical. With that, I give you Matthew Yglesias (boldface mine; italics original):
They're not actually saying that what they did was right. Rather, they're saying that it was selfish but also legal. ...one is within one's rights, under certain circumstances, to insist on one's ability to inflict suffering on vast numbers of people in order to make more money for your rich self and…
mikethemadbiologist | April 18, 2009We hear a lot about 'too big to fail' and how future regulation should be designed, at least in the financial sector, to prevent growth to that size. Apparently, Treasury Secretary Geithner hasn't heard about this:
Even worse is Geithner's notion of designating certain banks as too big to fail and then subjecting them to more stringent capital requirements and a special tax that would be used to pay for the occasional government bailout. In practice, that approach is likely to create a competitive imbalance between the biggest banks and everyone else, while inviting the giants to find clever…
mikethemadbiologist | April 12, 2009Economist Dean Baker makes an excellent point about the supposed complexity of the housing crisis:
There are some very basic points here that everyone should understand. The details of any form of regulation will be "complicated." For example, the actual fire safety rules for schools are undoubtedly very complicated. How many of us could write up the appropriate safeguards to ensure that our children will be protected from fire risks as they study? Similarly, the safety rules that are necessary to ensure that our food is not contaminated would also require background that very few of us have…
mikethemadbiologist | April 9, 2009There's been a lot of discussion over Obama economic advisor Larry Summers' economic ties to Wall Street (7.2 million such ties in 2008 alone). What I don't get is why Obama sees the need to keep him around.
Yes, Summers is an asshole. He was an asshole at Harvard, and I don't see why he would have changed. Yes, he's a corrupt asshole, but we already knew he was getting paid millions by a hedge fund. But what I don't get why Obama considers him to be essential. Consider these speaking fees:
GIANT BAILOUT SECTOR
Goldman Sachs: $202,500 (two speeches)
Citigroup: $99,000 (two speeches)
JP…
mikethemadbiologist | April 4, 2009...I'm sure this will work out just fine:
The Obama administration is engineering its new bailout initiatives in a way that it believes will allow firms benefiting from the programs to avoid restrictions imposed by Congress, including limits on lavish executive pay, according to government officials.
Administration officials have concluded that this approach is vital for persuading firms to participate in programs funded by the $700 billion financial rescue package.
The administration believes it can sidestep the rules because, in many cases, it has decided not to provide federal aid directly…
mikethemadbiologist | March 30, 2009It's a trite saying to "follow the money", but, in the case of Senator Evan Bayh's (D-Goldman SachsIndiana) decision to oppose serious mortgage readjustments on foreclosed properties ("cramdowns"), it seems to fit. Here's the background on Bayh's opposition to cramdowns on foreclosures:
Senate debate on legislation that would allow bankruptcy judges to modify mortgage terms for troubled homeowners will be postponed until after the spring recess in April, according to a spokesman for Majority Leader Harry Reid, D-Nev...
Speaker Nancy Pelosi, D-Calif., initially was forced to pull the bill (HR…
mikethemadbiologist | March 29, 2009At this point, diversity in the Obama administration means you've never worked for Goldman Sachs. Meet the newest Obama nominee, Gary Gensler for head of the Commodity Futures Trading Commission (italics mine):
Gensler helped create this financial crisis when he was in the Treasury Department back in the Clinton era, when bipartisan cooperation with Wall Street lobbyists was all the rage. Sanders gets right to the point: "Mr. Gensler worked with Senator Phil Gramm and Alan Greenspan to exempt credit default swaps from regulation, which led to the collapse of AIG and has resulted in the…
mikethemadbiologist | March 28, 2009I've argued before that nationalizing financial institutions the way the Obama Administration has done is incredibly stupid. If you're going to nationalize chunks of the economy, get some people who are partial to doing so. Which brings me to this little story from the New Deal era:
...a special bonus New Deal version of how to deal with rude letters from corporate types--in this case, the chiefs of the New York Stock Exchange, asked by the SEC to reorganize in light of recent events.
... the matter of reorganization was referred to the Exchange's Law Committeee--in other words, to Richard…
mikethemadbiologist | March 25, 2009My thanks to the readers who noted that I accidentally used adjusted income in my calculations of the ratio of the median house price to the median wage. Below are the updated figures:
Below, on the Y-axis, is the ratio of the median house price (not adjusted for inflation; from here) to the median income (not adjusted for inflation; from here). So a value of 1.0 means that the median house costs as much as the median income, a value of 2.0 means that the median house costs twice as much as the median income:
Here are the underlying numbers; obviously, median housing price is the higher…
mikethemadbiologist | March 25, 2009Update: Thanks to the readers who caught my error. I've updated the post here.
A tale of two graphs. But before I get to them, I have to admit that this post by Amanda gave me the needed kick in the ass to write about the huge increase in housing prices relative to annual income. Amanda writes:
...above all, I'm concerned about this belief that housing prices must be maintained at the ridiculously high levels they reached during the bubble, no matter what... My feeling is that we're taking a hit on the economy any way you slice it, so why can't housing costs come down to a point where…