Archive for the ‘relevance of economic knowledge’ Category

Perverse foreclosure laws wreck Las Vegas housing market

July 10, 2013

It is a well-known historical fact that most governments – democratic or autocratic – introduce perverse laws. Ignoring the law of unintended consequences, thoughtless, ill-educated politicians produce laws that achieve the exact opposite of their explicit objective.

Few lawmakers, however, can bathe in the infamy of Nevada, a gamblers’ state whose residents gambled excessively on the housing market bubble that burst in 2007. Las Vegas confronted one of the most serious house foreclosure consequences of this gamble. Well, as a signature gambling state, the Nevada legislature gambled one again, recording another spectacular loss in the arena of the American housing dream.

Between 2002 and 2006, house prices doubled in Las Vegas with many buyers making zero or minimal deposits, and confronting the sketchiest of income and asset evaluations. From 2007 through 2012, average house prices collapsed 62 per cent, driving many households into foreclosure and short sale. What is required in such circumstances is a swift and efficient foreclosure system, removing those who cannot pay their mortgages out of home ownership and into the rental market, allowing house prices to fall quickly to their bottom, and thus encouraging a new inflow of more affluent home owners.

The State of Nevada rejected outright this solution. New legislation – in the form of A.B. 284 – threatens criminal penalties for bank officials who do not follow new rules to certify that foreclosures are processed properly. Further, it makes it a felony for any one who makes a false representation concerning real estate title. Worse still, the wording of the new law, rushed through the legislature, is highly ambiguous. Severe penalties apply to vaguely defined crimes.

The Nevada law simply stopped foreclosures cold. In October 2011, the first month after the law took effect, lenders filed just 600 notices of default, an 88 per cent drop from the previous month. By May 2013, foreclosed homes, which accounted for half of all homes sold in Las Vegas since 2007, accounted for only 11 per cent of home sales. Many mortgage holders have gone 60 or more months without making any mortgage payment and still remain in their homes, without any notification of foreclosure proceedings.

As a perverse consequence of the foreclosure seizure, Las Vegas now has only 4.300 previously owned homes listed for sale, down 70 per cent from two years ago. New home sales, in contrast, are up 87 per cent so far this year. The number of new building permits issued this year is up 52 per cent from last year.

Because mortgages for these new homes are extremely difficult to come by – the consequence of A.B. 284 – most of the new homes purchases are by cash buyers, many of whom are aiming to flip their purchases in order to re-sell at higher prices driven by the foreclosure seize-up of the existing housing stock.

So the New Nevada law has effectively destroyed the market in existing houses and driven a rising bubble in new house construction. When this second bubble bursts – as burst it surely will if ever the existing stock of houses comes onto the market – Las Vegas will be right back in 2007, with an even larger stock in houses that should, but will not be, foreclosed.

Well, it is the gamblers’ city. The game is in play and the tables load up until the dealer calls out : ‘Rien ne vas plus“!

If Obama keeps his promise, he will pardon Edward Snowden

July 9, 2013

“In his second inaugural address, President Barack Obama called upon ‘We the People’ to preserve America’s ideals of individual freedom and equality.’ When Edward Snowden disclosed the National Security Agency’s secret surveillance programmes, he was rising to this challenge. Like the nation’s ‘founding fathers’, hw was also defying the usurpations of an increasingly intrusive government. Mr. Obama should therefore call off the campaign to apprehend him and offer Mr. Snowden a pardon instead.” Stephen Walt*, ‘Snowden deserves an immediate presidential pardon’, Financial Times, July 9, 2013

“Mr. Snowden’s motives were laudable: he believed fellow citizens should know their government was conducting a secret surveillance programme enormous in scope, poorly supervised and possibly unconstitutional. He was right….Once a secret surveillance system exists, it is only a matter of time before someone abuses it for selfish ends. Richard Nixon kept his own ‘enemies list’ and used the Central Intelligence Agency to spy on american citizens. Former Federal Bureau of Investigation director, J. Edgar Hoover, helped keep himself in office by collecting dirt on officials.” Stephen Walt*,ibid.

“Gerald Ford pardoned Richard Nixon, George H.W. Bush pardoned the officials who conducted the illegal Iran-Contra affair, and Mr. Obama has already pardoned several convicted embezzlers and drug dealers. Surely Mr Snowden is as deserving of mercy as these miscreants. Pardoning him would also show that Mr. Obama’s rhetorical commitment to ‘We the People’, and to open and transparent government, is not just empty words.” Stephen Walt*, ibid.

* Stephen Walt is Professor of International Affairs at Harvard University

When it comes to macro-economic forecasting, LSE failure breeds LSE success

July 8, 2013

“During a briefing on 5 November 2008 – conducted with big wall-chart graphs – about the ongoing ‘financial crunch’, the Queen dropped a (bombshell) question on the assembled throng of academics. ‘If these things were so large, how come everyone missed them?’ The venue (the LSE) was certainly a highly pertinent place for the Queen to ask the question about macroeconomic forecasting, as in the previous year (2007-8) the LSE had been the largest single institutional recipient of UK taxpayer finance for economic/econometric research funnelled via the Economic and Social Research Committee (ESRC a quango, 100% taxpayer-financed). Moreover, it is now openly admitted by a leading (and Nobel laureate) economist at the LSE, Professor Christopher Pissarides, that he and others at the LSE (and elsewhere) had failed to foresee the nature, timing and severity of the crunch.

what has the ESRC actually done?…at an (announced) cost to taxpayers of 5 million pounds sterling, it has set up a new Centre for Macroeconomics, based on LSE and chaired by Christopher Pissarides, but also encompassing (we are told) University College, London, Cambridge University, the Bank of England, the NIESR, and ‘other leading global institutions’ (read a charmed circle of selected insiders’. John Burton, http:// http://www.iea.org.uk/blog/more-macro-quackery

LSE has learned well how to make big money out of its major intellectual failures. Would this happen if the monies had to be raised from private sources? What do you think, dear readers.

English history offers a parallel for Egyptian political reform (2)

July 6, 2013

In 1689, an unconstitutional English Parliament (unconstitutional because it was not called by the King) met and wrote a new constitution (the original constitution was unwritten). The Bill of Rights narrowed the discretionary power of the monarch, increased the independence of the judiciary, in all but name eliminated any notion of the divine right of kings, and significantly increased the powers of parliament. Most importantly, the suffrage was strictly limited to some 5 per cent of the male population (women had no suffrage until the early 20th century). A high property requirement was set in place for any person to vote. Members of Parliament served without pay, unless appointed as members of the Cabinet. King William III and Queen Mary II were required to sign this Bill of Rights before they could jointly access the throne.

This new constitution significantly reduced the arbitrary discretion of the monarch. Equally important, it set in place a parliament that would firmly establish and enforce property rights, thus paving the way for the Industrial Revolution. Britain became the richest and most powerful nation on the planet, building an Empire on which the sun would never set. Slowly, over time, the suffrage was allowed to expand, until in 1884, individuals without property were allowed to vote. This opened the gates to socialism and to the decline and fall of the British Empire.

Egypt is not yet ready for such a transition. Poorly educated as much of its population is, and subject to Islamic religious fanaticism as one-third of its population, surely is, there is no immediate prospect of establishing and maintaining an effective secular parliamentary system.

So the military, for the time being will have to govern. Since senior members of the military are at this time the primary holders of property in Egypt, this should ensure that an effective system of property rights will be established. If the military is far-sighted, I recommend that tit follows the example set by General Augusto Pinochet in Chile when he seized power from an incompetent and socialist President Allende. The General called in free-market Chilean economists trained at the University of Chicago by Milton Friedman, George Stigler, Gary Becker and Arnold Harberger to reform the economic institutions of Chile. Remarkable success followed. When the General voluntarily stepped down from power and returned Chile to democracy, the country was the richest in Latin America, and remains so to this day. This time around, it may not be so exclusively the Chicago-boys that are called to service – Chicago unfortunately is no longer an uncontaminated citadel of free-market economics. Other universities – such as UCLA, George Mason University, New York University, and Clemson University – may have to supplement Chicago supply.

While so ruling, the Egyptian military should ensure that all young Egyptians, females as well as males, receive a secular education. They should ensure that the job market is open equally to females as well as to males. They should offer stability of rule for a time-period sufficient for wealth-enhancing institutions to emerge. This may take five to ten years of transition governance.

The military should then write a new constitution for Egypt, modeled closely on the United States Constitution. A strict separation between Mosque, Church and Temple on the one side and the State on the other side, should be imposed. As in 1787, the suffrage should be strictly limited by a property requirement, albeit allowing females equal access with males to the ballot box. The secret ballot should be required. The initial suffrage should be restricted to no more than ten per cent of the adult population. Voters should satisfy both the requisite property requirement and (possibly) should be limited to individuals with university degrees and equivalent professional qualifications.The judiciary should be completely independent from the executive and legislative branches of government.

Then the world would truly marvel at the high rate of economic growth and economic freedom achieved by an Egypt unfettered from the bonds of autocracy and backward-Muslim religious fanaticism.

Egyptian President Mohamed Morsi ousted by military coup

July 3, 2013

On July 3, 2013, after tanks and troops were deployed close to the presidential palace in Cairo, Egyptian Defense Minister, Abdelfatah al-Sissi appeared on television to announce that President Morsi had been deposed.An army-backed plan for political transition in Egypt will begin immediately with a short period of interim rule before new presidential and parliamentary elections. The coup occurred two years after President Obama bribed the Egyptian military to stand down and allow U.S. ally President Hosni Mubarak to be removed by a popular revolution.

I wonder how President Obama and his three witches – Hillary Clinton, Susan Rice and Samantha Powers-Sunstein – are reacting to this welcome news. After all they were so besotted by the Muslim Brotherhood and its extremist version of Sharia Law that they allowed a loyal ally of Israel to be displaced in favor of an an overtly anti-Semitic government in the most important country in the Middle East. Earlier this week, Obama deflected all relevant questions targeted at his Middle Eastern policy. The U.S. President is either politically clueless or in favor of the implementation of Sharia Law with respect to the governance of this once great country.

News of the successful coup must be largely welcomed by lovers of freedom. Of course, there are risks that the military may attempt to administer the country for longer than they have suggested. That is the nature of an autocracy. However, some autocracies are much to be preferred to some democracies. Egypt is clearly not yet ready for democracy in its effective pluralistic form. If the military, even though motivated solely to raise the value of the many Egyptian assets that it owns, reverses Morsi’s disastrous thrust to socialism, that alone will provide Egyptians with economic freedoms that they desire. Political freedom can wait a while, until the population at large matures and comprehends the nature of the secular choices that should be made at some future ballot box.

The courage of Edward Snowden

July 3, 2013

First they came for the Tea Party
and I didn’t speak out because I was not a member of the Tea Party

Then they came for the rich
and I didn’t speak out because I was not rich

Then they came for private market entrepreneurs
and I didn’t speak out because I was not an entrepreneur

Then they came for the advocates of freedom
and there were insufficient numbers left in America to speak out for me.

Thank you Edward Snowden for speaking out for me and my fellow patriots!

The Fed should taper QE3 immediately

July 2, 2013

At his June 19 press conference, Fed Chairman Ben Bernanke outlined the Fed’s plan to start reducing the pace of bond-buying later in 2013 and to end purchases by the middle of 2014. He conditioned this plan on a substantial improvement in the U.S. labor market, leading to an unemployment rate of about 7 per cent by mid-2014 with an increased rate of economic growth.

There can be no realistic expectation that the U.S economy will deliver on these projections. Over the past 12 months, unemployment has fallen from 8.2 per cent to 7.6 per cent. However, there has been no increase in the ratio of employment to population, no decline in the teenage unemployment rate, and virtually no increase in the real average weekly wage for those who are employed.

The Fed assumes that real GDP will grow by 2.5 per cent during the four quarters of 2013. With a growth rate of only 1.8 per cent in the first quarter and a likely greowth rate of only 1.7 per cent in the second quarter, the growth rate will have to jump to more than 3 per cent in the last two quarters to meet this expectation. And that is well nigh impossible.

U.S. exports are declining in response to weakening demand internationally and to a rising dollar. The Obama tax hike in January coupled to the spending sequester continues to drag down aggregate demand. These effects significantly outweigh the small positive effect on GDP from increased residential investment.

Yet, the market has reacted as if the taper is already in place. As bond yields continue to rise, the aggregate economy will respond in a similar fashion. So it makes a great deal of sense for the Fed to accept expectations and to begin the taper immediately. Such a policy would counter the tendency of investors to seek higher yields in high-risk securities. It would allow normal market forces to return, lifting long-term bond interest rates to the traditional 2 per cent above the inflation rate; or even more, given the debt crisis that continues to overhang the U.S. economy.

‘Do well while doing good’ should be the mantra of an independent Fed. Of course, much depends on the meaningfulness of the word ‘independent’.

Hat Tip: Martin Feldstein, ‘The Fed Shoud Start To ‘Taper’ Now’, The Wall Street Journal, July 2, 2013

Egypt’s President Morsi threatened with army coup

July 1, 2013

General Sisi today gave President Morsi and his Muslim Brotherhood government forty eight hours to satisfy those demonstrating against his government or to expect an immediate Egyptian army intervention.This follows a rising wave of popular uprisings against Morsi’s attempt to thrust Sharia Law down the throats of a once secular nation. Muslim Brotherhood corrupt socialism has taken the Egyptian economy to the very edge of an economic black hole. Only ill-advised financial support from Qatar stands in the way of this total collapse.

When a political party is voted into office by religious zealots with no understanding of global economics, this is the fate that awaits its under-educated leaders. No doubt the military will force Morsi and his closest advisers into exile, rather than executing them. Wisely the army will restore secular rule to Egypt and make some marginal moves towards a market economy.

However, an enormous burden of responsibility for this disaster rests on the shoulders of President Obama and his three witches – Hillary Clinton, Susan Rice and Samantha Powers-Sunstein – who deliberately cast off a trusted ally when President Mubarak asked for support during the first phase of the so-called Arab Spring. Any serious reading of the Tahrir Square occupation should have advised the U.S. government to leave things alone, and to allow Egypt to take the slow road to democracy.Instead, the Obama administration bribed the Egyptian army to stand aside in order to allow Mubarak to fall.

At a minimum, one might have thought that Obama would have learned the lesson from Jimmy Carter’s stupidity in encouraging a similar fateful upheaval to occur in Iran.

Lieutenant Ben (Bligh) Bernanke attempts to round Cape Horn

June 29, 2013

In 1787, Lieutenant William Bligh set sail from England on the cutter Bounty, headed first for Tahiti, where he was to pick up breadfruit trees and ferry them to the Caribbean where they might produce food for the growing slave population. To save time, Bligh steered the Bounty to Cape Horn, rather than taking the calmer passage around the Cape of Good Hope.

After a month of unremitting turbulence, during which the Bounty was tossed like flotsam by the waves and gale-force winds, Lieutenant Bligh recognized that he would never round the Horn. Instead, he was forced to change direction and to steer his vessel to the Cape of Good Hope. Though reaching Tahiti, and loading his ship with bread fruit trees, Bligh never reached the Caribbean. Instead, his crew mutinied and set him loose on a long-boat allowing him plenty of time to rue his initial directional decision.

Chairman Ben Bernanke now confronts the dilemma of Lieutenant Bligh. Having pursued a relentless path of monetary expansion, designed to socialize U.S. financial markets, this week he determined to round Cape Horn in order to speed up the path to monetary stability. Immediately, Bernanke confronted the savage turbulence of dangerous financial waters together with gale-force political winds from the Obama administration and Democrats in Congress.

In an uncanny projection of the fate of Lieutenant Bligh, President Obama has assumed the role of the Master’s Mate, Fletcher Christian, in signaling mutiny. Ben Bernanke now has no chance of reappointment to a third term. 2014 is to be the end of the line for this loyal servant of the President. In the mean-time, Ben Bernanke has already blinked. After one month of unremitting turbulence, Chairman Bernanke will adjust the rudder and follow the compass to the more peaceful waters of continued monetary expansion.

However, have no doubt that Fletcher Christian will take him down well before the 2014 elections.

Morsi’s Egypt totters on the edge of an economic black hole

June 28, 2013

When the Obama administration stabbed U.S. ally, President Mubarak in the back, to curry favor with Egypt’s Muslim Brotherhood, it surely could not have expected any outcome other than a Muslim Brotherhood victory at the polls. In this sense, President Obama owns the political-economic mess that now threatens to take Egypt down an economic black hole.

President Mohamed Morsi is an ill-educated religious bigot, typical of the Muslim Brotherhood that he now leads in the aftermath of Egypt’s Arab Spring. He has forced a Sharia-based constitution down the throats of the Egyptian people. He has demonstrated supreme incompetence in his attempt to lead a nation of 85 million people into a new era of prosperity. His personal support across the country has fallen from 58 per cent at his election in 2012 to 28 per cent in May 2013.

Having inherited a bloated and inefficient bureaucracy from his predecessor, Morsi has charged backwards to make it even worse. During the past two years, the budget deficit has skyrocketed to almost 12 per cent of gross domestic product. Cash injections from Qatar, Libya and Turkey are barely providing enough foreign currency reserves to cover three months of imports. The economic slowdown that he has provoked has increased poverty and unemployment with no sign whatsoever of any turn-around.

Investor confidence has totally evaporated and businesses are widely failing amid this foreign currency crunch. Morsi has failed to conclude a loan agreement with the IMF because he refuses to undertake austerity reforms that would start with a reduction in fuel subsidies. The country owes billions of dollars to oil and gas companies. Its sovereign debt and main banks have been downgraded by rating agencies sending them ever deeper into junk territory.

Morsi is a fourteenth-century throw-back president of a backward ruling party. The now only remaining hope for Egypt sadly is a military coup designed to return Egypt to a secular state and to impose austerity-based reforms that alone will pull Egypt back from the black hole that confronts it.

Hat Tip: Heba Saleh, ‘A revolution betrayed’, Financial times, June 28, 2013


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