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March 31, 2007
Calculated Risk Vs. Austin Goolsbee, Round Two
In Round 1 of this installment of the great subprime debate, I interpreted Calculated Risk as objecting to certain economists' excessive affection for market outcomes, certain economists including (in CR's view) Professor Goolsbee. There is a fair amount of religion in these types of arguments. As one of those excessively affectionate economists I prefer to think of a core belief in market efficiency as a reasoned faith, but the truth is we are all operating on assumptions that are difficult to adjudicate with the meager evidence we have at hand. But there is one part of CR's criticism that, I think unintentionally, omits some pertinent facts, and as a consequence flirts with unfairness:
... I don’t think theory can really explain the revolting disingenuousness at the end of [the Goolsbee] op-ed:
The Center for Responsible Lending estimated that in 2005, a majority of home loans to African-Americans and 40 percent of home loans to Hispanics were subprime loans. The existence and spread of subprime lending helps explain the drastic growth of homeownership for these same groups.
This is actually what CRL has to say on this topic:
According to the Fed report, even after adjusting for differences in the borrower characteristics contained in the HMDA data, African-American and Latino borrowers were more likely to receive higher-rate loans. Furthermore, a recent study released by CRL shows that disparities tend to persist even after additional adjustments were made for differences in credit scores, equity, and other risk factors not available in HMDA data. The Fed authors also adjust for originating lender. Though this adjustment reduces the disparities substantially, significant differences remain. . . .
The CRL study found that, even after controlling for legitimate risk factors, African-American and Latino borrowers were still more likely to receive higher-rate subprime loans than similarly-situated non-Latino white borrowers. With raw disparities in higher-rate loans between groups basically unchanged from 2004 to 2005, there is little reason to believe that legitimate risk factors would account for all of the disparity evident in the 2005 data.
In other words, CRL is suggesting that a pattern of finding subprime loans given to minority borrowers with similar credit, income, and equity profiles to non-Latino whites who get prime loans may imply a certain “inefficiency” in the mortgage market somewhere. For Goolsbee to use this data to buttress an unregulated free-for-all by claiming that it helps out the traditionally disadvantaged is, well, dishonest.
The "Fed report" in question is "New Information under HMDA and Its Application in Fair Lending Enforcement," by Robert Avery, Glenn Canner, and Robert Cook. For the uninitiated, here is what "HMDA" means:
Most lending institutions with offices in metropolitan statistical areas are required by the Home Mortgage Disclosure Act of 1975 (HMDA) to disclose information to the public about applications for home loans and the home loans that they originate or purchase during each calendar year. The law’s requirements arose from concerns that, in some cases, lenders were contributing to the decline of certain neighborhoods by failing to provide adequate home financing to qualified applicants on reasonable terms and conditions. The disclosure of lending activity is intended to help determine whether lenders are adequately serving their communities’ housing finance needs, to facilitate enforcement of the nation’s fair lending laws, and to guide investment activities in both the public and the private sectors. HMDA is implemented by the Federal Reserve Board’s Regulation C.
In a nutshell, this is what Avery, Canner, and Cook find with respect to the pricing of loans to minority individuals:
The foregoing analysis indicates that the information in the HMDA data—that is, adjusting the HMDA data for borrower-related factors plus lender—is insufficient to account fully for racial or ethnic differences in the incidence of higher-priced lending; significant differences remain unexplained.
Does that settle it? Not even close:
Clearly the HMDA data do not include all the factors that are involved in credit underwriting and pricing. However, by controlling for variations so as to make borrowers as similar as possible on the dimensions of the data that are available, one can account for some of the factors that may explain differences in the outcomes of the lending process among groups...
Explaining the remaining differences is likely to require more details about such factors as the specific credit circumstances of each borrower, the specific loan products they seek, and the business practices of the institutions they approach for credit.
Absent information about specific credit circumstances, specific loan factors, the institutions that particular types of lenders seek to obtain loans, and the like, you are pretty much free to see things as you wish:
The disproportionate borrowing by non-Asian minorities from higher-priced lenders could occur because of often benign factors such as a ‘‘segmented’’ marketplace in which different lenders offer different products and borrower groups self-select the product-lender combination that best matches their credit or other circumstances. Such a marketplace does not necessarily raise public-policy concerns regarding fair lending: For example, compared with non-Hispanic whites, minority groups on average perhaps because on average they may have less savings to meet down-payment and closing cost requirements), which are typically higher priced and which are the specialty of certain lenders. This explanation could account for differences in lender choice, but demonstrating it requires loan-specific information— such as loan-to-value ratios—as well as other information that is not in the HMDA data.
There is, of course, a non-benign interpretation of the Avery et al results:
However, a situation that might suggest an inadequately functioning marketplace—and that could trigger fair lending concerns—would occur if minority borrowers are incurring prices on their loans that are higher than is warranted by their credit characteristics. Such a problem could arise in one or both of the following circumstances: (1) neighborhoods with high proportions of minority residents may be less well served by lenders offering prime products, a circumstance that would make obtaining lower-priced loans more difficult for well-qualified minorities, or (2) some minority borrowers may be steered to lenders who typically charge higher prices than the credit characteristics of these borrowers warrant.
Calculated Risk's link to the Center for Responsible Lending study is apparently broken, but I think it refers to "Unfair Lending: The Effect of Race and Ethnicity on the Price Subprime Mortgages," by Debbie Gruenstein Bocian, Keith Ernst, and Wei Li. The study purports to rectify some of the ambiguity in the Federal Reserve analysis:
This study extends previous analyses of home loan pricing disparities by supplementing HMDA data with additional loan-level information from a large, proprietary subprime database. By merging the datasets, we were able to evaluate whether race and ethnicity affect subprime loan pricing after controlling for key risk factors, including credit scores and loan-to-value ratios. The results show that African-American and Latino borrowers are more likely to receive higher-rate subprime home loans than white borrowers, even when we control for legitimate risk factors.
So that settles it? Not really:
This analysis does not allow us to estimate precisely how much race and ethnicity increase the prices charged to borrowers. It is also beyond the scope of this paper to determine definitively why these disparities exist. However, we do posit several possible causes, including the considerable leeway mortgage originators have to impose charges beyond those justified by risk-based pricing.
The CRL -- a self-proclaimed "Resource For Predatory Lending Opponents" -- definitely choose the non-benign spin on the Bocian et al results. But having admitted that their study cannot definitively determine why disparities in loan prices exist, it would appear that we have returned to the realm of religion.
So how about a little inter-faith charity? Amen.
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March 30, 2007
In Praise Of The Subprime Market (Etc.)
Yesterday's New York Times had Austin Goolsbee making good sense, at least from my point of view:
Lost in the current discussion about borrowers’ income levels in the subprime market is the fact that someone with a low income now but who stands to earn much more in the future would, in a perfect market, be able to borrow from a bank to buy a house. That is how economists view the efficiency of a capital market: people’s decisions unrestricted by the amount of money they have right now.
... In the “permanent income hypothesis” on which the economist-underwritten loan is based, the borrower’s belief that he will always be able to earn more money in the future, which justifies over-consumption of housing in the present into which he will grow, renders mortgage market “efficient” to the extent that it does away with such artificial constraints as down payment and DTI requirements—which are based on “the amount of money they have right now,” and adopts innovative standards depending on an individual borrower’s confidence in the amount of money he might have in a couple of years.
CR is a fair-minded, smart, and honest fellow, and does recognize that the market does not actually operate on the assumption that "the borrower... will always be able to earn more money." Quoting CR quoting Goolsbee:
Of course, basing loans on future earnings expectations is riskier than lending money to prime borrowers at 30-year fixed interest rates. That is why interest rates are higher for subprime borrowers and for big mortgages that require little money down. Sometimes the risks flop. Sometimes people even have to sell their properties because they cannot make the numbers work.
But CR is not convinced:
Of course it’s not surprising that Goolsbee ignores the evidence of a house-price bubble, since there can apparently be no bubbles in perfect markets. Theories do that to you.
I think Felix Salmon had this one covered a few weeks back:
... much of the increase in subprime credit was concentrated in depressed areas such as Michigan and Ohio, which accounted for 15% of all U.S. foreclosures in January. And it's precisely those areas that did not see a run-up in housing prices.
Embracing the Goolsbee point of view does not require one to believe that every nook and cranny of the mortgage market was, or even is, operating on safe and sound principles. But -- sorry to sound like a Real Economist™ -- curious moves, big mistakes, and bad behavior are sometimes just part of the game. On this, Free exchange, the blog from the Economist, adds some good sense its own:
There seem to be some cases of abuse in the subprime market... But it's not clear that this has been very widespread. Even in a very bad subprime market, the overwhelming majority of homeowners will continue to make their payments, benefitting (one presumes) from the ability to own a home and build some equity.
"The contagion isn't that big a problem,'' [head of Bears Stearns' mortgage business Tom] Marano said. "I don't see the risk as being that significant at this point.''
And again from Felix Salmon:
The big losers will be the holders of the equity tranches of MBSs and subprime-backed CDOs, as well as those subprime originators who find themselves holding a bunch of scratch-and-dent loans they thought they'd sold already. So it makes perfect sense that subprime mortgage originators are closing shop. But I'm not shedding too many tears for them: they made a lot of money in the boom years, and then they relaxed their underwriting standards far too much at the end of 2005 and the beginning of 2006. They deserve to bear the consequences.
As for the holders of MBS and CDO equity, we're talking very, very sophisticated investors and financial institutions here, who are almost without exception both willing and able to bear those losses. I see no systemic risks there.
Like Jim Hamilton, I'm not yet willing to argue that financial markets will definitively dodge the spillover bullet. But beyond the heat of the moment, I think Professor Goolsbee has it exactly right.
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March 29, 2007
Some Uncomfortable History
It hasn't been a good week. From new home sales to residential housing prices to durable goods, you have to dig pretty hard to unearth a little positive spin. So, it's as good a time as any to conjure up comparisons to the last recession -- which, as reported at Economist's View and at Calculated Risk, is exactly what Evan Koenig does in an article published on the Dallas Fed website. Evan concludes:
There are several disturbing similarities between the U.S. economy's recent behavior and its behavior in 2000–01, but also some reassuring differences.
There is nothing amiss in Evan's analysis, but I like to make the comparison in a slightly different way. Let's conjecture that, if a recession is in the cards, it will arrive sometime next quarter -- say, July. To me, then, the best comparison is made by considering what the data looked like in December 2000, three months before the business cycle peak in March 2001. If we do this, the reassuring news looks considerably less so. For example, Evan says:
In 2000–01, consumption spending’s contribution to GDP growth fell by about 2 percentage points. Over the past couple of years, in contrast, consumption’s growth contribution has held comparatively steady.
True, but here is a variation on a type of picture I have shown here before:
The blue line represents the data known as December 2000 -- that is, data through the third quarter of that year. The yellow line illustrates what happened next -- which was, of course, a recession. And the red line is the data we are looking at today, through the fourth quarter of 2006. Reassuring would be if the blue line was clearly signaling some sort of weakness that the red line is not. Reassuring is not what I see.
What about employment?
It is striking that while goods-producing job growth has slowed by about as much as it did in 2000, service-providing job growth has held up much better than it did in the lead-up to the 2001 recession.
To the pictures:
If you are working at, you might find some comfort in the downward drift of employment growth leading into 2000. But there certainly was not much hint of what was about to unfold. So to me those are pretty scary pictures. In fact, just about every graph I look at gives me the willies:
UPDATE: Kash does a similar experiment, in prose, for the 1990-91 recession.
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» Fed Watch: Fed Still Looking Through the Slowdown – Should You? from Economist's View
Tim's email says he is a bit contrarian in this one. Agree or disagree, I'm sure he'd like to hear you reactions: Tim Duy: Fed Still Looking Through the Slowdown – Should You?: The spate of weak data has been [Read More]
Tracked on Apr 2, 2007 7:16:52 PM
March 27, 2007
The Bottom Moves
Here, according to CME housing futures based on S&P/Case-Shiller home prices indexes, was the outlook for prices in the "big ten" markets as of last month:
Here's where we stand today:
Gotta hate that.
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I defer to no one in my abiding respect for the gang at Angry Bear, but contributor cactus is testing the waters in the deep end by offering up an affirmative answer to the question "Did Alan Greenspan Illegally Manipulate Presidential Election?". Though I know of no particular provision in the Federal Reserve Act that could be called into play to support a claim of illegality, I'll leave that one to the lawyers and stick to the economics of the claim.
Here, then, is the starting point for the cactus conspiracy (henceforth, the CC):
... we’d expect Greenspan to favor Republicans over Democrats – all else being equal, we’d expect to see unusually tight money when an incumbent Democratic president ran for re-election or a sitting Democratic VP ran for President, and unusually loose money when an incumbent Republican ran for re-election or a sitting Republican VP ran for President. However, not all elections are close, so the Uncle Alan would feel more of an urge to meddle when elections are close...
Therefore, in the five elections that took place under Greenspan’s watch, we’d expect the most meddling in 1992 and 1996 (when the Republican candidate clearly lost in a competitive election), followed by 2000 (when the Republican candidate lost the popular vote but only by a smidge).
The CC proceeds by a little too conveniently redefining the terms of monetary policy manipulation:
And where we would look to see evidence of the Fed’s behavior? Well, the Fed could move the fed funds rate or it can move M1 (cash and its equivalents). M1 has several advantages over the fed funds rate: nobody really pays attention to M1 whereas every change in the fed funds rate is literally national news, the Fed can move M1 every day if it chooses, and its effect is more widely dispersed throughout the economy. For a subtle guy like Big Al, M1 is the tool of choice.
If this is so, "Big Al" would have been very subtle indeed -- offering up an "it all depends on what the meaning of money is" subterfuge -- or he would have been a liar. Let me quote myself, quoting the man:
... at least for the time being, M2 has been downgraded as a reliable indicator of financial conditions in the economy, and no single variable has yet been identified to take its place.
That was 1993. (You can find it in print versions of the Chairman's testimony associated with the July Monetary Policy Report to Congress.) Fast forward to 2000, and this footnote in the July Monetary Policy Report of that year:
At its June meeting, the FOMC did not establish ranges for growth of money and debt in 2000 and 2001. The legal requirement to establish and to announce such ranges had expired, and owing to uncertainties about the behavior of the velocities of debt and money, these ranges for many years have not provided useful benchmarks for the conduct of monetary policy.
The Committee did qualify things with this...
Nevertheless, the FOMC believes that the behavior of money and credit will continue to have value for gauging economic and financial conditions, and this report discusses recent developments in money and credit in some detail.
... but the days of money measures playing a central operational role in the conduct of monetary policy are, for now, gone.
Even if we play along and take the whole money growth thing seriously, there are two problems with cactus's use of real M1 growth to make his point. First, if you want to look at the monetary aggregate the Fed really controls you would look at nominal monetary base. Second, and more critically for bringing the conversation back to reality, financial innovations -- like the invention of sweep accounts -- knocked both M1 and monetary base growth out of contention as stable indicators of the stance of monetary policy. So if we must look at money, M2 really would be the choice -- and here the CC is a little hard to spin:
According to M2 growth, monetary policy was actually tightening up during the election year 1992 and did not look particularly tight in 2000. But I have no inclination to offer that up as evidence of anything. Like Mr. Greenspan suggested in the passage cited above, for most of the decade monetary aggregates just weren't giving up the their secrets. And as for the secret agendas of Alan Greenspan and company, the Taylor rule is out there for all to see -- it really isn't any more complicated, or nefarious, than that.
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March 26, 2007
Housing, Subprime Mortgages, And The Swap To Watch
Joe Haubrich and Brent Meyer are busy out-blogging me these days, at the Cleveland Fed website. This time, they go about the business of describing credit default swaps, ABX.HE indexes, and why they are among the sharper tools in the current forecasting box:
... the ABX.HE index... is based on credit default swaps on different tranches of subprime mortgage-backed securities (MBS).
... the ABX.HE index is telling us something about credit default swaps (CDS). A CDS is like a derivative that gives you insurance. For example, a bank may wish to buy protection against default by RiskyCorp (perhaps because they’ve given RiskyCorp a loan). They do this by entering into a contract where they pay another firm (who is selling protection) a fixed amount, periodically, as long as RiskyCorp doesn’t default on its corporate bonds. (In general, the “credit event” might be something else, such as a major downgrade, missed payments, or so forth.) If RiskyCorp does default, the seller of protection makes a payment to the buyer of protection.
... the ABX.HE is a series of five indexes that track CDSs based on tranches of mortgage-backed securities comprised of subprime mortgages and home equity loans. The tranches differ by their ratings, from AAA (best credit) to BBB-, (least good credit). See MarkiT, which produces the indexes for the real details. For an example of how indexes work, see here.
The prices of the riskier tranches started moving down in late 2006, but the real action started in late 2006, so a closer look is appropriate. There’s not a lot of movement among the top-quality tranches, the AAA and AA, but February (when New Century Financial and HSBC, the number-three and number-two subprime lenders, announced problems) was rough on the lower-rated indexes, with the BBB- dropping from 90.85 to 64.46. That’s a 29 percent drop in only one month. Since then, there’s been a rebound, up over 10 percent, but the market seems to be anticipating continuing large losses in the subprime market.
Here's the picture:
As Joe and Brent note:
... because the CDSs are more standardized and generally more liquid than corporate bonds, you can see why Federal Reserve Vice Chairman Donald Kohn states that “instead of looking to the bond market to measure default risk, we are increasingly turning to the market for credit default swaps”...
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March 22, 2007
Did The Fed Do It?
The ISI Group's Andy Laperriere, writing on the opinion page of yesterday's Wall Street Journal, says the answer is yes (at least in part):
Stock markets world-wide have sold off the past few weeks over concerns the collapse of the subprime mortgage industry could prolong and deepen the housing slump and threaten the health of the U.S. economy. Federal Reserve officials and most economists believe the problems in the subprime mortgage market will remain relatively contained, but there is compelling evidence that the failure of subprime loans may be the start of a painful unwinding of a housing bubble that was fueled by easy money and loose lending practices...
The fact that Congress is now holding hearings on the fallout from the second major asset price bubble in the last decade should prompt some broader questions. For example, what role did the Fed's loose monetary policy from 2002-2004 play in fueling the housing bubble? Should the Federal Reserve reexamine its policy of ignoring asset bubbles?
I know that the easy money claim has become something of a meme, but I often find myself pondering this picture:
What's the story here? That the long string of federal funds rate cuts beginning in January 2001 caused the decline in long-term interest rates -- including mortgage rates -- that commenced a full half-year (at least) before the first move by the FOMC? That low levels of short-term interest rates have kept long-term rates well below their pre-recession peaks? Then what to make of the fact that rates at the longer end of the yield curve have barely budged in the face of a 425 basis point rise in the funds rate target? Maybe it's "long and variable lags"? Should we then be expecting that big jump in long-term rates any day now? I guess it's still a conundrum. But maybe, then, we should be a little circumspect about the finger pointing?
OK, here's part of the Laperriere article I can get behind:
It's not the size of foreclosure losses as a share of the economy that matters, it is the effect those losses have on the availability of credit.
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» Long-term bondrates from The Theroxylandr in Flame
Im arguing with macroblog about about this picture: He said: Whats the story here? That the long string of federal funds rate cuts beginning in January 2001 caused the decline in long-term interest rates including mortgage rates... [Read More]
Tracked on Mar 23, 2007 1:02:51 PM
» What Conundrum? from Economist's View
Mohamed A. El-Erian of the Harvard Business School and Noble laureate in economics Michael Spence say there's nothing puzzling or hard to understand about global imbalances, declining risk spreads, flattened yield curves, and declining market volatilit... [Read More]
Tracked on Mar 24, 2007 7:27:28 AM
March 21, 2007
Construction and Employment
Brent Meyer and Tim Dunne write all about it in the electronic version of the Cleveland Fed's Economic Trends:
The slowdown in residential construction activity has had a muted impact on employment in the construction sector. Employment held steady in 2006, hovering around 7.7 million jobs, though employment in construction bears watching as there was a net decline of 62 thousand jobs last month. Still, on a year-over-year basis, construction employment is down only 0.2 percent from February 2006.
... Of all those employed in construction industries, only 43.2 percent work in residential construction, while 43.8 percent work in nonresidential building construction and 13.0 percent work in heavy and civil engineering construction. Of those employed in residential construction industries, about 30 percent work for general building contractors and the rest work in specialty trades (for example, roofing, plumbing, and concrete contractors).
The changes in recent employment look markedly different for nonresidential and residential building industries. On a year-over-year basis, employment in residential construction contracted by 133 thousand jobs, or -3.9 percent of residential construction jobs. Outside of residential construction, employment grew by 116 thousand jobs, or 2.7 percent of nonresidential construction employment.
There is a "but":
On a cautionary note, the MIT Center for Real Estate reported that the demand for office properties remained strong at the end of 2006, but there was some weakening demand in the apartment, retail, and industrial property sectors based on their models. This weakening demand could affect workers employed by companies that do multifamily housing and private nonresidential construction going forward.
For more information -- and plenty more good pictures -- read the whole thing. And while you are visiting virtual Cleveland, check out Joe Haubrich and Brent Meyer's answer to the question "What's Up with the Yield Curve?"
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March 20, 2007
Where The Risk Is
And so it appears that the moment of truth is near, when we will finally see beyond the immediate fate of the housing market and determine the magnitude of the collateral damage (no pun intended). I think that there is a consensus that, if the worst is to come, some sort of substantial disruption to financial markets will be in the middle of it all. Nouriel Roubini covers about every inch of territory you can on this theme, even managing to juxtapose Alan Greenspan and Ben Bernanke with foreign-policy neo-conservatives. In somewhat more measured tones, Kash Mansori and Calculated Risk have begun to fret about the potential for spillover into the commercial banking sector. Says Kash:
In my previous post I explained why I think that the quantity of bad mortgages in the US economy may actually be enough to significantly affect the non-performance and write-off rates for the US banking system as a whole. Yesterday, Calculated Risk followed this up with a discussion of why he thinks that the health of commercial real estate loan portfolios may soon suffer the same fate that residential loan portfolios are currently experiencing.
Some of that is not speculation, as this story from own neck of the woods so clearly shows:
The quaking U.S. market for subprime mortgage loans is rattling National City Corp. too.
The parent of National City Bank of Pennsylvania has decided it won't try to sell $1.6 billion in subprime loans after all, due to "adverse market conditions," National City said in a securities filing Thursday. The loans "are currently not saleable at what management considers an acceptable price," the bank said.
Instead, Cleveland-based National City took a write-down of $11 million in February, and sometime this month will return to its portfolio the loans it had intended to sell. "A further write-down is likely," the filing said. Spokeswoman Kristen Adams would not elaborate...
Additionally, National City expects to add "on the order of $50 million" to its reserves for possible loan losses, the filing said.
But here's how the story ends:
National City shares closed yesterday at $35.99, up 30 cents.
Hmm. Frankly, I just don't think the traditional banking sector is where be the dragons. Instead, I worry about the answers to three questions: 1. Will a growing perception of risk begin to choke off lending to investment projects that are otherwise economically viable? 2. Will a growing perception of risk cause businesses to forgo or defer an increasingly large quantity of investment projects? 3. Have hedge funds, private equity funds, and specialty financial corporations become such important parts of the credit channel that there is scant relief to be found from a relatively unscathed traditional banking sector?
To question 1, we have this, from Bloomberg:
Risk premiums on investment-grade corporate bonds are at their highest level in more than three months on concern rising delinquencies by subprime borrowers will slow the U.S. economy...
"This period of volatility is likely to continue as long as there is divided opinion about the magnitude and resulting financial impact of the subprime problem,'' said Edward Marrinan, head of North American credit strategy at JPMorgan Chase & Co. in New York. "Subprime risks and accompanying fears of a spillover into the broader consumer sector are the catalysts for the heightened volatility currently exhibited by all risky asset classes,'' he said in an interview...
The 7-basis-point increase in investment-grade spreads is the index's worst three-week performance since the period ending May 20, 2005, Merrill data show. The increase means a company would pay $70,000 more in annual interest for every $100 million borrowed.
We might hold on to the belief that firms are partially insulated from rising borrowing costs (or restrictions on loan availability) due to the fact the corporate cash-flow to investment ratio remains relatively high...
... but there are two problems with seeking shelter in that picture. First, we have data only through the third quarter of 2006, which is pretty stale information at this point. Second, and more importantly, a high cash-flow to investment ratio may itself be a symptom of business's unwillingness to commit to fixed investment spending.
To question number 3, I have no idea what the answer is. And I wish I did.
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March 19, 2007
Are We Panicking Just A Bit Too Soon?
If there was any doubt about it before, that groaning sound from the residential housing market definitely has our attention now. A woefully incomplete list of blogger commentary from the past several days would include items at Alpha.Sources blog (here, with some international perspective here), at Angry Bear, at Beat the Press, at The Big Picture, at Bizzy Blog, at Brad DeLong's, at Daniel Gross, at Economic Dreams - Economic Nightmares (here and here), at Economics Unbound, at Economist's View (here and here), at Euro Intelligence, at Felix Salmon, at The Housing Bubble Blog (here and here), at Mish's Global Economic Trends Analysis, at the Skeptical Speculator, and at The Street Light. I won't even bother to list individual items from Calculated Risk or Nouriel Roubini. Just head on over and start reading.
In the midst of this, let me make one brief plea for a little perspective: It might be good to remember that this was not entirely unexpected. Since at least summer I have been giving "economic outlook" speeches with the same basic message: Weakness in the residential housing market will continue for some time -- the bottom in prices seems unlikely until at least mid-year. Adjustments of this sort are never easy, there will be some pain, and probably a disruption in the pace of economic expansion as things sort themselves out. The punch line is always something like, "but things do sort themselves out, and there is no reason to expect that the economy will fail to return to a normal pace of growth after a sluggish quarter or two."
Anything yet make that projection look wrong? Not within my confidence intervals. Forecasters, economic pundits, and other human beings are congenital slaves to the latest surprises in the data, so confidence has ebbed and flowed and ebbed again as the news has surprised to the downside, to the upside, and back again. But would anyone really want to argue that we aren't in the neighborhood of where most informed observers thought we would be about now?
Trouble, of course, often looks worse when it arrives than it did when we were merely contemplating its arrival. It is understandable that we feel a little wobbly now that the shake-out among certain mortgage lenders is here at last. And there are parts of the "soft-landing" scenario that look a bit tenuous at the moment -- I would put the worrisome signs of weakening business investment expenditures, emphasized by pgl at Angry Bear and Jim Hamilton at Econbrowser, at the top of my list. But for the time being, I'm going to go easy on the panic button.
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- Hitting a Cyclical High: The Wage Growth Premium from Changing Jobs
- Thoughts on a Long-Run Monetary Policy Framework, Part 4: Flexible Price-Level Targeting in the Big Picture
- Thoughts on a Long-Run Monetary Policy Framework, Part 3: An Example of Flexible Price-Level Targeting
- Thoughts on a Long-Run Monetary Policy Framework, Part 2: The Principle of Bounded Nominal Uncertainty
- Thoughts on a Long-Run Monetary Policy Framework: Framing the Question
- What Are Businesses Saying about Tax Reform Now?
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- Weighting the Wage Growth Tracker
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- Small Business
- Social Security
- This, That, and the Other
- Trade Deficit
- Wage Growth