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Applying Arithmetic to the Mortgage 5 Percent Retention Rule Print
Wednesday, 01 June 2011 20:49

The bankers are warning of Armageddon if a rule from the Dodd-Frank bill is left in place that requires that retain a 5 percent stake in mortgages where the owner puts less than 20 percent down. In effect, that if the bank sells a loan into a security pool that had a down payment of less than 20 percent, it will be liable for at least 5 percent of the losses incurred on the mortgage if there is default.

While the bankers are portraying this as an ominous restriction that will prevent them from making loans to moderate-income homeowners, a little arithmetic suggests otherwise. Before the bubble, Freddie Mac estimated that its average loss on a foreclosed property was 25 percent of the mortgage's value.

If we assume that the mortgages in question will have the same 25 percent loss rate once the market becomes more normal, then this would imply a loss of 1.25 percent of the mortgage's value, given the bank's 5 percent stake. If one in ten of these mortgages go bad, then this implies an average loss of 0.125 percent on loans in this category.

However, this calculation assumes that the bank can sell off a mortgage with less than 20 percent down at the same price that it can sell off a mortgage with 20 percent or more down. Since this is almost certainly not true, then the loss to the bank from this provision would be somewhat less than 0.125 percent of the price of the mortgage. If this loss were fully passed on to homebuyers then the impact of this provision would at most be equivalent to raising the cost of a mortgage by 0.13 basis points, and almost certainly considerably less. Given this arithmetic, it is not plausible that this 5 percent rule will have any noticeable effect on the access of moderate-income families to mortgages.

 
Ruth Marcus Blames Private Medicare Insurers for the Lack of Innovation in the Pharmaceutical Industry Print
Wednesday, 01 June 2011 07:15

Of course she probably did not know that this is what she is doing in her hypothetical conversation between "Paul" and "Barack," but that is exactly what she is doing when she touts the lower than expected cost of the Medicare drug benefit. The main reason that the drug benefit cost less than expected is that drug prices in general have gone up less than expected. And, the reason that drug prices have gone up less than expected is that there have been very few new blockbuster drugs in last decade.

This means that even though the industry claims that it is spending more than ever on research, it has much less to show in the form of new drugs than it did 20 years ago. It seems a stretch to blame this lack of innovation on the private insurers offering the Medicare drug benefit, but we can't question a very serious person with a regular column in the Washington Post.

The rest of this hypothetical discussion is equally confused. Contrary to what it asserts, the vast majority of Democrats did not think it was okay to have just private insurers in the exchanges set up under the Obama plan. They pushed hard to include a good public option. However, they did not have the 60 votes to get a public option through the Senate.

And the comparison of the cost of the Ryan plan to the existing Medicare plan is not a hypothetical. The additional $34 trillion cost that CBO projected for buying Medicare equivalent policies is based on the actual history with Medicare Plus Choice and Medicare Advantage. How many times must this experiment be repeated before its results are accepted?

It is worth noting that there is a simple mechanism for saving large amounts of money under the Medicare system. The government could give beneficiaries a voucher that would allow them to buy into the health care systems of other countries with longer life expectancies than the United States. The beneficiary and the government could split the tens of thousands of dollars in projected annual savings. If the Post was not such an ardently protectionist paper it would support this program

 
The WSJ Gets Scary With Debt Print
Wednesday, 01 June 2011 05:09

The WSJ had a chart alongside an article on the House vote on raising the debt ceiling. The chart shows the debt ceiling through time. The ceiling is shown in nominal dollars. By not adjusting for the growth in the economy or even the rate of inflation, the chart makes the ceiling look hugely out of line with past levels.

That's a good practice if the point is to scare readers about the size of the debt. It is bad journalism. The debt ceiling was higher relative to the size of the economy during World War II and its aftermath.

It's also worth commenting on its reference to credit default swaps (CDS) as a reference to the risk that investors assign that the U.S. could default on its debt. In fact, the price of CDS on the U.S. debt imply nothing of the sort. If the government actually defaults on its debt, the issuer of a CDS on the debt will almost certainly be bankrupt, so the CDS would itself be worthless.

Rather than being a bet on the government defaulting on its debt, the price of a CDS on U.S. government debt should be viewed as a bet on how much people will be willing to pay for the CDS tomorrow. In this way the price of a CDS on U.S. debt can be viewed as comparable to the price of an awful painting by a very famous artist. No one actually wants the painting, but it may hold great value because other people are willing to assign it great value.  

 
The Washington Post Still Has Not Heard About the Housing Bubble Print
Wednesday, 01 June 2011 04:54

If the Washington Post sent reporters through northern Japan they would note the wrecked roads and buildings, the large number of deaths, the crisis at the nuclear power plants, but they would never notice the earthquake/tsunami that caused it all. That is what one can assume from its continued failure to notice the housing bubble.

Anyone who followed trends in house prices should not have been at all surprised by the drop in prices reported for March (the "double-dip"). Nationwide house prices are still close to 10 percent above their long-term trend.

No one -- as in not a single economist anywhere -- has presented a remotely plausible reason as to why we should expect house prices to diverge from their 100-year long trend. Given the continued near-record vacancy rates, and huge inventory of homes in the foreclosure process, there is no reason to think that house prices will stop falling any time soon.

The Post should try to find at least one person who recognized the housing bubble (the largest asset bubble in the history of the world) for its articles on the housing market, instead of relying exclusively on people who were caught by surprise by its collapse.

 
NYT Tells Readers That a Mother "Seems" Delighted That Her Daughter Was Elected to Congress Print
Tuesday, 31 May 2011 05:14

This is worth noting because the NYT is so anxious to tell readers what politicians actually believe about the deficit, Social Security, and other issues. It is much easier to accept that Pat Courtney was actually delighted about her daughter Kathy Hochul's election to Congress than that most politicians believe the things they say about government policy.

(Hat tip to Ben Ross.)

 
The NYT Still Hasn't Heard About the Housing Bubble Print
Tuesday, 31 May 2011 04:31

The NYT had a front page article on the prospect that house prices will hit a new post-bubble low with the release of new data from the Case-Shiller index. (This refers to nominal house prices. Real house prices are down by about 4 percent from their low in 2009.) The article does not make any reference to the housing bubble.

At this point the bubble is mostly deflated, but real nationwide house prices still must fall back by about 10 percent to get back to their 100 year-long trend. It would have been worth mentioning this trend in this article.

The article also includes a misstatement by Douglas Yearley Jr., the CEO of the builder Toll Brothers. Yearley is quoted as saying, "no one ever renovated the kitchen or redid a room for the kids in a rental."

This is not true. In cities that give security of tenure to renters, meaning that it is difficult for landlords to kick them out, it is not uncommon for tenants to pay for major repairs/renovations to their units.

 
David Brooks Wrecked the Economy Print
Tuesday, 31 May 2011 04:18

No, I don't have any evidence for that assertion, but neither does David Brooks have any support for the assertion that today's graduating college seniors, "inherit a ruinous federal debt."

It's apparently a day for throwaway lines and I wanted to play too. 

 
NPR Misinforms Listeners About German Unemployment Print
Tuesday, 31 May 2011 04:07

In its top of the hour news segment (no link) Morning Edition told listeners that the unemployment rate in Germany had fallen to 7.0 percent. This is misleading. The 7.0 percent figure is the official German measure of unemployment. This measure counts part-time workers desiring full-time jobs as being unemployed.

By contrast, the OECD calculates a harmonized unemployment rate that uses a methodology that is comparable to the methodology used in the United States. By this measure, the Germany unemployment rate had already fallen to 6.3 percent by March.

News outlets should present the OECD harmonized measure to their audiences. If they use the German government measure, at the very least they should point out that it is not directly comparable to the U.S. rate.

 
Right to Rent Trumps Moral Hazard Print
Monday, 30 May 2011 18:08

In response to my friend, Jared Bernstein, responding to Paul Krugman, let me point out that there was a real simple, non-bureaucratic way in which to allow underwater homeowners to stay in their home and get out from under their crushing mortgage burden.

If we just gave them the option of staying in their home paying the market rent, post foreclosure, it would immediately give them housing security and relieve them of the prospect of paying a crushing mortgage debt. This requires no taxpayer dollars, no government bureaucracy, nor moral harzard, and it would have given immediate relief. This was good enough for conservatives like Desmond Lachmon at the American Enterprise Institute and Andrew Samwick, but not for the folks in the Obama administration.

I can see why people who work for the banks opposed right to rent, but not why anyone else would.

 
Bruce Ramsey and the Seattle Times Can Say Untrue Things About Social Security Because the Government Cannot Sue for Libel Print
Sunday, 29 May 2011 15:54

Bruce Ramsey, a columnist for the Seattle Times, apparently thinks it is really cute to call the U.S. government bonds held by Social Security "IOUs." That is the only possible explanation for using this unusual term for government bonds in a column that is completely incoherent.

Ramsey apparently thinks that he is giving his readers news by telling them that they don't have a constitutional right to Social Security. This is of course true, but people do not have a constitutional right to many things that they can reasonably depend on, such as drinkable water, roads they can walk and drive on, not having their income taxed at a 90 percent average rate.

Congress could change laws tomorrow and make it so that we no longer enjoy any of these items, the constitution will not prevent them. But most of us conduct our lives as though Congress will not take such steps, because any Congress that did take away any of these items would likely be voted out of office quickly. Similarly, any Congress that substantially reduced Social Security benefits would likely be looking for new jobs quickly also. So, there is no constitutional right to Social Security benefits; there is just the fact that in a democracy it will be very difficult for Congress to substantially reduce Social Security benefits, since almost everyone either depends on them or expects to depend on them in the future.

But the serious inconsistency problem arises when Ramsey talks about the government bonds held by the Social Security trust fund:

"If you or I had the bonds, we would be trillionaires. But Social Security is the government — and an organization's IOUs are not an asset to itself."

Okay, first off, under the law, Social Security is a distinct entity from the government. Mr. Ramsey may not like this fact, but that is the law. This means that the bonds held by Social Security are an asset to Social Security.

Congress can change the law, but as the law is written now, both the bonds and interest on the bonds are assets to Social Security. This means that under current law as long as the trust fund holds bonds, Social Security must pay full benefits. (If Mr. Ramsey knows any member of Congress who plans to vote to default on the bonds held by the trust fund he could do a great service to his readers by publishing their names. Their constituents would probably want to keep this information in mind at election time.)

The inconsistency in Ramsey's argument is that if we take his "Social Security is the government" line at face value then his article makes no sense.

Let's say Social Security is the government just like the Defense Department, the Education Department or the State Department. What does it mean to say that Social Security has a deficit? Does the Defense Department have a deficit?

If Social Security is just like any other part of the government then it makes no sense at all to discuss the program as running as a surplus as deficit. The government collects revenue though a variety of sources, including a payroll tax, and it has various expenses. If we take Ramsey's view of Social Security (ignoring current law) then claiming that Social Security has a deficit or faces a shortfall is nonsense.

Of course that is not the direction that Ramsey goes. He wants to cut benefits because current Social Security tax revenues are less than current benefits. However after he just told us that there is no link between these two -- Social Security is the government -- there is no reason anyone should care whether the payroll taxes designated for Social Security are bigger or smaller than the benefits paid out.

Essentially what Ramsey wants is to say that Social Security is the government when taxes exceed benefits, so the money cannot be banked for future benefits -- but Social Security is not the government when benefits exceed taxes -- so then he can say that benefits have to be cut.

It's dishonest, but hey, it's not like Social Security can sue him for libel.

 
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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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