Showing posts with label Op-Ed. Show all posts
Showing posts with label Op-Ed. Show all posts
Monday, June 30, 2008
Op-Ed at RealClearMarkets - Oil Speculation
A more polished version of my post on Friday was published today on Real Clear Markets. It can be found here.
Thursday, May 22, 2008
RCM Op-ed "A Tale of Two (Housing) States"
There is never a problem so small that central planners cannot make far worse. So-called “Smart Growth” regulations have crippled the market’s ability to produce a stable home price environment and have aided the housing and credit crises.
In the ‘90s, urban sprawl became a buzzword amongst environmentalists and the urban planning community. It was supposedly ugly, polluting, and destroying open space. The most objectionable quality, however, was that our cities did not fit the idyllic patterns of the Europe experienced on college semesters abroad. Parts of the country, notably California, gave license to urban planners to force new development patterns mimicking those of centuries past. By employing a myriad of limits and mandates, the plans forced growth into dense urban centers. The ideas hopped the pond and spread the world over.
Not understanding that the economics of home construction will not match a predetermined plan, new myopic regulations ran amok. The supply of new homes in these Smart Growth markets began to slow. By rationally responding to this new artificial restriction on supply, home prices rose rapidly. For a while, Smart Growth was making many people very rich on paper.
Other cities, however, imbibed much less of the Smart Growth kool-aid and prices stayed low.
According to the S&P Case-Shiller Index, home prices in the Los Angeles and San Diego metros soared by 18% and 15% annually between 2001 and mid-2006. At the same time in the Atlanta and Dallas metros prices grew a mere 4.4% and 3% annually. Index data prior to 2001 is unavailable for Dallas, but home prices in Atlanta grew at the same 4.4% between 1991 and 2001. Adding to this price paradox is that Atlanta and Dallas were consistently among the fastest growing metropolitan areas in the United States.
It was then in mid-2006 that home prices in many of the highflying cities hit their all-time highs. Afterwards, home prices began to ease in L.A., San Diego, and San Francisco all before the foreclosures began to rise. The stock price of Countrywide hit an all-time high on Feb 2, 2007, showing that mortgage-lending investors had little idea of what was coming.
Home prices when rising at double-digit rates in a liquid market allow many to avoid foreclosure. Equity was growing too quickly to catch many people underwater on their mortgage. When home prices rose to more than ten times median income in California, demand simply could not continue to rise. Flat and then falling prices revealed how many people really could not afford to own a home.
For California, RealtyTrac data shows that foreclosures did not appreciably rise until August of 2006, but home prices were already flat in L.A. and falling in San Diego and San Francisco. Within six months, foreclosures in California grew by 30% and then a whopping 256% more within a year. The massive wave of foreclosures did not occur until nearly a year after prices had already started to drop.
The credit crisis began in part by the way that mortgage-backed securities are priced and by the highly leveraged nature of the mortgage lending industry. This home price boom wreaked havoc on a financial system unaccustomed to such volatility. Ratings are given to mortgage-backed securities based on backward looking analysis of defaults. In an environment where rapidly rising home prices mask foreclosures, risk premiums were too low and values too high on these securities. This practice had been a reliable model due to decades of steady trends. The mortgage lending business model was based on borrowing at low interest rates, lending to consumers at higher rates, and reselling the overpriced mortgage bundles to institutional investors. This system was unprepared for the fundamental changes brought by Smart Growth.
Defaults began to climb as prices fell, causing both the rate and severity of foreclosures to increase. At the same time interest rates were rising. The margins for mortgage lenders disappeared, and some companies collapsed. Any company or hedge fund that leveraged itself assuming faulty valuations of mortgage-backed assets was suddenly in trouble as well.
With less demand for their mortgage bundles, fewer loans were arranged. A vicious cycle set in where falling prices left more people underwater on their loans leading to more foreclosures. More foreclosures increased the supply of homes on the market leading to falling prices.
Painting Smart Growth as the culprit becomes inevitable because other theories on the housing crisis offer no explanation for geography. The Dallas metro was not experiencing the same surging prices as Los Angeles, but the differences do not stop there. Foreclosure rates in Texas have remained flat in the last two and a half years. Even with all the alleged and rampant fraud, resetting of ARMs, and irresponsible borrowers, Texas saw no surge in foreclosures. The only effect seen is slower sales after tightened credit requirements late in 2007. In Texas, there never was a bubble nor would there ever have been a credit crisis.
The only rational explanation for the differences between cities experiencing the housing crisis, and those that are not, is the prevalence of “Smart Growth” legislation. Sinister mortgage lenders and reckless borrowers are not the culprits. This housing crisis is an unprecedented disaster because of unprecedented meddling in the economics of housing development by the peddlers of “Smart Growth”. This scenario will happen again and again if its distortions are not removed.
In the ‘90s, urban sprawl became a buzzword amongst environmentalists and the urban planning community. It was supposedly ugly, polluting, and destroying open space. The most objectionable quality, however, was that our cities did not fit the idyllic patterns of the Europe experienced on college semesters abroad. Parts of the country, notably California, gave license to urban planners to force new development patterns mimicking those of centuries past. By employing a myriad of limits and mandates, the plans forced growth into dense urban centers. The ideas hopped the pond and spread the world over.
Not understanding that the economics of home construction will not match a predetermined plan, new myopic regulations ran amok. The supply of new homes in these Smart Growth markets began to slow. By rationally responding to this new artificial restriction on supply, home prices rose rapidly. For a while, Smart Growth was making many people very rich on paper.
Other cities, however, imbibed much less of the Smart Growth kool-aid and prices stayed low.
According to the S&P Case-Shiller Index, home prices in the Los Angeles and San Diego metros soared by 18% and 15% annually between 2001 and mid-2006. At the same time in the Atlanta and Dallas metros prices grew a mere 4.4% and 3% annually. Index data prior to 2001 is unavailable for Dallas, but home prices in Atlanta grew at the same 4.4% between 1991 and 2001. Adding to this price paradox is that Atlanta and Dallas were consistently among the fastest growing metropolitan areas in the United States.
It was then in mid-2006 that home prices in many of the highflying cities hit their all-time highs. Afterwards, home prices began to ease in L.A., San Diego, and San Francisco all before the foreclosures began to rise. The stock price of Countrywide hit an all-time high on Feb 2, 2007, showing that mortgage-lending investors had little idea of what was coming.
Home prices when rising at double-digit rates in a liquid market allow many to avoid foreclosure. Equity was growing too quickly to catch many people underwater on their mortgage. When home prices rose to more than ten times median income in California, demand simply could not continue to rise. Flat and then falling prices revealed how many people really could not afford to own a home.
For California, RealtyTrac data shows that foreclosures did not appreciably rise until August of 2006, but home prices were already flat in L.A. and falling in San Diego and San Francisco. Within six months, foreclosures in California grew by 30% and then a whopping 256% more within a year. The massive wave of foreclosures did not occur until nearly a year after prices had already started to drop.
The credit crisis began in part by the way that mortgage-backed securities are priced and by the highly leveraged nature of the mortgage lending industry. This home price boom wreaked havoc on a financial system unaccustomed to such volatility. Ratings are given to mortgage-backed securities based on backward looking analysis of defaults. In an environment where rapidly rising home prices mask foreclosures, risk premiums were too low and values too high on these securities. This practice had been a reliable model due to decades of steady trends. The mortgage lending business model was based on borrowing at low interest rates, lending to consumers at higher rates, and reselling the overpriced mortgage bundles to institutional investors. This system was unprepared for the fundamental changes brought by Smart Growth.
Defaults began to climb as prices fell, causing both the rate and severity of foreclosures to increase. At the same time interest rates were rising. The margins for mortgage lenders disappeared, and some companies collapsed. Any company or hedge fund that leveraged itself assuming faulty valuations of mortgage-backed assets was suddenly in trouble as well.
With less demand for their mortgage bundles, fewer loans were arranged. A vicious cycle set in where falling prices left more people underwater on their loans leading to more foreclosures. More foreclosures increased the supply of homes on the market leading to falling prices.
Painting Smart Growth as the culprit becomes inevitable because other theories on the housing crisis offer no explanation for geography. The Dallas metro was not experiencing the same surging prices as Los Angeles, but the differences do not stop there. Foreclosure rates in Texas have remained flat in the last two and a half years. Even with all the alleged and rampant fraud, resetting of ARMs, and irresponsible borrowers, Texas saw no surge in foreclosures. The only effect seen is slower sales after tightened credit requirements late in 2007. In Texas, there never was a bubble nor would there ever have been a credit crisis.
The only rational explanation for the differences between cities experiencing the housing crisis, and those that are not, is the prevalence of “Smart Growth” legislation. Sinister mortgage lenders and reckless borrowers are not the culprits. This housing crisis is an unprecedented disaster because of unprecedented meddling in the economics of housing development by the peddlers of “Smart Growth”. This scenario will happen again and again if its distortions are not removed.
Friday, May 2, 2008
New Op-Ed at RealClearMarkets
I was invited this week to write an op-ed for Real Clear Markets concerning ethanol mandates. I dislike the mandates, but I had some problems with the logic people were using to attack them. At any rate, here it is:
Contradictory Food-Price Signals
By Brian Shelley
From Haiti to the Himalayas food riots have broken out over the soaring price of staple foods like rice, wheat and corn. A number of economists have been rallying around the idea that ethanol subsidies are to blame, and they paint a compelling story. The problem is that this story contradicts another one told about farm subsidies.
Simple economic analysis backs the claim that ethanol subsidies increase prices. The reasoning goes that demand for grain has risen because fuel now competes with food as the end use of farm output. Without the subsidies ethanol would not be able to compete as an energy source, but Uncle Sam has intervened with mandates that states increase the share of ethanol to be mixed with gasoline. With a significant portion of grain supply being diverted to energy production, a smaller amount of food is available for a growing world population. The price, in response to these market changes, has risen significantly.
News reports leave little doubt that high prices are hitting subsistence level consumers around the world, and anger has lead to riots. Images of gaunt refugees swarming delivery trucks flash in our minds when we hear aid agencies speak of the plight induced by high prices. The economic logic makes the argument a reasonable one and having an American policy causing hunger is surely a gripping story.
Free market advocates have jumped on the news with gusto to pillory the distortions of non-market mechanism of mandates. Many have become quickly convinced that ethanol subsidies alone are guilty. The evidence has been enough to convince Texas Senator Kay Bailey Hutchison to propose legislation to freeze biofuel mandates at current levels. In her recent op-ed she authoritatively states, “The fact that America's energy policies are creating global instability should concern the leaders of both political parties. Restraining the dangerous effects of artificially inflated demand for ethanol should be an issue that unites both conservatives and progressives.” Some writers have been more calamitous, such as Deroy Murdock on National Review Online who exclaims, “’Stop!’ The emergency brake should be pulled — NOW — before ethanol wreaks further havoc.” The topic and implications have clearly yielded a lot of strong emotions.
Hyperbole aside, it would be compelling logic if only it did not directly contradict the logic against farm subsidies. Over the last few years, free market advocates portrayed the same higher prices as being good for the poorest countries. David T. Griswold of the Cato institute in his 2006 paper “Grain Drain: The Hidden Cost of Rice Subsidies” states, in reference to farm subsidies, that “U.S. policy drives down prices for rice by 4 to 6 percent. Those lower prices, in turn, perpetuate poverty and hardship for millions of rice farmers in developing countries” If farm subsidies cause lower prices and perpetuate poverty, how can ethanol mandates raise prices and perpetuate poverty? Higher prices can not be a virtue of farm subsidies, yet a vice of ethanol subsidies.
The reality is that higher food prices cause consumers to lose and producers to win, and the net effect may be positive for these poorer countries dealing with the current market disruption. The market is giving a price signal to third world producers to revive dormant production. Previously they were pushed out of production when developed-world farm subsidies undercut world prices. If Mr. Griswold is correct, then high prices may be a boon for the most desperately poor because farming is one of the few forms of production that requires virtually no capital at its most basic level. The short-term pain for consumers may be a long-term gain as the inflated prices have finally produced a profitable environment for farming in countries so desperately in need of stable food supplies and expanded enterprise.
Ethanol as the sole explanation is hard to swallow in light of other global economic issues as well. With a laundry list of other commodities experiencing price spikes in recent years it seems a stretch to think that grains are not also subject to the same forces. From the weak dollar effects of Fed policy to the rising consumer class in India and China, explanations for the broad rise in commodities are being ignored in the narrow interest of unwinding ethanol subsidies.
The economic reasoning is there to explain that ethanol mandates increase prices, but exaggerating its effects for political expediency is dishonest. It has also not been established that high food prices are unequivocally against the interest of poorer nations. If the oft-stated objection to farm subsidies is the negative effects of lower food prices on the third world, drumming this claim that high food prices are bad into the folk economic understanding of Americans harms efforts to eliminate both market distortions. Ethanol mandates may have failed in many ways, but this attack doesn’t hold much water.
Contradictory Food-Price Signals
By Brian Shelley
From Haiti to the Himalayas food riots have broken out over the soaring price of staple foods like rice, wheat and corn. A number of economists have been rallying around the idea that ethanol subsidies are to blame, and they paint a compelling story. The problem is that this story contradicts another one told about farm subsidies.
Simple economic analysis backs the claim that ethanol subsidies increase prices. The reasoning goes that demand for grain has risen because fuel now competes with food as the end use of farm output. Without the subsidies ethanol would not be able to compete as an energy source, but Uncle Sam has intervened with mandates that states increase the share of ethanol to be mixed with gasoline. With a significant portion of grain supply being diverted to energy production, a smaller amount of food is available for a growing world population. The price, in response to these market changes, has risen significantly.
News reports leave little doubt that high prices are hitting subsistence level consumers around the world, and anger has lead to riots. Images of gaunt refugees swarming delivery trucks flash in our minds when we hear aid agencies speak of the plight induced by high prices. The economic logic makes the argument a reasonable one and having an American policy causing hunger is surely a gripping story.
Free market advocates have jumped on the news with gusto to pillory the distortions of non-market mechanism of mandates. Many have become quickly convinced that ethanol subsidies alone are guilty. The evidence has been enough to convince Texas Senator Kay Bailey Hutchison to propose legislation to freeze biofuel mandates at current levels. In her recent op-ed she authoritatively states, “The fact that America's energy policies are creating global instability should concern the leaders of both political parties. Restraining the dangerous effects of artificially inflated demand for ethanol should be an issue that unites both conservatives and progressives.” Some writers have been more calamitous, such as Deroy Murdock on National Review Online who exclaims, “’Stop!’ The emergency brake should be pulled — NOW — before ethanol wreaks further havoc.” The topic and implications have clearly yielded a lot of strong emotions.
Hyperbole aside, it would be compelling logic if only it did not directly contradict the logic against farm subsidies. Over the last few years, free market advocates portrayed the same higher prices as being good for the poorest countries. David T. Griswold of the Cato institute in his 2006 paper “Grain Drain: The Hidden Cost of Rice Subsidies” states, in reference to farm subsidies, that “U.S. policy drives down prices for rice by 4 to 6 percent. Those lower prices, in turn, perpetuate poverty and hardship for millions of rice farmers in developing countries” If farm subsidies cause lower prices and perpetuate poverty, how can ethanol mandates raise prices and perpetuate poverty? Higher prices can not be a virtue of farm subsidies, yet a vice of ethanol subsidies.
The reality is that higher food prices cause consumers to lose and producers to win, and the net effect may be positive for these poorer countries dealing with the current market disruption. The market is giving a price signal to third world producers to revive dormant production. Previously they were pushed out of production when developed-world farm subsidies undercut world prices. If Mr. Griswold is correct, then high prices may be a boon for the most desperately poor because farming is one of the few forms of production that requires virtually no capital at its most basic level. The short-term pain for consumers may be a long-term gain as the inflated prices have finally produced a profitable environment for farming in countries so desperately in need of stable food supplies and expanded enterprise.
Ethanol as the sole explanation is hard to swallow in light of other global economic issues as well. With a laundry list of other commodities experiencing price spikes in recent years it seems a stretch to think that grains are not also subject to the same forces. From the weak dollar effects of Fed policy to the rising consumer class in India and China, explanations for the broad rise in commodities are being ignored in the narrow interest of unwinding ethanol subsidies.
The economic reasoning is there to explain that ethanol mandates increase prices, but exaggerating its effects for political expediency is dishonest. It has also not been established that high food prices are unequivocally against the interest of poorer nations. If the oft-stated objection to farm subsidies is the negative effects of lower food prices on the third world, drumming this claim that high food prices are bad into the folk economic understanding of Americans harms efforts to eliminate both market distortions. Ethanol mandates may have failed in many ways, but this attack doesn’t hold much water.
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