Category Archives: Business and Economy

President Obama vs. Mitt Romney on dealing with housing crisis

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Even though President Obama and Mitt Romney are not officially running against each other yet, they have presented contrasting plans to deal with the housing crisis. Yesterday, President Obama offered a new “revamped refinancing program” that would help 1 to 1.5 million homeowners:

Under Obama’s proposal, homeowners who are still current on their mortgages would be able to refinance no matter how much their home value has dropped below what they still owe…

At the same time, Obama acknowledged that his latest proposal will not do all that’s not needed to get the housing market back on its feet. “Given the magnitude of the housing bubble, and the huge inventory of unsold homes in places like Nevada, it will take time to solve these challenges,” he said…

Presidential spokesman Jay Carney criticized Republican presidential candidate Mitt Romney for proposing last week while in Las Vegas that the government not interfere with foreclosures. “Don’t try to stop the foreclosure process,” Romney told the Las Vegas Review-Journal. “Let it run its course and hit the bottom.”

“That is not a solution,” Carney told reporters on Air Force One. He said Romney would tell homeowners, “‘You’re on your own, tough luck.'”

How much of these proposals is about looking for votes versus actually seeking out a plan that will help ease dropping home values, foreclosures, and a housing glut?

At the same time, the Washington Post reports that government efforts in recent years haven’t helped much:

President Obama pledged at the beginning of his term to boost the nation’s crippled housing market and help as many as 9 million homeowners avoid losing their homes to foreclosure.

Nearly three years later, it hasn’t worked out. Obama has spent just $2.4 billion of the $50 billion he promised. The initiatives he announced have helped 1.7 million people. Housing prices remain near a crisis low. Millions of people are deeply indebted, owing more than their properties are worth, and many have lost their homes to foreclosure or are likely to do so. Economists increasingly say that, as a result, Americans are too scared to spend money, depriving the economy of its traditional engine of growth.

The Obama effort fell short in part because the president and his senior advisers, after a series of internal debates, decided against more dramatic actions to help homeowners, worried that they would pose risks for taxpayers and the economy, according to numerous current and former officials. They consistently unveiled programs that underperformed, did little to reduce mortgage debts owed by ordinary Americans and rejected a get-tough approach with banks.

Too risky meaning that it was politically untenable when more people are concerned with risk and deficits?

The conversation about housing could play an interesting role in the 2012 elections as both parties look to claim the mantle of defenders of the American middle-class dream of homeownership.

Why paying off all of the American debt in the early 2000s might have caused problems

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Many people would suggest that the United States needs to tackle its growing debt problem. But a government report from the early 2000s suggests that paying off all the debt could have some negative consequences:

If the U.S. paid off its debt there would be no more U.S. Treasury bonds in the world…

But the U.S. has been issuing bonds for so long, and the bonds are seen as so safe, that much of the world has come to depend on them. The U.S. Treasury bond is a pillar of the global economy.

Banks buy hundreds of billions of dollars’ worth, because they’re a safe place to park money.

Mortgage rates are tied to the interest rate on U.S. treasury bonds.

The Federal Reserve — our central bank — buys and sells Treasury bonds all the time, in an effort to keep the economy on track.

If Treasury bonds disappeared, would the world unravel? Would it adjust somehow?

“I probably thought about this piece easily 16 hours a day, and it took me a long time to even start writing it,” says Jason Seligman, the economist who wrote most of the report…

In the end, Seligman concluded it was a good idea to pay down the debt — but not to pay it off entirely.

So which party or movement would support this? Would it be best to have a more flexible debt (small to large depending on the more immediate economic circumstances) or would it be better to have a more stable, small amount of debt?

I don’t know the intricacies of how this might all play out but it is a reminder of the globalization of finance: doing something that might be viewed as desirable in the United States would not only affect other sectors of American life but how other countries can operate. It would be interesting to know how we got to this point. Does every major country basically have some debt that other countries are counting on?

Conservatives getting behind mortgage modifications?

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A journalist argues that conservatives are starting to argue that the federal government should step in and help homeowners stay in their homes:

Mortgage modifications have been a key pillar of the progressive response to the economic downturn–and they’ve been one focus of the Occupy protests that have sprung up across the country lately. The Obama administration offered its own such program in 2009, though it has helped far fewer homeowners than anticipated, thanks to a flawed design. But until lately, conservatives had by and large opposed the idea, arguing, as Santelli did, that taxpayers shouldn’t be forced to pay for borrowers’ bad decisions, and that banks shouldn’t have their actions constrained by government.

So what’s changed? By and large, policy hands and political leaders alike recognize that the economy isn’t going to get better on its own, at least not any time soon,. There’s a widespread consensus that until the United States tackles the massive overhang of housing debt–American homeowners’ wealth has fallen by a stunning 40 percent since 2006–the economic recovery won’t gain steam. As Feldstein wrote: “The fall in house prices is not just a decline in wealth but a decline that depresses consumer spending, making the economy weaker and the loss of jobs much greater.” Rogoff, too, views the crushing volume of personal debt as an unaffordable drag on growth. “Simply put, you can’t operate an economy where huge numbers of people are desperately in debt and have no real way out,” he argues.

Hubbard originally offered a modification plan in 2010 as a way to avoid another “costly stimulus package” designed to spur consumer demand. But he, too, may also recognize that mortgage modification, though necessary for the health of the economy, is likely to be politically unpopular. If so, better to have President Obama take the hit, rather than a future Republican president—like, say, President Romney.

Of course, right and left don’t see entirely eye-to-eye on the issue. Dean Baker, an economist with the liberal Center for Economic and Policy Research, last week slammed Feldstein’s plan as too soft on banks and a bad deal for struggling homeowners. And it’s hard to imagine that Republicans in Congress would react favorably to an aggressive mortgage modification proposal from the Obama administration.

So if this is true – and “three instances” doesn’t a trend make even as this journalist suggests – what is happening?

1. Conservatives are recognizing that the mortgage debt is holding up the larger economic recovery. If people can’t move, they can’t go to the open jobs. The debt doesn’t allow them to spend on other consumer items. If government involvement can move people past this logjam, then the “free market” can work again. Desperate times mean that political ideology has to be bent a little.

2. As the journalist suggests, they only back this when a Democrat is in charge.

3. This is pandering for votes. American culture has a dream of homeownership – neither party wants to be against that.

This bears watching. Of course, the devil is in the details: who is actually going to support what? Who is going to pay for this? How many homeowners could be helped?

Knowing when to fold ’em

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The Washington Post had a fascinating article yesterday about how banks are responding to one city’s foreclosure crisis:

Cleveland — The sight of excavators tearing down vacant buildings has become common in this foreclosure-ravaged city, where the housing crisis hit early and hard. But the story behind the recent wave of demolitions is novel — and cities around the country are taking notice. A handful of the nation’s largest banks have begun giving away scores of properties that are abandoned or otherwise at risk of languishing indefinitely and further dragging down already depressed neighborhoods.

This closely mirrors the approach that Youngstown, another Ohio city, has taken to their dwindling population:

Even when the result is an empty lot, it can be one less pockmark. While some widespread demolitions could risk hollowing out the urban core of struggling cities such as Cleveland, advocates say that the homes being targeted are already unsalvageable and that the bulldozers are merely “burying the dead.”

However, unlike in Youngstown where that city is simply trying to shrink to a manageable size, the Cleveland demolitions are already leading to redevelopment:

The demolitions in some cases have paved the way for community gardens, church additions and parking lots.

For good or ill, this looks to be a growing trend for some time. The article notes that New York, Philadelphia, Georgia, and others have or soon will pass laws similar to the ones Cleveland used to authorize its land bank and teardowns. Unfortunately, there doesn’t seem to be any shortage of foreclosed property candidates:

At the end of August, the nation’s banks, along with Fannie Mae and Freddie Mac, had an inventory of more than 816,000 foreclosed properties on their books waiting for a buyer, according to RealtyTrac. An additional 800,000 are working their way through the foreclosure process.

H/t to the ABA Journal for the original link pointing me to the Post article.

Copyrighting time

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David Kravets at Wired reports on a copyright lawsuit that seems to attempt to enforce a copyright over data about time itself:

The publisher of a database chronicling historical time-zone data [Astrolabe] is claiming copyright ownership of those facts, and is suing two researchers for re-purposing it in a free-to-use database relied on by millions of computers….The researchers’ publicly available database was being hosted on a server at the Maryland-based National Institutes of Health, which apparently has removed the data at the request of Massachusetts-based publishing house, Astrolabe. The publisher markets its programs to astrology buffs “seeking to determine the historical time at any given time in any particular location, world-wide,” and claims ownership to the data in its “AC International Atlas” and “ACS American Atlas” software programs.

Wired posted a copy of Astrolabe’s complaint.  Digging into it a bit, here are the main facts alleged:

9. Defendant [researcher Arthur] Olson’s unauthorized reproduction of the Works have been published at ftp://elsie.nci.nih.gov/tzarchive.qz, where the references to historic international time zone data is replete with references to the fact that the source for this information is, indeed, the ACS Atlas [emphasis added].
10. In connection with his unlawful publication of some and/or any portion of the Works, defendant Olson has wrongly and unlawfully asserted that this information and/or data is “in the public domain,” in violation of the protections afforded by the federal copyright laws.
[11. and 12. The same as 9 and 10, except naming second defendant Paul R. Eggert.]

In other words, based on this complaint, it seems that the researchers simply took facts (e.g., “in 1900, Greenwich Mean Time +3 was defined as the longitude running from…”) and incorporated them into their own database.

If this is true, Astrolabe, as Wired points out,

faces the tough challenge of overcoming a 1991 Supreme Court decision [Feist v. Rural Telephone Service Co.], concerning a company that harvested listings from a phone company’s telephone book and re-published them. The court ruled that “copyright does not extend to facts contained in [a] compilation.”

Unfortunately, I’m guessing that Astrolabe filed this lawsuit simply to scare Olson and Eggert into a quick settlement well before a judge rule on the merits of their claim to use this data under established copyright law.  In part, my surmise is based on the counsel Astrolabe retained.  Their complaint is signed by Julie C. Maloney, an attorney who appears to be a solo practitioner based out of a small town in Cape Cod in Massachusetts.  Although she doesn’t have a law firm website, a bit of Internet searching appears to confirm that land use/zoning rather than intellectual property is her legal specialty.

While I don’t know Ms. Maloney or her professional reputation and am sure she is a capable advocate, these facts don’t suggest that Astrolabe is seeking a discussion on the legal merits of copyright law.  On the contrary, Astrolabe appears (1) primarily concerned with saving money by going with a solo practitioner rather than a bigger law firm, (2) incapable of finding a copyright-specializing attorney willing to take their (weak) case, or (3) both.

Chicago couple moves into trendy West Loop area, mad when it attracts new developments and changes

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This could be the cynical alternative headline one might apply to the front-page story of Friday’s Chicago Tribune Business section. Here is a quick overview of this story titled “West Loop project building discontent“:

In recent years, the West Loop has become a magnet for young professionals like Dore who like a balance between urban convenience and peaceful suburbs. But as Dore reached an empty parking lot on the southeast corner of Madison and Green streets, he glared at what he and his neighbors fear will be the end of their peaceful lifestyle — a parking lot that soon could be the site of a 22-story hotel.

“I’m just disappointed,” said Dore, who earlier this year became the reluctant leader of a group of neighbors who fought a losing battle against the high-rise. The first phase of the project, a three-story retail building anchored by a Mariano’s Fresh Market grocery store, is expected to break ground next month.

Their arguments that the project will block views, increase traffic and change the neighborhood’s dynamic have been made by residents in up-and-coming locations for years. As neighborhoods like the West Loop, the South Loop or the Near North Side grow, residents can be at odds with business owners, developers and city officials over the kind of development they want in their communities…

Dore and his wife, who moved to their three-bedroom condo in May 2009, say they are disappointed. Two years ago, they thought they had found a neighborhood close to the Loop that was also an ideal place to raise a family. Five weeks ago, their daughter, Anna, was born. But they are not sure they will stay in the West Loop.

The general argument here is not unusual: residents move into a neighborhood, whether in the city or suburb, the neighborhood starts changing, and residents are unhappy and start making NIMBY arguments. But several things struck me about this article:

1. I’m always somewhat surprised when residents act like the neighborhood can’t change. Particularly in this case, they moved into a trendy West Loop area. They like what this gentrified area has become. But other people and businesses want to move there as well. City neighborhoods often change rapidly and not only is this one trendy, it is relatively close to the Loop. Proponents of the new development suggest that the retail stores are needed and could be profitable. Did the residents really think that the neighborhood was going to be frozen in time?

1a. The site in question was formerly a parking lot. This unattractive use is preferable in a neighborhood? In many cities, parking lots are simply holding spaces until the owners can find a more profitable use. The money in parking lots is not the daily parking but rather waiting for the land to become really valuable and then selling the lot for big money.

2. The residents followed a typical path: form a community group, show up at public hearings, and let your local politicians know about your opinions. Just because their opinions were not followed doesn’t mean the system is broken.

3. At the same time, the article sounds like a classic example of the political economy model of growth. The neighborhood has succeeded to the point where bigger businesses now want to make money in the neighborhood. Politicians like these projects because they bring in more money in terms of jobs and property and sales tax revenues. I don’t know that there is much that the residents could have done to slow this down.

4. This really is written more as a human interest story rather than an overview of the development process. The perspective the newspaper readers get is that these residents have a legitimate grievance. Only later in the story do we hear the reasons why some want the new development to happen. Are we supposed to think that these city residents should be pitied because their West Loop paradise has been lost? The story could have been told in a completely different way that wouldn’t have made this one couple out to be victims. I’m kind of surprised this leads off the Business section because it really is a negative story when it could have highlighted how this neighborhood continues to thrive and attract development.

A call for better macroeconomic statistics

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As the economic crisis continues, one blogger suggests American macroeconomic statistics are “pretty weak” today:

In particular, the data coming out of the Bureau of Economic Analysis at the beginning of 2009 was way off. Here’s Cardiff Garcia, introducing an interview with Fed economist Jeremy Nalewaik:

The initial GDP estimate for the fourth quarter of 2008 showed that the economy contracted by 3.8 per cent. It was released on January 30, 2009 — about three weeks before Obama’s first stimulus bill passed. That number was continually adjust down in later revisions, and in July of this year the BEA revised it all the way down to a contraction of 8.9 per cent.

The BEA is happy to try to explain what happened here — but whatever the explanation, the original 3.8% figure was a massive and extremely expensive fail. It was bad enough to be able to get a $700 billion stimulus plan through Congress, but if Congress and the Obama Administration had known the gruesome truth — that the economy was contracting at a rate of well over $1 trillion per year — then more could and would have been done, both at the time and over subsequent months and years. Larry Summers warned at the time that the risks of doing too little were much greater than the risks of doing too much; only now do we know just how right he was on that front. (And even he didn’t push for a stimulus of more than $700 billion.)…

When I told Cardiff that the status of macroeconomic data-gathering has been declining for decades, I was making two separate statements — first that the quality of statistics has been declining, and secondly that the status of economists collating such statistics has been declining as well. Once upon a time, extremely well-regarded statisticians put lots of effort into building a system which could measure the economy in real time. Today, I can tell you exactly how many hot young economists dream of working for the BEA on tweaks to the GDP-measurement apparatus: zero.

Sounds like there is work to do. This commentator seems to suggest the government needs to offer the kind of money that would attract economists to this task. Are there economists out there right now who could handle this job and all it takes it some more money?

If we were looking at the causes of economic crises or perhaps what sustains them, could statistics really play a large role? Even with the best statistics, policymakers can still make bad decisions. But I suppose if the foundation of policy, the statistics that we trust to tell us what is really going on or what might, is faulty, then perhaps there is really little hope.

At the same time, I would suggest this isn’t only a macroeconomic problem: the world is complex, we want to tackle difficult problems, we are very reliant on statistical models, and there is more and more data to work with and collect. We need a lot of good people to tackle all of this.

Righthaven loses in Colorado

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Last week, Righthaven was flirting with bankruptcy due to legal fees associated with a Nevada case.  This week, the fees keep piling up, this time in Colorado:

Righthaven’s only interest in the Work is “the right to proceeds in association with a Recovery.”  The Copyright Assignment Agreement defines “Recovery” as “any and all sums . . .arising from an Infringement Action.”  Thus, when read together, the Assignment and the Copyright Assignment Agreement reveal that MediaNews Group has assigned to Righthaven the bare right to sue for infringement – no more, no less.  Although the assignment of the  bare right to sue is permissible, it is ineffectual….Accordingly, Righthaven is neither a “legal owner” or a “beneficial owner” for purposes of § 501(b), and it lacks standing to institute an action for copyright infringement….I convert Mr. Wolf’s Rule 12(b)(1) motion to a Rule 56 motion and GRANT him SUMMARY JUDGMENT.  Furthermore, in light of the need to discourage the abuse of the statutory remedies for copyright infringement, I exercise my discretion under Section 505 of the Copyright Act and ORDER that Righthaven shall reimburse Mr. Wolf’s full costs in defending this action, including reasonable attorney fees. [emphasis added]

More coverage from Ars Technica, Techdirt, and the EFF (h/t).

Assembling your own furniture benefits you through “the Ikea effect”

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Ikea may be able to have lower prices because consumers have to put together their own furniture but there could be another benefit as well for consumers: they will value their assembled purchased product more.

“When labor leads to love,” a paper in the Journal of Consumer Psychology experimentally tests “the Ikea effect” that leads to people valuing things that they assemble, customize or build themselves more highly than premade, finished goods. We’ve all heard the story of how cake-mixes didn’t sell until they were reformulated to require the “cook” to stir in a fresh egg, but most of what we know about this effect is marketing lore, not research. It’s fascinating stuff.

The abstract of the paper:

In four studies in which consumers assembled IKEA boxes, folded origami, and built sets of Legos, we demonstrate and investigate boundary conditions for the IKEA effect—the increase in valuation of self-made products. Participants saw their amateurish creations as similar in value to experts’ creations, and expected others to share their opinions. We show that labor leads to love only when labor results in successful completion of tasks; when participants built and then destroyed their creations, or failed to complete them, the IKEA effect dissipated. Finally, we show that labor increases valuation for both “do-it-yourselfers” and novices.

I suspected there may not be much positive effect when the consumer can’t assemble their purchase.

While this is interesting in itself, it leads me to another question: were companies like Ikea and others aware of this effect and therefore required assembly for more items so that consumers would have more positive feelings for certain products?

Poor in the suburbs: a growing plurality in the United States

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After a headline earlier this week about a “suburban depression,” more data shows the suburbs contain a growing plurality of the poor in the United States:

Significantly, the 2000s also marked a turning point in the geography of American poverty. The 2010 data confirm that poor populations continued their decade-long shift toward suburban areas. From 2000 to 2010, the number of poor people in major-metro suburbs grew 53 percent (5.3 million people), compared to 23 percent in cities (2.4 million people). By 2010, suburbs were home to one-third of the nation’s poor population—outranking cities (27.5 percent), small metro areas (20.5 percent), and non-metropolitan communities (18.7 percent)…

The magnitude and pace of growth in the suburban poor population over the past decade caught many communities unprepared and ill-equipped to deal with the growing need. In many suburbs, the safety net is patchy and stretched thin to begin with. The suburban social services infrastructure is not as developed or robust as in urban centers with a longer track record of addressing the challenges of poverty, nor is it as funded. And as governments continue to tighten their belts and philanthropic resources dwindle, safety net service providers are increasingly asked to do much more with significantly less.

There is also an interesting map showing the differing rates of growth in the suburban poor population across major metropolitan regions in the United States.

What’s the long-term solution to this? From what politicians seem to be suggesting, middle-class suburbanites need help keeping/buying a home, middle-class tax breaks, and good jobs. How exactly can the typical suburban communities provide services in this era of economic crisis? I wonder how much politicians and suburban communities are willing to truly deal with this or whether the ones that can afford to (or think they will afford to) will act like the issue doesn’t really exist and can’t be allowed to threaten the image of prosperous suburbs.