The View from Right Field

The Problem with Models

In her Notebook column in Saturday’s Financial Times,¹ Gillian Tett notes that auto loans, including “subprime” auto loans, have risen sharply over the past year.  In addition, the number of delinquent car loans, especially in the subprime category, are rising, too.  In fact, a million more Americans are delinquent on their car loans now than in 2010.

In trying to come up with a reason for the increase, which has apparently left some observers baffled, Ms. Tett says:

“But there is yet another possible explanation: consumer behavior might be shifting and, in the process, upending economists’ projections about default, as subprime mortgages did a decade ago.”

Ms. Tett notes that economists missed the subprime mortgage collapse because, inter alia, their models assumed consumers would default on the loans in a particular way: first, credit cards; second, auto loans; and last, mortgages.  But that wasn’t what happened.  People defaulted on the mortgages first.  Ms. Tett suggests this was because it was more acceptable to default on a mortgage but people needed their credit cards to live.  I would say it slightly differently: People started defaulting on their mortgages first because they realized that, in many states, it took a long time for people to get evicted from their house, while the effects of defaulting on their credit card or auto loan were more immediate.

Will Trump Reach a Real Agreement With China? More Importantly, Can Pandas Fly?

Donald Trump has delayed the March 1 deadline for increasing tariffs on Chinese imports, saying that he expects the details of a final deal between the U.S. and China will be worked out at a summit meeting with Chinese President Xi Jinping, to be held at President Trump’s Mar-a-Lago estate in Florida.  One question, of course, is what any such agreement would provide.  Would it just cover China agreeing to buy more stuff from the United States or would it really change the way the Chinese economy works?

The Economist, in a leader in its current issue (“Can pandas fly?”¹), encourages President Xi to, inter alia, limit the state’s role in allocating capital and temper China’s industrial policy.  The Economist says that “[a] more economically liberal China would end up richer and make fewer enemies.” 

But this misunderstands President Xi’s priorities – and the priorities of his predecessors.  Thirty years ago, Deng Xiaoping crushed the protesters in Tiananmen Square because maintaining control was worth putting his economic reforms on hold for a time.  It is the same with President Xi.  Growth is nice, but political control is more important.
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¹ “Can pandas fly?” was the title of the leader in the print edition of The Economist.

John C. Bogle, RIP

John Bogle, the man who essentially invented the idea of index fund investing for individual investors, passed away yesterday at the age of 89.¹

In 1976, the Vanguard Group, the company which was formed by Mr. Bogle in 1974, established First Index Investment Trust, the first index mutual fund for individual investors.  The fund only collected $11 million during its initial underwriting, but today, the fund, now known as Vanguard 500 Index Fund, has more than $400 billion in assets. 

Unlearning the Lessons of the Financial Crisis – One at a Time

In an interview with FT Weekend,¹ former Federal Reserve chairman Janet Yellen said that, even though work on the post-financial crisis regulatory framework is yet to be finished, Washington is already moving to ease “burdens” on financial firms.  Among the key concerns for Ms. Yellen is lending to indebted, less-creditworthy corporate borrowers, which she sees as a potential source of systemic risk.

In light of her comments, one wonders what she thinks of an article in The Wall Street Journal last week indicating that Fair Isaac Corp., the company that created the FICO credit rating score, is planning on revising the way the score is calculated.  In addition to measuring how people manage their credit, which is what they do now, Fair Isaac will look at how people manage their cash.  The idea, according to the article, is “to boost the number of approvals for credit cards, personal loans and other debt”.

Ten Years After the Big Bust

There actually are things going on other than the Great Brett Kavanaugh Nomination Spectacular.  For example, Donald Trump is playing Tariff-O-Rama with China, and yet the Dow Jones Industrials and the S&P 500 hit record highs on Thursday, and the Dow did it again on Friday.  And the yield on 10-year Treasuries is near a seven-year high.¹ 

Plus it’s the tenth anniversary of the big bust in 2008: the Lehman Brothers bankruptcy and the Great Recession that followed.²  Two of the big questions that have been discussed recently are: (i) did the government respond appropriately, in 2008-09, to what was happening then; and (ii) have we made sure that what happened then can’t happen again?

First, how was our response in 2008-09?  Without going into all of the detailed arguments that have been made, I would simply answer the question this way:  Could things have been done better?  Sure.  Could they have been handled worse?  Absolutely.  Which pretty much answers the question in my mind.  Because it seems fairly clear to me that the mistakes that were made were a lot fewer than the mistakes that could have been made but were not.

Uncertainty

I have talked before about how uncertainty can slow down the economy.  Businesses won’t invest if they are uncertain what the future holds.  During the Obama administration, uncertainty in regulatory matters, what the government was going to do, what new rules or costs the Administration might come up with, was a drag on the economy.  It seems like President Trump’s “trade wars” are probably a bit of the same today, and it could get worse.

But uncertainty is just as much of a problem, if not more, in foreign affairs.  Almost regardless of what your position is, it is better if other countries know what your position is and know that you will follow through on it than if they are uncertain.  Which brings me to Donald Trump.

What we have seen so far is President Trump saying, or tweeting, one thing and his administration saying something else.  President Trump denies (at least sometimes) that the Russians tried to interfere with the 2016 election.  People in his administration, such as Dan Coats, Director of National Intelligence, say the exact opposite.  President Trump rips on NATO.  Secretary of Defense James Mattis goes on trips trying to reassure our allies that our commitment is still strong.

What Can We Learn from the Financial Crisis – and Could It Have Been Handled Better?

As Harvard professor¹ Greg Mankiw says, the conventional wisdom is pretty clear on what caused the 2008 financial crisis:

“In the mid-2000s, the nation experienced a housing bubble.  A combination of stupidity, negligence and malfeasance led a bunch of Wall Street firms to make excessively risky bets that the bubble would go on forever. …

[W]hen the bubble burst, these new homeowners defaulted in record numbers, and the Wall Street firms headed toward insolvency. ...

Fortunately, policymakers came to the rescue.”

Inflation Finally Hits the Fed’s Target. Is This a Good Thing?

One assumes the Federal Reserve is happy that inflation is up.  After falling below the Fed’s 2% target for six years, the Commerce Department has reported the CPI for personal consumption items, excluding food and energy, was up 2% on a year-to-year basis in May.  And the index including food and energy was up 2.3%. 

As an aside, it is interesting that the Fed apparently likes to look at the former, because it is less volatile, when consumers focus on the latter because that is what they pay.  To the extent that expectations regarding inflation matter, and many economists believe they do, one would think the latter might be of more relevance.

A Cashless Society Plus China’s Social Credit System Equals …

­In May, FT Weekend had a long article on the increase in the number of payments being made electronically and asked, “Does cash have a future?” The subheadline read: “Electronic payment is quick, convenient, germ-free and can deter crime, from tax evasion to terrorism.  So why are we so reluctant to give up on coins and notes.”¹

The pluses of cash-free transactions are many.  For businesses, more cash-free transactions mean lower costs.  There are fewer break-ins by people looking for money.  Not having to handle cash is cheaper: you don’t have to count it; and you don’t have to physically take it to the bank.

Rebuilding In the Houston Flood Plain?

They are starting to rebuild in Houston after Hurricane Harvey, and there are disputes about how and where to rebuild.  Here are some excerpts from a recent Washington Post article:

“‘What are we going to do in these neighborhoods that people just don’t want to leave?’ said Stephen Costello, Houston’s chief resilience officer, whose task is to balance development and flood protection as the city recovers. …

The need to build even in flood-susceptible areas is the result of the region’s projected growth rate. …