Update on the Mortgate Crisis

I have stated my tentative belief that the mortgage "crisis" isn't likely to have severe repercussions for the economy. The Independent Institute's Robert Higgs supports that argument with some real data (which my argument noticeably lacked), pointing out that there is plenty of credit still available in the U.S.

For example, commercial and industrial loans at all commercial banks were $1,503.6 billion as of June 1, 2008. This loan volume is almost 19 percent greater than it had been a year earlier, 34 percent greater than two years earlier, and 53 percent greater than three years earlier.

Or consider real estate loans at all commercial banks, which were $3,644.9 billion as of June 1, 2008. This loan volume is 5.5 percent greater than it had been a year earlier, 17 percent greater than two years ago, and 33 percent greater than three years ago.

Or consider total consumer credit outstanding, which was $2,586.3 billion as of June 30, 2008. This loan volume is 5.6 percent greater than it had been a year earlier, 10.9 percent greater than two years earlier, and 15.2 percent greater than three years earlier.

He also points out that interest rates are still low. Granted the Fed is trying to keep them that way, but I think if there had been a massive dryup of credit caused by failed banks, the Fed would have had to take much more drastic steps to keep loan rates low.

All in all, I'm not too worried about the future. Now if the housing market in my town would just warm up, so I could sell my other house...

Republicans Should Take Note

Not that I've been following the news closely, but I don't think this story from the Center for Responsive Politics is getting as much play as it should.

Democrat Barack Obama has received nearly six times as much money from troops deployed overseas at the time of their contributions than has Republican John McCain, and the fiercely anti-war Ron Paul, though he suspended his campaign for the Republican nomination months ago, has received more than four times McCain's haul.

Looks like it's not just liberals who support an early exit from Iraq.

The Democrats’ Worst Nightmare

A great irony may be unfolding before our eyes. In July, Democratic nominee Barack Obama raised $51 million dollars, while Republican nominee John McCain struggled to raise just over half that ($27 million). Obama’s total of $390 million is more than twice McCain’s $153 million. And yet Obama’s lead over McCain has narrowed.

Democrats have long complained about the power of money in campaigns, and bitterly resented that the Republicans could nearly always outspend them by tapping the wealthy business class. So now they face the stunning possibility that they could outspend the Republicans by a wide margin, yet still lose the election.

That would be ironic indeed, and just how devastating would it be to the Democratic Party?

Cafferty Pistol-whips McCain

For those who don't read CNN.com., I'll point out this vicious--but wholly fair-->critique of John McCain by Jack Cafferty. Here's a sample:

John McCain graduated 894th in a class of 899 at the Naval Academy at Annapolis. His father and grandfather were four star admirals in the Navy. Some have suggested that might have played a role in McCain being admitted. His academic record was awful. And it shows over and over again whenever McCain is called upon to think on his feet.

Ouch, that's gonna leave a mark.

Hiding Out

I'm at an undisclosed location for a few days, trying to prepare my classes for the fall term. God willing and the creeks don't rise, I'll return soon.

Pondering the Housing Market

Everyone's an Economist, Externalities Version

Standard economic theory predicts goods with positive externalities will be underproduced because the producer cannot capture the full value of what is produced (some people can enjoy it for free, without compensating the producer). From a biography of Al Wight, who, writing as James Herriot, became the world's most famous veterinarian and made the Yorkshire dales world famous, is this lovely example, which occured one day when Wight went shopping for fireworks.

[H]e made a visit to a shop [and] asked for rockets.

Another customer overheard his request and leaned towards him. "Don't buy rockets, Mr. Wight," he whispered, "they 'ave a good selection o' Roman candles an' some right good Catherine wheels, at good prices an' all!"

Alf was mystified. "My kids love to see rockets soaring to the sky. Anyway, what's wrong with rockets?

the man eased in closer. "Why, everyone else can see 'em!"

What if the Mortgage Companies Failed?

Would there really be a problem if these entities just failed? Are they like banks in that they would start contagion

This is the question asked by James K in a comment on a previous post.

The answer is, I'm not sure. I'm not an expert in the mortgage industry by any means. But what happens is that the mortgages get packed and sold to investment firms. As the high-risk packages, made up of the sub-prime mortgages, are not being repaid, nobody wants to buy those right now, and so the investment banks that sell them are currently refusing to make funds available to the subprime mortgage firms. That is, the investment banks are the secondary lenders that make money available to the primary lenders (who make the money available to the home buyer), which, if I understand correctly, they do by purchasing the loans from those primary lenders (that purchase refills the coffers of the primary lender, so they can make more loans).

If I have that wrong, I hope someone corrects it.

So I suppose the danger is that large losses accrue to the investment banks themselves, reducing the supply of credit available in general, perhaps wiping out mom and pop's lifesavings, and in general creating the "contagion."

But I have doubts the contagion would create a long-term depression, as opposed to a short-term slump--a "correction: if you will. Keep in mind that it's primarily the sub-prime loans that aren't being repaid. Those are buyers who over-extended themselves. Most of them aren't impoverished, and haven't gone to living on the street, but have had an income decline they couldn't afford because they were living on the edge. Foreclosures are at about 1 in every 200 homes, and housing prices have declined--in some areas--by 10-20%. That sounds horrible, but it's only .5% of homes, and the values haven't been totally lost. That is, the lenders can regain some of the money that the defaulters can't repay by selling the house at a lower price.

So the lenders will lose money. Fannie Mae and Freddie Mac--government created, but publicly traded, lenders--have lost, respectively, $1.3 billion in the last quarter and $5 billion in the last year. That's big amounts for those firms, but they're also the biggest mortgage backers in the country, so they're taking the lion's share of the losses. Quadruple that amount and it's still not that big a chunk of the U.S.'s $13 trillion economy.

And of course saving the mortgage firms doesn't come free. There's not some great untapped reserve of money that can be used painlessly to save them; the money will be diverted from other uses. Or more likely, we'll try to borrow more by selling more federal securities, thus continuing upward pressure on interest rates, with the attendant economic effects. Notably, what I've noticed in the arguments for rescuing the mortgage industry is a focus only on the primary effects on the industry itself--I haven't seen much on the secondary effects of industry failure or secondary effects of industry rescue. I rather suspect Bastiat's ghost might be muttering something about the seen and the unseen. I think the real question is which course of action has the greatest benefit/cost ratio.

If there is some reason to mitigate the losses, I think it would be wise to do the minimum--do what it takes to keep the effects from snowballing and wreaking great harm to the economy (and let's face it, at 5.7% unemployment, our economy is a long way from being wrecked), but not enough to let the lenders off the hook for their bad decisions.

Sarkozy, New Leader of the Free World?

French President Nicolas Sarkozy has brokered a truce between Russia and Georgia. Granted, the timing was right for Russia to make an agreement, as they'd achieved their goals, and granted the truce is fragile and both sides are claiming the other is violating it.

None of that detracts from the fact that Sarkozy did what Bush should have done. Yes, the French have at least temporarily taken away the U.S.'s role as leader of he free world. And if you don't think that's a kick in crotch to U.S. conservatives, you've already forgotten about freedom fries.

In Which I Join Positive Liberty

Jason Kuznicki has invited me to join the Positive Liberty blog. As I have liked that blog since I began reading blogs (not more than two years ago--I'm always a bit slow on the tech stuff), I'm honored to join.

That doesn't mean I'm discontinuing this blog. I just have to figure out how to split myself between the two without enervating myself. Off the top of my head, I'm guessing it will make sense to direct my longer, more thoughtful and analytical posts, to Positive Liberty, and keep shorter, more visceral ones for this blog. But we'll see how it works out in practice.

So I'm feeling good about myself today, thanks to Jason, and I hope to see you at PL soon.