Houses of Economists- Carmen M. Reinhart

Rogoff and Carmen at Carmen's house

After much hand-wringing, he decided to return to the United States to attend Yale, which overlooked his threadbare high school transcript. He considered majoring in Russian until Jeremy Bulow, a classmate who is now an economics professor at Stanford, began evangelizing about economics.

Mr. Rogoff took an econometrics course, reveling in its precision and rigor, and went on to focus on comparative economic systems. He interrupted a brief stint in a graduate program in economics at the Massachusetts Institute of Technology to prepare for the world chess championships, which were held only every three years.

After becoming an “international grandmaster,” the highest title awarded in chess, when he was 25, he decided to quit chess entirely and to return to M.I.T. He did so because he had snared the grandmaster title and because he realized that he would probably never be ranked No. 1.

He says it took him a long time to get over the game, and the euphoric, almost omnipotent highs of his past victories.

“To this day I get letters, maybe every two years, from top players asking me: ‘How do I quit? I want to quit like you did, and I can’t figure out how to do it,’ ” he says. “I tell them that it’s hard to go from being at the top of a field, because you really feel that way when you’re playing chess and winning, to being at the bottom — and they need to prepare themselves for that.”

He returned to M.I.T., rushed through what he acknowledges was a mediocre doctoral dissertation, and then became a researcher at the Federal Reserve — where he said he had good role models who taught him how to be, at last, “professional” and “serious.” ...

And, unlike Mr. Rogoff, she has never been hired by an Ivy League school. But measured by how often her work is cited by colleagues and others, this woman whom several colleagues describe as a “firecracker” is, by a long shot, the most influential female economist in the world.

Like Mr. Rogoff, she took a circuitous route to her present position.

Born in Havana as Carmen Castellanos, she is quick-witted and favors bright, boldly printed blouses and blazers. As a girl, she memorized the lore of pirates and their trade routes, which she says was her first exposure to the idea that economic fortunes — and state revenue in particular — “can suddenly disappear without warning.”

She also lived with more personal financial and social instability. After her family fled Havana for the United States with just three suitcases when she was 10, her father traded a comfortable living as an accountant for long, less lucrative hours as a carpenter. Her mother, who had never worked outside the home before, became a seamstress.

“Most kids don’t grow up with that kind of real economic shock,” she says. “But I learned the value of scarcity, and even the sort of tensions between East and West. And at a very early age that had an imprint on me.”

With a passion for art and literature — even today, her academic papers pun on the writings of Gabriel García Márquez — she enrolled in a two-year college in Miami, intending to study fashion merchandising. Then, on a whim, she took an economics course and got hooked.

When she went to Florida International University to study economics, she met Peter Montiel, an M.I.T. graduate who was teaching there. Recognizing her talent, he helped her apply to a top-tier graduate program in economics, at Columbia University.

At Columbia, she met her future husband, Vincent Reinhart, who is now an occasional co-author with her. They married while in graduate school, and she quit school before writing her dissertation to try to make some money on Wall Street.

“We were newlyweds, and neither of us had a penny to our name,” she says. She left school so that they “could have nice things and a house, the kind of things I imagined a family should have.”

She spent a few years at Bear Stearns, including one as chief economist, before deciding to finish her graduate work at Columbia and return to her true love: data mining. “I have a talent for rounding up data like cattle, all over the plain,” she says.

Macro Podcasts

Former Director Reinhart Says U.S. Asking Too Much of Fed

Parry Says Fed Is Facing `Serious' Policy Challenges

Related;
With Fannie and Freddie, is the government mistaking a ‘first-generation’ crisis for a ‘second-generation’ crisis?;

There are two main types of crises. In a “first-generation” or fundamentals-based crisis, investors choose to flee from a currency, or actively speculate against it, because they correctly recognize that the country’s policies will not support a fixed exchange rate forever. Leaving the fixed exchange rate regime is inevitable, but the timing can be forced by market participants when they sense the government’s vulnerability. In the corporate world, if a company’s debt service is so rickety that eventually it will become insolvent, investors will flee as soon as they realize that. They will not wait until the corporate cupboard is bare.

In a “second-generation” or self-fulfilling crisis, speculators are in the driver’s seat. A country’s resources might be sufficient to maintain an exchange rate peg indefinitely, as long as the country is not forced to pay an unduly high risk premium in markets. But if investors come to doubt its ability to defend the peg, those doubts become self-fulfilling and the risk premium balloons. In other words, the peg does not hold because investors doubt that it will.

Similarly, a company might be viable as long as it can roll over maturity debt. If investors trust the firm to be viable, it can access markets. However, if its survival comes into doubt, the markets will be shuttered and, eventually, so too will the firm.

Secretary Paulson has been working on the assumption that the travails of Fannie and Freddie stem from a self-fulfilling speculative attack: in other words, that this is a “second-generation” crisis. If that is true, those speculators can be beaten back by an overwhelming show of force. Thus, the Federal Reserve has thrown open its discount window to the GSEs and the Bush administration has sought from Congress an unlimited authority to lend to Fannie and Freddie. The Fed and the White House hope this will convince market participants that GSE debt will always be honored and that all maturing obligations can be rolled over at narrow spreads to Treasuries. The mere possibility of a massive governmental infusion of funds should squash the crisis of confidence without any need for disbursement.

Meanwhile, the Securities and Exchange Commission (SEC) has prohibited the “naked” short selling of the shares of certain financial firms, including those of Fannie and Freddie. (A naked short sale involves selling an equity you do not have in your possession.) In addition, the SEC is apparently becoming more aggressive in dealing with rumor-mongering among traders.

Again, the assumption is that the financial woes of the GSEs derive from speculative withdrawal rather than from weak fundamentals. But this assumption might be wrong. Fannie and Freddie are called the two housing giants for a good reason: they own or guarantee over $5 trillion worth of U.S. mortgages—more than half the market. Which means they have a large, under-diversified exposure to a sector that has plummeted.

Mistaking a “first-generation” crisis for a “second-generation” crisis is a lot like countersigning a loan for a relative who turns out to be feckless. Three unfortunate developments ensue.

Messages from Merrill’s Misfortunes;

Perhaps more firms will follow Merrill’s path and seek to raise new capital. But aggregate financial losses may wind up dwarfing private-sector resources. In that case, the health of the U.S. economy may require an injection of government funds into the financial sector. One lesson of the savings-and-loan debacle of the late 1980s—and also a lesson of banking crises worldwide—is that delaying such a government capital injection will raise the overall tab. With federal resources already stretched thin and many national priorities unfulfilled, the idea of sinking still more money into large financial firms seems distasteful. But we must accept the fact that our national economy is hostage to the financial system.

Repel the calls to contain competitive marketsBy Alan Greenspan

Assorted Five

Five readings on currencies and monetary policy

Inside the Economist's Mind: A Book Review

Nobel Prize winner Robert Lucas recalls that when he was a little boy, in the 1940s, his father asked him if he thought there were any differences in the quality of the milk delivered by the five or six dairies that sent truck to their neighborhood. The young Lucas replied that the milk was probably quite similar. His father then told him "that under socialism only one truck will deliver to all the houses on each block, and the time and gasoline wasted in duplicating routes will be used for something else."...

Friedman pooh-poohs the notion that he wielded great policy influence on U.S. presidents, saying that they "would have acted as they did if they had never seen me or heard from me." He also dismisses as grandiose the view that he had a well-thought out agenda for restoring the luster of capitalism and free markets: " ... people have a tendency to attribute to me a long-term plan; they think I must have planned this campaign. I did no planning whatsoever. These things just happened in the order in which they happened to happen. And luck plays a very large role, a very large role indeed." Samuelson also talks about his "incredible luck" in stumbling upon economics at a time when the subject had "myriads of challenging open problems ...I once described this as being like fishing in a virgin Canadian lake. You threw in your hook and out came theorem after theorem."

And speaking of fishing, one other common trait of these eminent economists seems to be that they like to fish. The book has several interesting photographs, quite a few of which show these economists with the fish they have just caught. Perhaps fishing is an activity that involves practical problem-solving and yet allows time for deep thinking about abstract economic matters

Economic Forecasts: Too Smooth by Far?

Gelman's Great Book

Map Your Neighborhood, by the Numbers
A new Web site allows home buyers, real-estate developers, nonprofit groups and any other interested parties to map neighborhoods for free using a wide range of data, such as per-capita income, education levels and unemployment. PolicyMap is a clever tool that makes government statistics more useful and accessible, though it also highlights some limitations in the U.S.’s numerical self-knowledge.

Podcast of the Day

Harvard's Glaeser Says Home Prices Need to Fall Further

Related;
Housing Supply and Housing Bubbles

Link of the Day

Walk Score

Demand Contingent Plans against tail risks from your governments

Finally, in conclusion, I would like to say that my blog at IMF.org is again up and running. Please invite your readers and listeners to ask questions or post comments there. To make things a little more interesting, while I have been speaking, I have put up a post regarding what I regard as the key messages from this morning's discussions. Thank you very much.

Finally, let me comment briefly on some policy implications of this global assessment. A key message is that, with continuing tensions and uncertainties prevailing in global markets, policymakers in both advanced and emerging economies need to respond to a potentially quickly changing balance of risks. In addition, in our view, now is the time when prudent governments will draw up contingent plans to guard against deeper "tail risks."

Priority must be given to containing financial disruptions in a durable manner. As was discussed at yesterday's press conference on our Global Financial Stability Report, a key focus must continue to be recognizing losses quickly and rebuilding financial capital.

Macroeconomic policies can play a complementary role in supporting demand and limiting the negative interaction between financial markets and the real economy.

Monetary policy remains the first line of defense. Central banks in several advanced economies, notably the United states, have appropriately eased policy rates as their growth outlooks have worsened, and may need to continue easing until their economies find a firmer footing. In the Euro Area, current inflation remains uncomfortably high, but we expect that inflation will come down over the relevant roughly two-year policy horizon in the context of slower growth. This should provide some room for future policy easing on the part of the European Central Bank.

Fiscal policy is the second line of defense. The U.S. fiscal stimulus, for example, looks likely to provide timely support in the second half of this year. However, the use of fiscal space, where available, should be temporary and not jeopardize efforts aimed at consolidating public finances over the medium term.

Given the risk of negative interplay between housing and credit markets, the so-called third line of defense—namely, the use of public sector balance sheets—may be needed to support housing and financial markets.

In the United States, steps have already been taken to ensure the availability of mortgage financing and to stem systemic risk, but more may be needed before financial and housing markets find completely stable ground.

We also cannot ignore the international aspects of the current financial crisis. Given the cross-border dimensions of exposures and counterparty risks, solutions implemented in national silos may not be adequate to resolving an underlying global problem of capital adequacy in the financial system.

In many emerging and developing economies, the challenge remains to manage inflation and overheating risks, but it will be important to respond flexibly if global downside risks intensify.

Finally, as a way to reduce global pressure on food and energy prices, more open trade policies in those products would be a good start. Less insular biofuels policy in advanced economies would help relieve some pressure. At the same time, we encourage countries to avoid raising taxes or imposing quotas on their food exports. These reduce incentives for domestic producers and also increase international prices.

Related;
IMF puts cost of credit crisis at $945bn

Investment advice from Colbert

American Dream is in the Toilet!

Garbage Warrior

Lunatics running the asylum?

The Value of Bernanke's house

Bernanke lives in Washington's Capitol Hill area in a four- bedroom, 2,600-square-foot house he bought new in May 2004 for $839,000. Almost four years later, it may not be worth any more, according to real estate records and local agents....

Real estate records show Bernanke's next-door neighbor's house sold in July 2007 for $880,000, 4.9 percent more than Bernanke's purchase three years earlier. A home four doors down and comparable in size and condition to Bernanke's has been on the market for five weeks at $899,000, after a failed attempt to sell for $988,000 in 2006....

The average sales price in the Washington area dropped to $217,780 in December, a decline of 13 percent from a record of $251,070 in May 2006, S&P/Case-Shiller data show. Washington's home prices had gained an average of 15.9 percent a year in the 10-year period ending in 2005, according to Case-Shiller figures.

-Bernanke's Own Home on Capitol Hill Shows Housing Boom and Bust

Related;
Housing Markets: A Vacant Look

'Assessment is cautiously positive'- IMF

The Financial Market Crisis and Risks for Latin America;

Asset price bubbles? Are there similar asset price bubbles that could threaten Latin America? Here the assessment is cautiously positive. No substantial exposure is reported in Latin America to the subprime-related distressed credit products that we have seen in the United States, even though the trend in some countries has been toward increased domestic securitization. It has helped that in many countries, including here in Brazil, regulatory frameworks have made it difficult for banks to either buy the kind of structured products that have been at the center of events in the United States or accumulate significant off-balance sheet exposures. Second, housing price trends do not indicate the kind of price run-up that we have seen in the United States and some European economies, although the data here is very incomplete. Against this, equities have boomed in the region, especially for commodity-linked companies, which account for a substantial share of market capitalization in Brazil, Peru, and Chile. It should help that, broadly speaking, valuations appear in line with real earnings prospects, although the performance of more commodity-dependent stock markets will depend greatly on the impact on global commodity prices if a global recession were to unfold.

Related;
The international role of the euro and its potential in Latin America

Origins of the Subprime Mortgage Turmoil, again

According to Ben Bernanke;

Over the past quarter century, advances in information technology, the development of credit-scoring techniques, and the emergence of a large secondary market, among other factors, have significantly increased access to mortgage credit. From 1994 to 2006, subprime lending increased from an estimated $35 billion, or 4.5 percent of all one-to-four family mortgage originations, to $600 billion, or 20 percent of originations (Inside Mortgage Finance, 2007). Responsible subprime lending expanded credit to borrowers with imperfect or limited credit histories. More renters became homeowners than would have otherwise. Though few subprime mortgages are being written today, I believe responsible subprime lending has been helpful, and at some point will be again, in fostering sustainable homeownership.

However, far too much of the lending in recent years was neither responsible nor prudent. The terms of some subprime mortgages permitted homebuyers and investors to purchase properties beyond their means, often with little or no equity. In addition, abusive, unfair, or deceptive lending practices led some borrowers into mortgages that they would not have chosen knowingly.

The current crisis has many roots. The drop in home prices in many once-hot markets is among the most significant. In a recent survey, nearly 30 percent of homeowners reported that their houses decreased in value over the past year.2 The decline in home equity makes it more difficult for struggling homeowners to refinance and reduces the financial incentive of stressed borrowers to remain in their homes. Mortgage performance data show a strong correlation between adverse house price changes and subsequent increases in mortgage delinquency and foreclosure (Avery, Brevoort, and Canner, 2007; Gerardi, Shapiro, and Willen, 2007). Investors who purchased homes in the hope of price appreciation seem particularly likely to walk away from "underwater" mortgages. Indeed, the role of investors in the housing market has increased markedly over time. According to data collected under the Home Mortgage Disclosure Act (HMDA), lending to non-owner-occupants has risen from about 5 percent of the home-purchase loans in the mid-1990s to about 17 percent of all purchases in 2005 and 2006 (Avery, Brevoort, and Canner, 2007). Mortgage delinquencies are also tied to local economic conditions; notably, several midwestern states struggling with job losses and slow income growth have seen increased delinquencies.

The deterioration in underwriting standards that appears to have begun in late 2005 is another important factor underlying the current crisis. A large share of subprime loans that were originated during this time featured high combined loan-to-value ratios and, in some cases, layers of additional risk factors, such as a lack of full documentation or the acceptance of very high debt-to-income ratios. In 2006, for example, the HMDA data suggest that nearly 40 percent of higher-priced home-purchase loans involved a piggy-back loan or second mortgage.3 Indeed, many defaults are occurring within the first few months of origination, well before payment resets occur on subprime ARM products.

Much of the weakening in underwriting standards appears to have happened outside of institutions regulated by the federal banking agencies. The HMDA data for 2006 show that more than 45 percent of high-cost first mortgages were originated by independent mortgage companies, which are institutions that are not regulated by the federal banking agencies and that sell almost all of the mortgages they originate. In this instance, this originate-to-distribute model appears to have contributed to the breakdown in underwriting standards, as lenders often found themselves able to pass on the credit risk without much resistance from the ultimate investors. For a number of years, rapid increases in house prices effectively insulated lenders and investors from the effects of weaker underwriting, providing false comfort.

Another concern is the substantial number of borrowers with subprime ARMs whose interest rates are scheduled to reset upward--about 1.5 million in 2008.4 The problem posed by resets is serious, but it may be mitigated somewhat by lower short-term interest rates and by the efforts of servicers, including those working with the Hope Now Alliance, to find solutions for borrowers facing resets, including interest-rate freezes (Hope Now Alliance Servicers, 2008). In addition, the FHASecure plan, which the Federal Housing Administration (FHA) announced late last summer, offers qualified borrowers who are delinquent because of an interest rate reset and who have some equity in the home the opportunity to refinance into an FHA-insured mortgage. Recently, the Congress and Administration temporarily increased the maximum loan value eligible for FHA insurance, which will allow more borrowers access to this program.

The current high rate of delinquencies and foreclosures is not confined to the subprime market. In 2007, about 45 percent of foreclosures were on prime, near-prime, or government-backed mortgages. Across market segments, delinquencies are rising fastest on the more-complex loans originated over the past few years. In part, that trend seems to be due to the fact that such loans were made to borrowers in weaker financial condition. In some cases, borrowers may not have fully understood the details of their loans, including the potential for large payment increases.

We're in unchartered waters- Rubin

On Friday, March 14, The Hamilton Project at Brookings hosted a discussion on proposed policy responses to the mortgage-foreclosure problem. Former U.S. Treasury Secretary Robert E. Rubin gave welcoming remarks followed by former U.S. Treasury Secretary Lawrence H. Summers, who provided an overview of the mortgage landscape and its broader economic implications. A roundtable discussion, including Michigan Law School Professor Michael S. Barr, Brookings Senior Fellow Douglas W. Elmendorf, JPMorgan Chase Senior Vice President Marguerite E. Sheehan, and NeighborWorks America CEO Kenneth D. Wade evaluated several specific proposals for ameliorating the mortgage-foreclosure problem and proposed next steps for consideration.

Listen to the podcast.

A good time to sell Adam Smith's house

IN MOST countries it would have been marked by a fanfare of press releases and a long roll of fund-raising drums. Not in Scotland. This week Edinburgh's city council put on the market the house where Adam Smith spent his last 12 years, from 1778 until 1790. Advertisements in the property sections of local newspapers seek offers in excess of £700,000 ($1.4m) for a 17th-century house of historical interest, but fail to point out its connection with the father of modern economics.

This indifference to one of Scotland's greatest sons in the city where he spent much of his adult life is curious, but consistent. His house, recently a municipal centre for troubled boys, has a small, tarnished bronze plaque recording it as the town house of the Earls of Panmure and the home of Adam Smith. His grave just off the High Street was overgrown until 2006 when, thanks to £10,000 from an expatriate Scottish oilman, it was cleaned; visitors still have to hunt for it. In Glasgow, where Smith lectured for more than a decade, a professorship is named after him but there are no other signs of his tenure.

-The economist's house is on the (free) market

Readings for the Day

How a Bubble Stayed Under the Radar- Schiller

Global Warming Paradox?

Graduate programs in development

A level playing field for cities

Why Risk Aversion Isn't

More Evidence That Andrei Shleifer Is the Most Insightful Economist of His Generation

Economics of suicide

Non-doms: move to New York City and pay more

Just how badly is the United States really doing?

Sovereign wealth is a force for stability

Jim Hamilton: There Is No More Macroeconomic Balance

Jevon's Contribution to Index Number Theory

Still Stocks Rather than Bonds for the Long Run

Fiscal Policy Surveys and the "Mueller Test"

The Virginia School

Weekend Reading List - from The Numbers Guy

China up close: understanding the Chinese economy and financial system

A brief history of central banks. -- Michael D. Bordo

Liquidity, Monetary Policy, and Financial Cycles

Are We Underestimating the Gains from Globalization for the United States?

U.S. Jobs Gained and Lost through Trade: A Net Measure

Recent concerns about the transfer of U.S. services jobs to overseas workers have deepened long-standing fears about the effects of trade on the domestic labor market. But a balanced view of the impact of trade requires that we consider jobs created through the production of U.S. exports as well as jobs lost to imports. A new measure of the jobs gained and lost in international trade flows suggests that the net number of U.S. jobs lost is relatively small—2.4 percent of total U.S. employment as of 2003.

Whither Goes Housing- Podcast

A podcast from NABE on the Housing Market

David Berson, Senior Vice President, Chief Economist and Strategist, The PMI Group, Inc.
Dowell Myers, Professor and Director, Population Dynamics Research Group, University of Southern California
Moderator: Kathryn Kobe, Director, Price Wage & Productivity Analysis, Economic Consulting Services LLC

The housing sector is an important end-use market for manufacturing and the decline of housing activity has directly affected a number of industries, especially those involved in supplying construction materials but also those supplying consumer products (appliances, furniture, carpeting, etc.) typically associated with a home purchase. Falling home prices characterize this business cycle and are now affecting manufacturing industries indirectly as consumers retrench, moderating the demand for durable and non-durable goods and then feeding back to orders and production.

The end of a miracle in UK?

Axel Leijonhufvud, the Swedish-born economist, once made an insightful observation about inflation targeting. It worked better in practice than it did in theory, he said. I feel the same about the UK economy. Given what we have long known - about the country's relatively low productivity growth rate and the erosion of its scientific and engineering excellence - the British economy should clearly not have performed quite as well as it did for the past 15 years. Economic theory would suggest that this was not possible.

In the next few years, I expect the UK economic miracle to be exposed for what it was: an overlong joyride on the back of an overlong asset price bubble. The UK economy is about to undergo a downturn at least as large as that of the US - maybe even worse, because of an even more inflated housing market and because the financial sector constitutes a larger share of gross domestic product.

According to my calculations, UK residential property prices are about 30 per cent above their trend in real terms. If the trend has not changed in the past few years, that would suggest that inflation-adjusted prices could fall by up to 40 per cent from peak to trough.

Of course, it is possible that the trend has changed, that cool Britannia has attracted so many foreign buyers that the trend line may have shifted higher forever. But foreign buyers can leave just as quickly as they arrive and their presence is related to the health of the financial sector. My guess is that the half-century-old trend line is still approximately right.

Moreover, the trend is consistent with several other indicators, such as the ratio of house prices to rents achieved, which in the UK has recently been about two-thirds above its long-term average. Whatever explanations one might come up with in defence of higher house prices, they cannot conceivably explain why house prices should be out of line with rents forever.

A house price crash would take time to unfold. Assuming a constant inflation rate of 2 per cent a year, nominal house prices would have to go down by about an unprecedented 25 per cent if the decline stretched over six years. Remember: the first stages of a housing downturn consist of denial followed by anger. A fall in actual prices is a relatively late-stage phenomenon of a housing crash.

-Britain can no longer depend on being cool