How to prevent the next housing crisis

New research suggests that lax lending standards caused all borrowers (prime and subprime) to increase leverage.  When house prices declined, defaults occurred across the spectrum.  In other words, the housing crisis of 2008 was caused by upper-, middle-, and low-income borrowers.

To prevent a housing crisis from bringing down banks that loan consumers money to buy houses, the authors suggest two things:

“And the question is how to absorb [losses]. Because one way to absorb them is by saying 'Even before prices become very high, can we dynamically regulate banks so that loan-to-value ratios have to be lower when prices are high. So there's more buffer in the loans of each individual person.” 

A bank collapse could also be prevented by increasing the burden on creditors in the event of failure, Schoar said. One example, she said, might be providing safeguards such as contingent convertible bonds (known as CoCos) that would convert to equity in the event of impending bank failure, stabilizing a bank before bankruptcy can occur. CoCos are undergoing a test in the European markets, where volatility among banks is causing investor concern.

Both measures will reduce moral hazard.  With higher loan to value ratios, banks will have less incentive to make risky loans; and CoCo's will discourage risky loans as well because creditors (not the government loan-insurance programs) will have to absorb losses.

What can Nashville learn from Gurgaon, India?

Higher US rates ==> Stronger dollar

Which discount rate should pensions use?

We have blogged (frequently/excessively) about our unfunded pension liabilities.  Now the largest pension fundCalpers is trying to decide at which rate it should discount future liabilities.

Top officers of the largest U.S. pension fund want to lower their investment targets, a move that would trigger more pain for cash-strapped cities across California and set an increasingly cautious tone for those who manage retirement assets around the country.

Chief Investment Officer Ted Eliopoulos and two other executives with the California Public Employees’ Retirement System plan to propose next Tuesday that their board abandon a long-held goal of 7.5% annually, according to system spokesman Brad Pacheco. Reductions to 7.25% and 7% have been studied, according to new documents posted Tuesday.

If they follow Illinois' and NY's lead, ...

The Illinois Teachers Retirement System in August dropped its target rate to 7% from 7.5% in August, the third drop in four years, and the fund’s executive director has said the rate will likely be reduced further next year. The $184 billion New York State and Local Retirement System lowered its assumed rate from 7.5% to 7% in 2015.

...cities in California will have to save more for their pensions.

The accounting maneuver would have real-life consequences for taxpayers and cities. It would likely trigger a painful increase in yearly pension bills for the towns, counties and school districts that participate in California’s state pension plan. Any loss in expected investment earnings must be made up with significantly higher annual contributions from public employers as well as the state.

Strategy is simple: "become a monopolist"

It looks as if Peter Theil has read Chapter 10:

The problem with a competitive business goes beyond lack of profits. Imagine you're running one of those restaurants in Mountain View. You're not that different from dozens of your competitors, so you've got to fight hard to survive. If you offer affordable food with low margins, you can probably pay employees only minimum wage. And you'll need to squeeze out every efficiency: That is why small restaurants put Grandma to work at the register and make the kids wash dishes in the back.

A monopoly like Google is different. Since it doesn't have to worry about competing with anyone, it has wider latitude to care about its workers, its products and its impact on the wider world. Google's motto—"Don't be evil"—is in part a branding ploy, but it is also characteristic of a kind of business that is successful enough to take ethics seriously without jeopardizing its own existence. In business, money is either an important thing or it is everything. Monopolists can afford to think about things other than making money; non-monopolists can't. In perfect competition, a business is so focused on today's margins that it can't possibly plan for a long-term future. Only one thing can allow a business to transcend the daily brute struggle for survival: monopoly profits.

Falling euro driven by low interest rates and political risks.

Why has the euro fallen so much against the dollar?  The WSJ has this take:

The U.S. Federal Reserve is moving away from monetary easing, while the European Central Bank is deep in an experiment of negative interest rates. To a large degree, a weak euro is a good thing for the eurozone’s efforts to build exports and return ultra-low inflation to healthier levels.

Recall that low European interest rates lead (i) investors to search for higher returns elsewhere (selling euros to buy dollars), and (i) foreign borrowers to borrow in euros and invest in their domestic economy (again, selling euros to buy dollars.)

But the there are also political risks.  With weaker economies, like Greece, unwilling to adopt reforms that would lead to growth, and stronger economies, like Germany, unwilling to bail them out, the future of the Euro is uncertain.  Elections in 2017 will pose further tests.

Consulting firm Bain & Co. has told clients to “withhold new investments” in Western Europe, warning that a breakup of the euro is likely.

Is gift giving efficient?

How NOT to motivate physicians: lessons from Cuba

Cuba penalizes physicians for "not meeting quotas" on infant mortality.  How do they respond?

• When pregnancies are deemed risky, doctors have to coerce women to undergo abortion in spite of their wishes. 
•  On top of this, forced sterilization in some cases are an actually documented policy tool. These restrictions do reduce mortality, but they feel like a heavy price for the people. 
•  ...doctors ... lie about the statistics. One thing that is done by the regime is to categorize “infant deaths” as “late fetal deaths” – its basically extending the definition in order to conceal a poorer performance.

What happens when you adjust the infant mortality statistics?

• ...Cuba moves from having an average infant mortality rate ... to having the worst average infant mortality in that dataset – above that of most European and North American countries.

Psychology saves lives

The field of psychology has fallen on hard times, specifically with its replication crisis (only 1/3 of its experimental results can be replicated), but insights from the field have contributed to our understanding of decision making.  And in New Zealand, framing an issue have overcome popular resistance to paying for kidneys:

New Zealand MP Chris Bishop framed the bill as compensating donors for lost wages rather than paying them. A decrease in the disincentive to donate–an increase in the incentive to donate. To an economist, potato, potato. But for people whose kidneys fail in New Zealand, the right framing may have been the difference between life and death.