Carpe Diem

Paul Krugman Has Predicted 9 Out of the Last None Recessions Under Bush Administration

1. “Right now it looks as if the economy is stalling…” — Paul Krugman, September 2002

2. “We have a sluggish economy, which is, for all practical purposes, in recession…” — Paul Krugman, May 2003

3. “An oil-driven recession does not look at all far-fetched.” — Paul Krugman, May 2004

4. “A mild form of stagflation – rising inflation in an economy still well short of full employment – has already arrived.” — Paul Krugman, April 2005

5. “If housing prices actually started falling, we’d be looking at an economy pushed right back into recession. That’s why it’s so ominous to see signs that America’s housing market … is approaching the final, feverish stages of a speculative bubble.” — Paul Krugman, May 2005

6. “In fact, a growing number of economists are using the “R” word [i.e., "recession"] for 2006.” – Paul Krugman, August 2005

7. “But based on what we know now, there’s an economic slowdown coming.” – Paul Krugman, August 2006

8. “This kind of confusion about what’s going on is what typically happens when the economy is at a turning point, when an economic expansion is about to turn into a recession” – Paul Krugman, December 2006

9. “Right now, statistical models … give roughly even odds that we’re about to experience a formal recession. … The odds are very good — maybe 2 to 1 — that 2007 will be a very tough year.” – Paul Krugman, December 2006

Bottom Line: In other words, to paraphrase Megan McArdle, Paul Krugman has predicted nine out of the last none recessions under the Bush administration.

(Source: The Q&O Blog, via the Mighty Angus at Kids Prefer Cheese.)

Update: According to LyinginPonds, Paul Krugman ended up as the #2 most partisan columnist in 2007 (tied with Joe Conason), right behind the #1 most partisan columnist: Ann Coulter.

Carpe Diem

Predatory Borrowing With Fake Paycheck Stubs

From George Mason economist Tyler Cowen writing in today’s NY Times:

There has been plenty of talk about “predatory lending,” but “predatory borrowing” may have been the bigger problem. As much as 70% of recent early payment defaults had fraudulent misrepresentations on their original loan applications. One study looked at more than three million loans from 1997 to 2006, with a majority from 2005 to 2006. Applications with misrepresentations were also 5 times as likely to go into default.

Many of the frauds were simple rather than ingenious. In some cases, borrowers who were asked to state their incomes just lied, sometimes reporting five times actual income; other borrowers falsified income documents by using computers. Too often, mortgage originators and middlemen looked the other way rather than slowing down the process or insisting on adequate documentation of income and assets. As long as housing prices kept rising, it didn’t seem to matter.

In other words, many of the people now losing their homes committed fraud. And when a mortgage goes into default in its first year, the chance is high that there was fraud in the initial application, especially because unemployment in general has been low during the last two years.

As an example of how easy it is to submit fraudulent income data with fake paycheck stubs, you can buy software for $70 from FakePayCheckStubs (see ad above) to “print out personalized instant paycheck stubs for your new or existing business! Authentic looking stubs will FOOL EVERYONE or 100% Money Back Guarenteed! (sic)”
Carpe Diem

Competition Breeds Competence and Lower Prices

The 2008 North American International Auto Show (NAIAS) started today in Detroit. From the NAIAS website:

More than 6,700 journalists from 62 countries and 42 United States attended the NAIAS 2007 Press Days. Almost 30% of media attendees were from outside the U.S. In addition to Europe and Asia, many media came from a wide variety of countries from all over the globe including Azerbaijan, Argentina, Chile, Croatia, Egypt, Ecuador, Jamaica, India, Latvia, Moldavo, Peru, Rwanda, Turkey, Venezuela and Yugoslavia, to name just a few.

And one of the main things that draws these journalists is the sheer number of vehicle debuts showcased at the NAIAS. The NAIAS has hosted 1,049 North American and worldwide vehicle introductions – which is a fancy way of saying that these vehicles were seen for the first time in the world or in the U.S. at the NAIAS. Media know that if they want to capture a photo of a vehicle the first time it is debuted, their best bet is the NAIAS (see picture above from this year’s show).

The positive news about the 2008 NAIAS is a real “breath of fresh air” for Michigan. We hear a lot in Michigan about the loss of manufacturing and UAW jobs here, the decline of the automobile industry in Michigan, losses and declining market share for Ford and GM, the highest unemployment rate in the country (7.4%), etc.

One of the most under-appreciated, unreported and unrecognized facts about the automobile industry is captured in the chart above (click to enlarge), showing the Consumer Price Index (CPI) for All Items from the BLS, vs. the CPI for New Cars from 1995-2007.

Notice that since 1995, consumer prices have increased by 40%, an annual rate of 2.6% for consumer prices on average. However, new car prices have FALLEN by about 2% over the last 13 years, meaning that new cars are much more affordable today than in 1995. If new car prices had increased at the same rate as the average product in the CPI, new car prices today would be 40% higher than they are today! Keep in mind that wages and income have increased at a rate equal to, or higher than, the CPI, meaning that cars are about 42% MORE AFFORDABLE today, relative to income and average prices, THAN IN 1995!

Despite the financial troubles for the UAW and the Big Three, American consumers have benefited tremendously from the intense foreign competition in the auto industry. Except for electronic goods, what other consumer products are actually cheaper today than in 1995? Not too many.

Bottom Line: Competition in the auto industry (or any industry) breeds competence, to the great benefit of the U.S. consumer. Without the significant discipline of foreign competition, we’d probably be paying 40% more for our American cars today.

Carpe Diem

Good Intentions Create Child Prostitution

From “Economics: Public and Private Choice” by Gwartney, Stoup, Sobel and Macpherson:

Guidepost #6 to Economic Thinking: “Economic actions generate secondary effects in addition to immediate effects.”

Pitfall #2 to Avoid in Economic Thinking: “Good intentions do not guarantee desirable outcomes.”

Application/Case Study:

Fact 1: Due to Western pressure, Bangladesh outlawed work in garment factories for children under 14.

Fact 2: Somewhere between 30,000 and 100,000 children lost their jobs when the garment factories introduced the age limit, and many of them ended up on the streets as prostitutes.

Fact 3: Working as a prostitute is much worse than working in the garment industry, according to Rasmus Juhl Pedersen, adviser to Save the Children Denmark.

Fact 4: Western companies are so afraid of being associated with child labor that the children are thrown out of the factories even though no one has prepared any alternatives for them. Well-meaning Western consumers who boycott products that can be tied to child labor do more harm than good, according to Save the Children Denmark.

Source: Jonah Norberg, Good Intentions Create Child Prostitution

Carpe Diem

NAR: Housing Affordability is at 4-Year High

According to the National Association of Realtors (NAR), the Housing Affordability Index in late 2007 was at the highest level since 2004 (see graph above), due to falling single-family home prices, rising median family incomes, and declining mortgage rates (see post below).

To interpret the Housing Affordability Index (HAI), a value of 100 means that a family with the median income has exactly enough income to qualify for a mortgage on a median-priced home. An index above 100 signifies that family earning the median income has more than enough income to qualify for a mortgage loan on a median-priced home, assuming a 20% down payment.

For example, the composite HAI of 119.3 in November 2007 means a family earning the median family income ($59,833) has 119.3% of the income necessary to qualify for a conventional loan covering 80% of a median-priced existing single-family home ($208,700), financed at the effective rate on loans closed on existing homes of 6.41%. The increase in the HAI shown above in the graph means that the typical family is more able to afford the median priced home today than at any time since 2004.


Bottom Line: Falling home prices, increasing income levels, falling mortgage rates, and an increasing housing affordability should help offset some of the troubles in the mortgage and housing markets.
Carpe Diem

30-Year Fixed Mortgage Rates Lowest in 28 Months

WASHINGTON Freddie Mac said 30-year home fixed-rate mortgages averaged 5.87% in the latest week — the lowest since September 2005. A week ago the average was 6.07%, and in the year-earlier period it was 6.21%. From the most recent peak of 6.73% in mid-July 2007, 30-year rates have fallen almost a full percentage point (see chart above).

Will falling mortgage rates help the real estate industry turn around? Well, they sure can’t hurt, and have to be a lot better for the real estate industry than rising rates! Example: payments on a $100,000 30-year mortgage at last July’s rate of 6.73% ($647.27 per month) are almost 9.5% higher than payments at today’s rate of 5.87% ($591.22 per month), suggesting at least some modest increase in affordability for home buyers.
Carpe Diem

NAM: CAFTA, NAFTA, and Free Trade Are Working

From the National Association of Manufacturers (NAM):

It’s official. With the trade data recently released by the U.S. Department of Commerce, the U.S. trade balance in manufactured goods with CAFTA (Central American and Dominican Republic Free Trade Agreement), has registered a $2 billion trade surplus. This is a sharp reversal from the pre-CAFTA situation, where in the years before the passage of the CAFTA agreement we averaged an annual manufactured goods trade deficit of about -$1.5 billion (see chart above).

Now the facts are in, showing that logic once again prevails over mythology. Far from being a “job killer,” CAFTA has been a real plus for the United States – as has NAFTA, another free trade agreement. American manufacturing faces some real problems – but CAFTA and other free trade agreements are not among them.

Carpe Diem

Larry, Curly, Moe and The Economy

A month ago, the Fed lowered rates by only a quarter of a percentage point instead of making the half-point cut that many were expecting. The Fed appears to have made a big mistake about oil and aggregate demand at the last rate-cut session — for several reasons.

First, the big drivers of added demand for oil are not really subject to Fed control. China, India and other developing nations are responsible for the bulk of increased demand. The Fed does not have the power to lower demand for oil in the developing nations, except in a very indirect way.

In other words, punishing the United States economy because oil prices are high is attacking the wrong culprit. It’s sort of like a Three Stooges movie in which the wrong person keeps getting hit on the head.

From the always entertaining and provocative Ben Stein, writing in today’s NY Times, arguing for continued Fed interest rate cuts.