HUD Saved Us from a Depression

An article in today's New York Times concerns the Federal Housing Administration. FHA provides insurance for homebuyers who don't meet traditional criteria for conventional loans. In othe words, the FHA is part of the government support and encouragement of homeownership. During the subprime craze, many buyers bypassed the FHA, but in the last year or so the FHA has backed a lot of mortgages. Their reserves are low--0.53 percent of the total porfolio, and some think that the FHA will need a bailout before too long. Yet, they also had faced pressure from Congress to open their doors to a broader group of applicants, i.e., applicants with lower down payments and poorer credit ratings. Brian Montgomery, a former head of the FHA, said that even if a bailout is needed, people should still feel gratitude. The article ends with a quote form Mr. Montgomery, "They should be going over to the H.U.D. building and frankly thanking the career staff for saving them from a depression."

So, government subsidization and pressure on lenders to encourage broader homeownership led to the run up in housing prices. When the housing bubble burst, we entered a severe recession. The FHA has continued to prop up housing markets, evidently saving us from a depression. But the collapse in prices that followed the run-up in prices is due, to a considerable extent, to government policy. Does that make sense?

Are Football Hemets Risky?

An article in today's WSJ raises an interesting question about head safety. Concussions are common among pro football players, and retirees often experience head and brain issues later on in life. Would they be better off without helmets? Obviously, no helmets would change the game. When I was in graduate school, a classmate thought about doing his dissertation on whether safer football equipment actually reduced injuries. His expectation was no--as the equipment gets better, the behavior of the players changes. This fits into a well-known article written by Sam Peltzman concerning automobile safety mandates and whether they resulted in saved lives. Peltzman hypothesized that as people drove safer cars, their driving behavior would change. People would drive less defensively. The probability of dying in a car accident is the probability of being in an accident times the probablity of death given you were in an accident. Safer cars--mandatory seat belts, collapsable steering columns and so on, reduce the probability of death given an accident. But changed driving behavior may increase the probability of an accident. Peltzman's empirical analysis found that few drivers and passengers in cars died but more pedestrians and motorcycle riders died. This is consistent with the behavior change. (See Sam Peltzman, "The Effects of Automobile Safety Regulation," JOURNAL OF POLITICAL ECONOMY, 1975, 83 (4), pp. 677-726).

Government as Co-Conspirator

In my previous post I cited a WSJ op-ed piece, in which the author argued that the government has been a co-conspirator with many on Wall Street in running up debt that led to the financial and economic crises. I think the article still focuses too much on Wall Street and not enough on the government. It does note that the recent actions of the government, both the Fed and the Treasury, are similar to actions taken several times over the last thirty years. The most surprised and disappointed man in America had to be Dick Fuld, CEO of Lehman Brothers, when the government didn't resuce them the way it did so many others in the past. Given what happened afterwards, it is very doubtful the government will ever let any large financial institution go under again. So, the moral hazard issues continue. The short-term approach followed by the Fed and Treasury also continues.

Government as Co-Conspirator in Financial Meltdown

Interesting op-ed piece in today's WSJ. Am busy so no time to comment today but will do so soon.

More on "Jobs Saved"

Former colleague Victor Claar sent me a link to a news story about errors in the counting of saved jobs, including the treatment of raises as equivalent to saved jobs.

There is another dimension I had not considered as yet. There has been a disruptive construction project on an intersection in Holland through which I often drive. Signs indicated that funds came, at least in part, from the stimulus package. The firms that worked on the job then must estimate how many jobs the project saved or created. The project lasted three months. Will the companies report these jobs saved or created as if they were year-long jobs or will the length of the project be considered? In earlier blogs I wrote about how the methodology used by the government to estimate jobs created or saved focused on job-years. I believe the average citizen reading about jobs saved or created believes that the number of unemployed falls or at least doesn't increase by the number of jobs saved. But, that clearly is wrong, and there is really no way to tell by how much.

Things That Can Be Explained by the Bell Curve

My previous post on Ed Lazear brings to mind a lecture I often give in class on the Bell curve. The tails of the Bell curve never touch the axis. So, if intelligence is measured on the axis and a pretty intelligent person is two standard deviations above the mean, there are still some people farther out--three, four, five standard deviations. In percentage terms, the probability of someone being five standard deviations above the mean is small, but when you consider that we live in a country of 300 million people, there can be a number of people at that level of intelligence. No matter how smart I may think I am, there are lots of people a lot smarter.

What if we measure something like sexual deviency on the axis? In a country of 300 million people there may only be five or six people at five or more standard deviations away from the mean. But that is enough people to fill up an episode of Jerry Springer. And, they all want to be on TV. So, some of these TV shows don't prove that the country is going to pot; they just verify the Bell curve.

Are Economists Insensitive?

I posted yesterday about an op-ed piece by Ed Lazear. I met Lazear over twenty years ago at Lousiana State University. A colleague had visited at the University of Chicago and was able to bring a couple of economists from Chicago to LSU for a few days. Lazear came the day after he ran in the Chicago Marathon. He was hobbling around quite a bit. We took him to lunch at a restaurant in the student union, which was in the middle of campus. It was about a ten minute walk. The next day as we got ready to go to lunch, he asked if we could go somewhere by car. No one thought to take into consideration the obvious pain he was in when walking after the marathon. So my answer to the question in the title is, "Yes."

He presented a paper on "Sales". He began by talking about paying the bills and noticing that his wife's shoes were more expensive than his. She said that women's shoes tend to be more expensive. But why? he wondered. His shoes had more material in them, were more durable, and one would think would cost more. This is someting I had discussed with my wife on more than one occasion. Men's shoes should be more expensive but are not. What is going on? Lazear went on to develop a model to explain why, other things equal, women's clothes had higher prices than men's clothes. It made sense when he went through the model. It was published later in the American Economic Review. This anecdote illustrates one of many differences between economists who end up at the University of Chicago and economists who end up at places like LSU.

Salieri is my patron saint.