Month: February 2008

A New Study Shows that the “Rising Tide” Lifts Fewer Boats than Previously Counted

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A new study of purchasing power parity (PPP) is showing that living standards for the bulk of populations in developing countries are far lower than previously estimated.

Basically, the relative purchasing power of currencies have been miscalculated, giving an unrealistic picture of the living standards of the average person in what is sometimes called the “3rd World”.

It means that poverty and inequality are far higher than under previous estimates:

Suddenly the world has more poor. Incomes declined in emerging economies: down by 40 percent in China and India, 17 percent in Indonesia, 41 percent in the Philippines, 32 percent in South Africa and 24 percent in Argentina. For Indonesia, the decline was far worse than the Asian crisis, and for China and India, the decline was worse than the one experienced by Germany during the Great Depression. Yet hardly anyone noticed.

The event was the release of new estimates of purchasing power parity, or PPP. Measured as part of a large international endeavor called the International Comparison Program, PPP aims to accurately calculate a country’s economic power rather than simply dividing total national output by a country’s population.

It’s hard to see this as anything but a full bore refutation of the facts that the free trade zealots use.

Lenders Oppose Mortgage Bankruptcy Reform

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If I own a rental property, or a vacation home, and I declare chapter 11 bankruptcy, the courts can modify the terms, though not the principal, or the loan, but for my primary home, they cannot.

It does not make sense to me either, so I support the bills Emergency Home Ownership and Mortgage Equity Protection Act of 2007 and the Foreclosure Prevention Act of 2008, which allow courts to modify mortgage terms in bankruptcy.

They don’t go far enough, they only apply to the more exotic mortgages, and they should apply to all, particularly in terms of prepayment penalties and other fees.

The mortgage industry says it’s bad for consumers, because it will drive up interest rates.

The truth is that it makes the more exotic mortgages less attractive, but the old style fixed rate mortgages should be about the same.

Even if it did bump up rates, average mortgages payments would still stay the same, because people do not buy homes on price, but on monthly payments, and prices would adjust.

That’s what happens when one makes such a highly leveraged purchase.

Economics Update

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The European Commission is predicting higher inflation and slower growth for this year.

Because the European Central Bank has controlling inflation as its sole mission, as opposed to the Fed, which also has an obligation to maximize employment, I think that we will see no rate cuts from the ECB, and perhaps a rate hike, which means that the current, and any future rate cuts by the fed will increase downward pressure on the dollar.

In terms of the US economy, we have the index of leading indicators index falling for the 4th straight month, the Philadelphia Federal Reserve’s report on manufacturing activity fell sharply, to the lowest point in 6 years, and Philly Fed’s future general activity index, which looks forward about 6 months, fell to the lowest number since 1990.

On the brighter side, this has driven oil prices down, because a recession implies reduced demand for energy, to $97.31/bbl.

In real estate, we have Mark Zandi, chief economist and co-founder of Moody’s Economy.com, predicting that home prices will fall 20% from their peaks.

He’s an optomist. First, interest rates are going up, and second, you always get overshoot in a correction like this. I expect a 40%+ drop in real terms, though inflation will mask some of that.

We also have the spread between adjustable-rate and fixed-rate mortgages growing. This is an indication that lenders are expecting rates to go up in the relatively near future, and they don’t want to be locked into low return loans.

We are also seeing localities recognize that they are going to get hosed on bond issues because of the bond insurance crisis, paying higher rates on lower rated bonds.

McCain Already in Violation of McCain Feingold Campaign Finance Law

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If not by the letter of the law, then certainly by the spirit.

McCain got a $4 million loan for his campaign, and as part of the deal, he agreed to take public financing if his campaign failed. If he won, or became the front-runner, he would get the necessary donations.

Federal Election Commission Chairman David Mason, in a letter to McCain this week, said the all-but-certain Republican nominee needs to assure the commission that he did not use the promise of public money to help secure a $4 million line of credit he obtained in November.

And interesting aside to this is that it gives Barack Obama an out on his promise on opting in to public financing.

John McCain is already in violation of McCain-Feingold, so there can be no deal.

Cafe Talk | Talking Points Memo | Behind the Times McCain Story

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We have an interesting comment on the John McCain coverage at the NY Times from Molly Gordy on TPM Cafe.

She notes that Marilyn Thompson, one of the authors of the, quit the Times and returned to the WaPo, about a month ago. Ms. Gordy wonders if she did so because she felt that the story had been unfairly spiked.

For reasons that have never been clear to me, the press is seriously in the can for McCain, and they may have suppressed, or watered down, the story.

Good Point on the Credit Collapse: Actions Taken are Bailing Out Banks, Not Helping Economy

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John Cassidy at Portfolio.com details what amounts to an ongoing and growing program of bailouts for the banking industry.

There is, of course, the Fed Auctions of cash where worthless and near worthless securities are being used as collateral for loans, but there is more.

The Federal Home Loan Bank system, which actually dates from the Herbert Hoover administration, has been shoveling cash out the door, with an implicit federal guarantee. It’s government chartered, like Fannie and Freddie, which have now had their lending limits increased.

Cassidy’s recommendation, that the Federal Government buy distressed security at steep discounts, would be a good one, except that any discount would likely still be too much. The assets are illiquid, which means that they have next to no value right now.

The only way that we are getting out of this is by inflating our way out of this.

A lot of 401(k) and IRA accounts are going to be a lot worse off, but the alternative will look like 1932.

Good Point on Castro

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Matthew Yglesias wonders why Castro was so prominent on the world stage.

The answer is that it was not him, but rather the fact that he made so many people in the US power establishment crazy.

His conclusion is spot on:

I think there’s probably a lesson to be learned with regard to current issues with Islamist political movements around the world. For good reasons and for bad ones, the romance of thumbing one’s nose at the USA has powerful and important resonance for a lot of people around the world. Under the circumstances, it rarely serves our interests to get into dramatic confrontations with leaders who are far too puny to objectively threaten our interests. After all, what significance would Castro have without his superpower adversary? US persecution of the Communist regime in Havana is really the only thing it has going for it.

The Obama-Nixon Connection, and it’s a Good thing

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I got this quote from The Economist:

As Mr Crook observes, Mr Obama is far from a centrist. His voting record suggests that, if elected, Mr Obama would be the most economically left-wing American president since … well, it’s hard to say. Richard Nixon?

He means it as an insult, I’d take it as a compliment, and there is an argument to be made that Nixon in terms of the economy and regulation was more liberal than any of his successors.

I think, however, that the author of the piece overestimates Obama’s liberalism.