The Economist gives Obama a tepid endorsement

I thought this was interesting -- in one of the most tepid endorsements I recall reading for a political candidate, the economics-centric The Economist magazine has decided to support Obama.  Not because Obama has done a great job with everything, but because they just can't figure out who Romney is. Some key excerpts from the endorsement:

Mr Obama’s first term has been patchy. On the economy, the most powerful argument in his favour is simply that he stopped it all being a lot worse. America was in a downward economic spiral when he took over, with its banks and carmakers in deep trouble and unemployment rising at the rate of 800,000 a month. His responses—an aggressive stimulus, bailing out General Motors and Chrysler, putting the banks through a sensible stress test and forcing them to raise capital (so that they are now in much better shape than their European peers)—helped avert a Depression. That is a hard message to sell on the doorstep when growth is sluggish and jobs scarce; but it will win Mr Obama some plaudits from history, and it does from us too...

No administration in many decades has had such a poor appreciation of commerce. Previous Democrats, notably Bill Clinton, raised taxes, but still understood capitalism. Bashing business seems second nature to many of the people around Mr Obama. If he has appointed some decent people to his cabinet—Hillary Clinton at the State Department, Arne Duncan at education and Tim Geithner at the Treasury—the White House itself has too often seemed insular and left-leaning. The obstructive Republicans in Congress have certainly been a convenient excuse for many of the president’s failures, but he must also shoulder some blame. Mr Obama spends regrettably little time buttering up people who disagree with him; of the 104 rounds of golf the president has played in office, only one was with a Republican congressman.

Above all, Mr Obama has shown no readiness to tackle the main domestic issue confronting the next president: America cannot continue to tax like a small government but spend like a big one. Mr Obama came into office promising to end “our chronic avoidance of tough decisions” on reforming its finances—and then retreated fast, as he did on climate change and on immigration. Disgracefully, he ignored the suggestions of the bipartisan Bowles-Simpson deficit commission that he himself set up. More tellingly, he has failed to lay out a credible plan for what he will do in the next four years. Virtually his entire campaign has been spent attacking Mr Romney, usually for his wealth and success in business...

Mr Obama’s shortcomings have left ample room for a pragmatic Republican, especially one who could balance the books and overhaul government. Such a candidate briefly flickered across television screens in the first presidential debate. This newspaper would vote for that Mitt Romney, just as it would for the Romney who ran Democratic Massachusetts in a bipartisan way (even pioneering the blueprint for Obamacare). The problem is that there are a lot of Romneys and they have committed themselves to a lot of dangerous things...

Mr Romney’s more sensible supporters explain his fiscal policies away as necessary rubbish, concocted to persuade the fanatics who vote in the Republican primaries: the great flipflopper, they maintain, does not mean a word of it. Of course, he knows in current circumstances no sane person would really push defence spending, projected to fall below 3% of GDP, to 4%; of course President Romney would strike a deal that raises overall tax revenues, even if he cuts tax rates...

However, even if you accept that Romneynomics may be more numerate in practice than it is in theory, it is far harder to imagine that he will reverse course entirely. When politicians get elected they tend to do quite a lot of the things they promised during their campaigns. François Hollande, France’s famously pliable new president, was supposed to be too pragmatic to introduce a 75% top tax rate, yet he is steaming ahead with his plan. We weren’t fooled by the French left; we see no reason why the American right will be more flexible. Mr Romney, like Mr Hollande, will have his party at his back—and a long record of pandering to them...

This newspaper yearns for the more tolerant conservatism of Ronald Reagan, where “small government” meant keeping the state out of people’s bedrooms as well as out of their businesses. Mr Romney shows no sign of wanting to revive it..

We very much hope that whichever of these men wins office will prove our pessimism wrong. Once in the White House, maybe the Romney of the mind will become reality, cracking bipartisan deals to reshape American government, with his vice-president keeping the headbangers in the Republican Party in line. A re-elected President Obama might learn from his mistakes, clean up the White House, listen to the odd businessman and secure a legacy happier than the one he would leave after a single term. Both men have it in them to be their better selves; but the sad fact is that neither candidate has campaigned as if that is his plan...

The Economist’s readers, especially those who run businesses in America, may well conclude that nothing could be worse than another four years of Mr Obama. We beg to differ. For all his businesslike intentions, Mr Romney has an economic plan that works only if you don’t believe most of what he says. That is not a convincing pitch for a chief executive. And for all his shortcomings, Mr Obama has dragged America’s economy back from the brink of disaster, and has made a decent fist of foreign policy. So this newspaper would stick with the devil it knows, and re-elect him.

 Like I said, tepid.  You can read the entire article here.

The Economist presents "The World in 2010"

Each year, The Economist magazine publishes "The World in" annual book of predictions, and the 2010 version is now available online.

From the editor's intro:

The good news about 2010 is that the world will emerge from recession and the post-crisis economic landscape will become clearer. Less cheerful is what that landscape will look like.

The rich world, burdened by debt and high unemployment, faces a long, hard slog. Governments will confront difficult decisions on how fast to start withdrawing the huge support they provided to keep the financial system going. Voters will vent their anger when given the chance at the polls—kicking out Labour in Britain in May and perhaps even depriving Barack Obama of a Democratic majority in the House of Representatives in America’s mid-term elections in November. Businesses will hardly feel much better, but they can at least begin to focus on strategies for future growth, rather than tactics for short-term survival...

For a summary of links to the various stories in this publication, click here.

When the electric car arrives, housing will have to adapt

After many years of fits and starts, it seems that a robust electric car to effectively compete with the century-old-plus internal combustion engine may be around the corner. When it does -- and loses the bulk required to port around parts specific to gas- and diesel-powered engines -- cars could become smaller and change in appearance. But many will also need to be powered by on-site hook-ups at service stations, business offices, malls and homes, so land use will also have to adapt.

So what could these changes mean for the future? From an article in The Economist:

IN 1995 Joseph Bower and Clayton Christensen, two researchers at the Harvard Business School, invented a new term: “disruptive technology”. This is an innovation that fulfils the requirements of some, but not most, consumers better than the incumbent does. That gives it a toehold, which allows room for improvement and, eventually, dominance. The risk for incumbent firms is that of the proverbial boiling frog. They may not know when to switch from old to new until it is too late...

Internal-combustion engines have dominated mechanised road transport for a century, but the past year or so has seen the arrival of a dribble of vehicles driven by electric motors...these are the products of small, new firms, or of established non-carmaking companies...But next year the big boys, encouraged by legislative pressure to produce low-emission vehicles, will leap out of the boiling water and join in. Their progress towards greenery will be an important theme of the Frankfurt motor show this month.

Bold claims are being made. Carlos Ghosn, who leads the Renault-Nissan alliance, thinks 10% of new cars bought in 2020 will be pure-battery vehicles. A report by IDTechEx, a research consultancy based in Cambridge, England, reckons a third of the cars made in 2025 will be electrically powered in one way or another. If that trend continues, liquid fuels might become as obsolete as photographic film...

Instead of a petrol engine, with its widespread infrastructure of filling stations providing the security blanket, why not build new infrastructure to refuel cars with new, fully charged batteries?

The leading proponent of this idea is Better Place. This firm, which is based in California, has been scouring the world for car markets that are, in its terminology, “islands” and offering to fit them with networks of car-charging and battery-swapping stations that will use robots to exchange exhausted batteries for fully charged ones in seconds.

Better Place defines an island as a place with an edge that motorists rarely cross, and the first to be picked by Shai Agassi, the firm’s founder, was Israel. Though more of the country’s edge is land than sea, few cars leave by either route. Israel is now being fitted out with the Better Place infrastructure. Meanwhile, Nissan is tooling up to start building cars with batteries of the appropriate dimensions, for sale starting next year, and Tesla plans to offer swappable batteries on the Model S.

Other “islands” that Better Place has signed deals with include Denmark, Hawaii and Australia. The firm also has a partnership with Tokyo’s largest taxi operator, Nihon Kotsu, to provide swappable batteries for a new fleet of electric taxis which will take to the streets of the Japanese capital. With some 60,000 taxis in Tokyo, this could turn into a huge market.

Besides providing drivers with secure refuelling, the Better Place approach has a second advantage. Separating ownership of the battery from ownership of the car changes the economics of electric vehicles. If you rent the battery rather than buying it, that becomes a running cost (like petrol) and the sticker price of the car drops accordingly. This might not matter to a sophisticated economist, who would amortise the battery cost over the life of the vehicle. Many people, though, are swayed by the number they write on the cheque that they give to the dealer.

Better Place, indeed, plans to go further. It will charge for its services (battery and electricity) by the kilometre travelled. The cost per kilometre will be lower than for petrol vehicles, and if you sign up for enough kilometres a month, it will throw in the car for nothing...

Owners with garages or driveways can top up at night using the domestic supply. The long recharge time will thus not be an issue, and the electricity will be cheap, off-peak power. Even if more expensive daytime power is needed (some office and supermarket car parks are already being fitted with recharging points, in anticipation of mounting demand), the cost of such juice is still favourable compared with petrol. Only for garageless owners does recharging become complicated. They will need street-based electrical infrastructure, and a lack of this will limit the spread of electric vehicles to start with...

Without the cost and complexity of many of the parts hitherto required to make a car, the shape of the automotive industry could be transformed as much as cars are. As for the oil companies, if the visionaries are correct, they risk finding themselves in the wrong business. Some researchers already have battery materials they reckon could be recharged in the time it takes to freshen up and have a snack at a service station. If they are right, the need for even a range-extender vanishes.

That is still a biggish “if”, of course. The efficiency of internal-combustion engines is improving, too—and as the advert below shows, electric cars have come and gone in the past. But propelling modern transport by means of serial explosions in an array of tin-cans does seem an incredibly primitive way of doing things. The time is ripe for a change.

Do mortgage modifications even work?

For months we've been hearing that the sticking point in modifying mortgage loan terms is that servicers didn't want to get sued by the multiple owners of a mortgage due to securitization. But according to an article in The Economist, there's very little difference in the rate of loan mods whether they were securitized or not. Moreover, most lenders still prefer to foreclose, in large part because borrowers in arrears have more incentive to catch up on the loan without a modification. From the article:

A new study* by a trio of Federal Reserve economists finds that very few delinquent mortgages are modified overall, and that securitised loans are as likely to be renegotiated as those on lenders’ books.

The economists looked at a sample of mortgages in a huge data set that covers 60% of America’s residential-mortgage market. Less than 3% of seriously delinquent borrowers got a mortgage modification that reduced their monthly payments in the year after they got into trouble. Less than 8% of them got any kind of modification at all. Differences between securitised mortgages and others were scant. Lenders of all stripes clearly prefer to foreclose on delinquent borrowers. Repossession proceedings were begun in half the cases and completed in one-third of them...

The newly immobile United States

One of the best things about America has always been the ability to reinvent oneself by moving to a new place. In my case, that's been pretty limited -- Long Beach to San Diego to Upland to Los Angeles -- but for many people born in small towns in the heartland, moving to a big city or the coasts has been the first step to create a new life. For others, when a new job beckoned, they'd simply sell their home, wait until the kids were out of school and move during the summer. But now, with so many homeowners underwater and health insurance (ridiculously) tied to employment, people stay rooted in places that no longer fit and working at jobs they hate. What does that mean for the U.S. economy? The Economist ponders that very question:

...throughout history, Americans have dealt with economic shocks by picking themselves up and moving on. Their mobility underpins America’s flexible, dynamic labour market. Now it faces two threats.

One is the housing bust. House prices have collapsed by 27% since their peak in 2006. By December last year a fifth of homeowners with mortgages owed more than their homes were worth. Such people are only half as likely to move as those whose homes are above water, estimate Joseph Gyourko and Fernando Ferreira of the Wharton School of business.

Some cannot sell their homes at all. Others could, but don’t want to take a big loss on an investment they thought was safe as houses. Either way, they are stuck. If a good job comes up in another town, they cannot take it. This effect is partly offset by the impact of foreclosures. Last month alone 291,000 homes received a foreclosure notice. The newly evicted are not merely free but obliged to move. This is unfortunate, but although jobs are in short supply nearly everywhere, being mobile at least increases the odds of finding one...

The other threat to mobility is health insurance. A company can buy health insurance for its employees with pre-tax dollars; an individual can buy it only with after-tax dollars. So although soaring premiums are prompting many firms to drop or restrict coverage, most Americans still get their health insurance from their jobs...

Tying health care to a job can tie people to jobs they hate. Gerry Stover, who now runs a doctors’ group in West Virginia, recalls a time when his wife was pregnant and he couldn’t get health insurance at a private firm. He became a prison guard. As a public employee, his family was covered. But the job was neither pleasant nor a good use of his talents...

Some people even get stuck in bad marriages because they need their spouse’s health insurance. As Alain Enthoven of Stanford University puts it, this gives new meaning to the word “wedlock”. The recession seems to have slowed internal migration. Only 11.9% of Americans moved house between 2007 and 2008—the most sluggish pace since records began in the 1940s....

California gains political power

With a Democratic President now in office as well as a House Speaker, two power senators and various congresspersons chairing important subcommittees, there's been a large but potentially unnoticed shift of power from the South to California. But will these newly powerful liberals over-reach? A story in The Economist ponders the question:

THE 2008 election did not just put a new president in the White House. It also completed one of the biggest shifts in the regional balance of power in America’s recent history, draining influence away from the once-mighty South and redistributing it to the coasts. This will help determine who gets what from Barack Obama’s attempts to stimulate and reshape the economy.

The biggest winner from this internal revolution is America’s biggest state, California. Nancy Pelosi, who has been speaker of the House since 2007, is no longer restrained by a Republican president. Californians run two of the most powerful committees in the House: Energy and Commerce (Henry Waxman), Education and Labour (George Miller), plus an important subcommittee on intelligence (Jane Harman)...

Californian number-plates will not be as ubiquitous as Texan ones used to be in the White House car park. But Mr Obama has nominated several Californians to leading positions in his administration besides Mr Panetta: Hilda Solis, a former congresswoman, to run the Labour Department, Steven Chu, a former head of the Lawrence Berkeley National Laboratory, to Energy, Nancy Sutley, a former deputy mayor of Los Angeles, to run the Council on Environmental Quality.

The rise of California is matched by the fall of the South. Southern politicians have long punched above their weight in Washington. Southern Democrats such as Lyndon Johnson and Sam Rayburn dominated Congress before the civil-rights era.

The rise of the modern Republican Party projected a succession of southern conservatives to the pinnacle of power—Newt Gingrich and Dick Armey in the 1990s and Tom DeLay in the early 2000s; not to mention the two Texan George Bushes. The Democrats were so worried about their decline in the South that they ran two southerners, Bill Clinton and Al Gore, in 1992 and 1996. Now the South is as impotent as it has been for a century.

This geographical shift has brought dramatic changes in style and substance. California’s Democratic House delegation is the most diverse on the Hill, with 10 white women, nine Hispanics, four black women and two Asian-Americans. It is also one of the most left-wing, according to the voting records. It is hard to imagine a bigger change from the southern-fried conservatives who once lorded it over Congress...

The Californication of the Democratic Party carries all sorts of risks. The most obvious is that California has the most dysfunctional politics in the country. The Golden State has one of the highest unemployment rates in America, at 9.3%, thanks to its high taxes, its unions, its anti-business climate and its gigantic housing bubble. Some 100,000 people have fled the state each year since the early 2000s...

The biggest risk is overreach. Many Californian liberals are as far to the left on cultural issues as the southern Republicans were to the right. Many of them also draw their support from two groups that have limited appeal to the rest of the country, particularly to the “bitter” voters that Mr Obama had such trouble wooing in November; the fabulously rich and public-sector activists.

All this suggests that one of Mr Obama’s most delicate tasks, if he wants to prevent his party from being captured by the “left coast” in the same way that the Republicans were captured by the South, will be to contain the Californian barons...

And Mr Obama did remarkably well in the South, capturing Virginia and North Carolina and coming within five points of taking Georgia. But putting just one person with a southern drawl in his cabinet might have helped.

Is life imitating art in "Atlas Shrugged?"

It seems that the economic malaise has helped boost sales of Ayn Rand's 1957 flagship book about capitalism under fire called "Atlas Shrugged." I became a fan of Ayn -- pronounced like "mine" and not "Anne" -- in high school, reading both this book and her book about a idealistic an architect named Howard Roark in "The Fountainhead" (which I actually liked better since it was a quicker read).

Still, both she and her more avowed disciples of objectivism can, in my humble opinion, seem a bit nutty, as if the unfettered free marketplace, dependent as it is upon the actions and behaviors of human beings capable of great greed and self-interest, is the answer to everything. From a story in The Economist:

Reviled in some circles and mocked in others, Rand’s 1957 novel of embattled capitalism is a favourite of libertarians and college students. Lately, though, its appeal has been growing...

Whenever governments intervene in the market, in short, readers rush to buy Rand’s book. Why? The reason is explained by the name of a recently formed group on Facebook, the world’s biggest social-networking site: “Read the news today? It’s like ‘Atlas Shrugged’ is happening in real life”. The group, and an expanding chorus of fretful bloggers, reckon that life is imitating art...

And with pirates hijacking cargo ships, politicians castigating corporate chieftains, riots in Europe and slowing international trade—all of which are depicted in the book—this melancholy meme has plenty of fodder.

Even if Washington does not keep the book’s sales booming, Hollywood might. A film version is rumoured to be in the works for release in 2011. But by then, a film may feel superfluous to Rand’s most loyal fans; events unfolding around them will have been dramatisation enough.

"The Fountainhead" was already made into a film version based on her 1943 book -- way back in 1949 and starring Gary Cooper.

Want to know more about Ayn and her philosophies? Check out the Ayn Rand Institute.

NIMBYs and seniors manage best through recession

Want to know the demographic magic bullets to survive recessions? According to a story in the Economist, areas with a larger share of seniors and NIMBYs -- such as California's Central Coast (i.e., Santa Barbara), its coast north of the Bay Area and some inland counties -- ride out economic troughs better than areas with younger populations:

Nowhere in California is immune to recession, but the oldest areas are proving most resistant. Of the ten counties with the lowest unemployment rates, nine, including Santa Barbara, contain an above-average proportion of people aged 65 or older. Youthful Los Angeles has shed almost a quarter-of-a-million jobs in the past year. Slightly older San Diego has lost a few thousand, while considerably older San Francisco has lost none. A map of the state’s retirees (see above) could almost double as a map of economic resilience...

California’s youngest regions are in its hot interior. In the middle years of this decade hundreds of thousands of families moved there in search of big, affordable houses. Unfortunately, many took on big, unaffordable mortgages to do it...

Health care is the only private-sector industry in California that accounted for job growth in 2008. Here, too, places benefit from having a fairly old population. The median age of people admitted to Santa Barbara’s Cottage Hospital is 55—eight years older than UCLA Hospital in Los Angeles. Although hospitals complain it is too stingy, few sources of revenue are more stable than Medicare, which paid for 44% of Santa Barbara’s patients in 2008.

In the past ten years, obedient to the findings of urban sociologists, American cities have tripped over themselves vying for young, creative people. They have revitalised downtowns and sponsored gay-pride parades. They might have been better off building retirement homes.

In Las Vegas, all bets are off

During the last housing bust of the early 1990s that hit Southern California, many people in the building industry simply temporarily relocated to Las Vegas since it was still booming. For years, thousands of people moved to Southern Nevada for the job opportunities afforded by a growing casino industry and the sorts of services that a growing city needs. Has that now stopped? A story in The Economist asks the question:

The housing slump and high petrol prices do seem to be taking their toll. In the year to April, gaming revenue across Vegas was down by 3.3% from the year before. A dip in occupancy, usually an impressive 90-95%, has prompted hotels to cut room rates, reversing a steady rise in recent years to more than $135 a night on average. Sub-$100 deals at prominent Strip hotels have proliferated in recent weeks.

Though hotels are still coy about advertising these bargains, MGM Mirage, the biggest Strip operator, is reportedly nudging local newspapers to run stories about them. This has raised concerns over a possible price war. Nor can the city fall back on convention business, which has boomed in recent years.

Attendance fell by 7.1% in the first quarter compared with a year earlier—a worrying sign because conference-goers spend twice as much per trip as pleasure-seekers do, though things picked up a bit in April. Las Vegas Sands Corp, the most convention-oriented of the big operators, posted an unexpected loss in the first quarter. Occupancy at its latest mega-hotel, the Palazzo, was a mere 79%. Harrah’s dipped into the red too...

All this coincides with the industry’s biggest-ever building spurt, raising the spectre of oversupply. Wynn Resorts is building a $2.2 billion follow-up to Wynn Las Vegas, the Encore, and MGM is spending $9.2 billion on a 76-acre project called CityCenter. More than 40,000 new rooms will become available in the next four years, triple the number Beijing is providing for the Olympics—and in a city that already has 7% of America’s hotel rooms...

The casino Titans are adept at dealing with shifts in demand, however. Led by Harrah’s, whose boss, Gary Loveman, is a former economics professor, they have become experts in collecting information about their customers and using it to tailor promotions. Gambling firms also have a knack for carving out new markets. And they are ramping up marketing efforts abroad...

If past downturns are a guide, a substantial number of Americans will head to Vegas rather than taking expensive holidays abroad, says David Schwartz of the Centre for Gaming Research. And the “whales”, as high-rollers are known, really are immune to economic fluctuations...

Some high-end casinos are doing even better this year than last, says Brian Gordon of Applied Analysis. This leaves some convinced that Vegas will once again defy the sceptics, just as it confounded those who argued that it would be hurt by competition from Californian gambling dens, or that the wave of mega-hotel openings in the 1990s would create crippling overcapacity.

History suggests that, in America’s gambling capital at least, supply creates its own demand.

Diagnosing (economic) depression

With all the rhetoric (and blog posts) about a potential economic depression, The Economist offers a means to diagnose the differences between a recession, a depression and a Great Depression. From the story:

THE word “depression” is popping up more often than at any time in the past 60 years, but what exactly does it mean? The popular rule of thumb for a recession is two consecutive quarters of falling GDP. America’s National Bureau of Economic Research has officially declared a recession based on a more rigorous analysis of a range of economic indicators. But there is no widely accepted definition of depression. So how severe does this current slump have to get before it warrants the “D” word?

A search on the internet suggests two principal criteria for distinguishing a depression from a recession: a decline in real GDP that exceeds 10%, or one that lasts more than three years. America’s Great Depression qualifies on both counts, with GDP falling by around 30% between 1929 and 1933. Output also fell by 13% during 1937 and 1938. The Great Depression was America’s deepest economic slump (excluding those related to wars), but at 43 months it was not the longest: that dubious honour goes to the one in 1873-79, which lasted 65 months...

Before the 1930s all economic downturns were commonly called depressions. The term “recession” was coined later to avoid stirring up nasty memories. Even before the Great Depression, downturns were typically much deeper and longer than they are today (see right-hand chart). One reason why recessions have become milder is higher government spending. In recessions governments, unlike firms, do not slash spending and jobs, so they help to stabilise the economy; and income taxes automatically fall and unemployment benefits rise, helping to support incomes. Another reason is that in the late 19th and early 20th centuries, when countries were on the gold standard, the money supply usually shrank during recessions, exacerbating the downturn. Waves of bank failures also often made things worse.

But a recent analysis by Saul Eslake, chief economist at ANZ bank, concludes that the difference between a recession and a depression is more than simply one of size or duration. The cause of the downturn also matters. A standard recession usually follows a period of tight monetary policy, but a depression is the result of a bursting asset and credit bubble, a contraction in credit, and a decline in the general price level. In the Great Depression average prices in America fell by one-quarter, and nominal GDP ended up shrinking by almost half. America’s worst recessions before the second world war were all associated with financial panics and falling prices: in both 1893-94 and 1907-08 real GDP declined by almost 10%; in 1919-21, it fell by 13%...

Where does that leave us today? America’s GDP may have fallen by an annualised 6% in the fourth quarter of 2008, but most economists dismiss the likelihood of a 1930s-style depression or a repeat of Japan in the 1990s, because policymakers are unlikely to repeat the mistakes of the past. In the Great Depression, the Fed let hundreds of banks fail and the money supply shrink by one-third, while the government tried to balance its budget by cutting spending and raising taxes. America’s monetary and fiscal easing this time has been more aggressive than Japan’s in the 1990s.

However, these reassurances come from many of the same economists who said that a nationwide fall in American house prices was impossible and that financial innovation had made the financial system more resilient. Hopefully, they will be right this time. But this crisis was caused by the largest asset-price and credit bubble in history—even bigger than that in Japan in the late 1980s or America in the late 1920s. Policymakers will not make the same mistakes as in the 1930s, but they may make new ones.

Click here for full story.

The World in 2009

Want to get a glimpse of what economic conditions await the world in 2009? Each year, The Economist publishes such a guide, which you can find here. Some of the stories included:

• The audacity of change
• Goodbye Guantánamo
• Pick your scenario
• The bucks stop here

• National Association for the Alleviation of Credit Pandemonium
• Crime, interrupted
• An end of hubris

Right or wrong? Review our previous issue:

The Democrats’ year

• Whatever next
• Small is beautiful
• Dirty words
• No end of trouble

• The return of the gentleman banker
• Who’s a bull?
• Currency comeback
• Lessons from a crisis

Right or wrong? Review our previous issue:

Back to basics

Click here for full report.

So how does this recession compare to others?

"The Economist" has an interesting article entitled "A thoroughly modern recession," and argues that although the current recession is sure to be the longest since WWII, since high interest rates weren't the culprit it has more in common with the downturns of the early 1990s and 2001 than the one largely enabled by the Fed hiking interest rates in the early 1980s. From the article:

Though it may end up as one of the longest recessions, if not the longest, of the post-war era, the current episode still seems to have more in common with the mild downturns of 1990-91 and 2001 than the more wrenching affairs that came before.

As Robert Hall, an economist at Stanford University, notes, earlier recessions, like that of the early 1980s, were caused by the Fed raising interest rates sharply to squelch emerging inflation and holding them high even once the recession began. In the current and past two recessions, interest rates never got very high and the Fed actually began to lower them before the contraction began. In a paper written a year ago*, Mr Hall described such apparently “causeless” recessions as perplexing...

The paradoxical truth may be that the less volatile business cycle (until recently) encouraged investors to take bigger risks with borrowed money, driving asset prices too high and ending in damaging busts. Some would still blame the Fed, for not deflating asset bubbles with higher interest rates.

In a recent speech, Donald Kohn, the vice-chairman of the Fed, rejected that charge but pleaded guilty to a lesser one: by better controlling inflation, central banks helped moderate the business cycle, which bred investor complacency. They thus “may have accidentally contributed to the current crisis.” The Fed may no longer be the prime suspect for causing recessions; but it is still an accessory to the crime.

Click here for full story.

Housing fundamentals actually improving

Although I doubt you'll ever see this story cited by bloggers completely enamored of bad news, a story in The Economist concludes that certain housing fundamentals are actually improving. Say WHAT?!

THE American housing market has deteriorated so sharply in the past two years that it is easy to fall prey to profound pessimism. Recent weeks have brought yet more bad news. To protect their thin capital, Fannie Mae and Freddie Mac, the big mortgage agencies, said they would limit the volume of new mortgages that they buy...

Amid the despondency, however, supply and demand are moving towards balance. Sales of new homes, which had plunged nearly 60% from their average level of 2005, have been stable since March. Sales of existing homes stopped falling last autumn...

By the standards of previous cycles, residential construction should be nearing the bottom. Karl Case, a housing expert at Wellesley College and one of the creators of the S&P/Case-Shiller home-price indices, notes that in three previous housing cycles, residential investment peaked at about 5.5% of GDP and hit bottom at around 3.5%. In the latest cycle it peaked at 5.5% in 2006 and by the second quarter had fallen to 3.1% of GDP, below the troughs of 1975, 1982 and 1991. He does not expect much rebound. But like hitting yourself with a hammer, house building need only stop falling for the economy to feel better...

Finally, since home prices have dropped about 18% from their mid-2006 peak (based on the S&P/Case-Shiller composite of 20 cities) and incomes have steadily grown, homes are returning to more typical levels of affordability in some regions. Mr Case estimates that in Los Angeles, the ratio of home prices to annual income per person doubled from 2001-06 to 16, and has since fallen to 11. In Boston, it rose from nine to 12, and has since fallen back to nine.

There are numerous caveats, however. First, the scale of the housing boom means history is a flawed guide to how big a retrenchment is in store...

Some believe that with banks and other lenders dumping huge numbers of foreclosed homes, prices could fall well below equilibrium. That is debatable. A recent paper by Charles Calomiris of Columbia University and Stanley Longhofer and William Miles, both of Wichita State University, argues that foreclosure sales will impact prices less than commonly thought. They examined state-level data from 1981 to 2007 and found that even large increases in foreclosures have only a small marginal impact on prices, perhaps because they occur late in the cycle when the supply of newly built homes is shrinking....

Most serious is the prospect of a further squeeze on credit...Even if Fannie and Freddie’s capital constraints do not stop them guaranteeing mortgages, they have tightened their underwriting terms. Banks, which lack capital themselves, are passing these tighter terms on to customers. Mortgage rates have risen by half a percentage point since early June...

This has left both optimists and pessimists pinning hopes for a rebound on the federal government. Last month’s housing-rescue law offers up to $7,500 to first-time homebuyers, a feature that the NAHB has been heavily promoting. The law also made the government’s implicit backing of Fannie and Freddie explicit, if necessary by injecting capital into them.

Death of the suburbs? Not in the Inland Empire

With the long-term trend towards higher energy prices, a major theme lately has been the death of the suburbs in favor of urban areas. In fact, on a global scale, cities are expected to continue increasing their percentage of overall population.

According to an article in The Economist, however, that doesn't necessarily mean the death of all suburbs, especially if they're located in Southern California's Inland Empire, or the IE. While the IE has seen housing prices plummet more than in neighboring Los Angeles or Orange counties, so far that's been due more to rising foreclosures and the use of sub-prime and Alt-A mortgages during the housing boom than higher fuel prices. And, according to the story, the IE has a few more tricks up its sleeve to benefit from the eventual rebound:

The Inland Empire is America’s warehouse: goods, mostly from China, are sorted and assembled there before being distributed across the country. Until recently increasing trade could be counted on to prop up the economy. Traffic through the ports of Long Beach and Los Angeles, America’s two biggest by container volume, levelled off only briefly during the early 1990s recession and continued to grow in 2001. Now it is declining. In June imports through the two ports were 15% and 12% below last year’s level. Moreno Valley’s office-vacancy rate is already the highest in the region...

The Inland Empire’s housing market did not collapse because people chose not to live in sprawling suburbs. They clearly did, hence the huge growth there. The problem was that buyers could not really afford the houses that were being built. Now they can...House-builders are at last creating smaller homes, and a few buyers are returning. Now the task is to ensure that neighbourhoods are not snapped up by slumlords...

Places like Moreno Valley retain two enormous advantages over traditional cities. They have lots of cheap, available land and a pool of workers keen to avoid the ever-lengthening commute to Los Angeles and Orange County. When it comes to attracting businesses, these two factors outweigh high petrol prices. The city of Ontario, which contains the Inland Empire’s main airport, already has more than two jobs for each home. Greg Devereaux, the city’s manager, reckons it will eventually have more than three.

What does L.A. want to be when it grows up?

One of the most common complaints about Southern California is its infamous sprawl -- I once sat next to a young guy on a plane from Ohio embarking on his first visit to California, and as we were flying into LAX from the east he was amazed at how long we flew over built-out areas before landing.

But the primary reason we have sprawl is because those who live in the currently developed areas fight increased density, so new development is pushed further outward. With politicians fearing urban constituents and builder's associations unwilling to embrace one type of building over another, we remain stuck in a stalemate of short-term interests and, frankly, a type of cowardice that has in the past prevented long-term planning (which is also why we don't have better public transit or a more fully developed freeway system in Southern California).

And yet that may be changing: over the past ten years, recent decisions by the L.A. City Council have been in far greater support of increased density to house increasing population growth that will occur even if existing families simply stay put (i.e., new births). From an interesting overview in The Economist:

Los Angeles has long epitomised car-oriented sprawl. As early as 1946 the historian Carey McWilliams judged it “a collection of suburbs in search of a city”. So rare are neighbourhoods where basic needs can be met without hopping into a car or bus that estate agents tout the few where they can as “walkable”. Urban planners elsewhere routinely invoke the city as an example of what to avoid. Yet even as they struggle to avoid becoming like Los Angeles, cities such as Atlanta, Phoenix and San Jose are copying it by spreading out and, hydra-like, growing new centres.

The original metropolitan miscreant is now trying to reform itself so fundamentally that Joel Kotkin, an urbanist at Chapman University, compares it to rewriting a DNA code. Last summer the city council changed zoning rules to allow tiny apartments to be built in and around downtown Los Angeles. On March 19th it rejected a plan to put 5,600 homes on the city's northern frontier, signalling that the metropolis must now grow up, not out. From next month developers will be allowed to build blocks of flats up to 35% bigger than previously, so long as they include some cheap housing...

“You're beginning to see a neighbourhood revolution,” says Zev Yaroslavsky, one of Los Angeles' shrewdest and most powerful politicians. He gives warning that outraged citizens may add an initiative to the ballot next year that would block dense housing projects, “smart” or not. Mr Yaroslavsky knows about the power of ballot initiatives. He sponsored one in 1986 that cut the size of most new office buildings in half, and another in 1998 that virtually halted subway construction.

Planners retort that Los Angeles will continue to grow, and it is better to build new apartments on run-down commercial streets than plonk them next to bungalows or bulldoze virgin land. They are particularly keen to put people next to express bus lines or subway stops. At present few use Los Angeles' skeletal rail system—259,000 journeys are made each day, compared with 1.2m bus journeys—and the network is growing painfully slowly. If the subway cannot reach the people, the thinking goes, the people must be brought to the subway.

This theory is the bedrock on which the new North Hollywood is being built. Near the office construction site a 14-storey block of flats (it seems enormous in the San Fernando Valley) has already appeared, and others will follow. The hope is that residents will both live and work there, or walk a few hundred yards to the local subway stop. But Cary Adams, a local resident, notes the developers are hedging their bets: two giant car parks are also scheduled for construction. This is, indeed, the genetic flaw in Los Angeles' new DNA.

A big reason Angelenos drive everywhere is that they can park everywhere, generally free. Businesses must provide parking spaces according to a strict schedule. This raises the cost of doing business and hugely lowers the cost of driving. Free parking is, as Donald Shoup of UCLA put it in a recent book, “a fertility drug for cars”.

Consider the roughly 29,000 people who live in Los Angeles' historic downtown. In the past few years a mixture of childless professionals and students have moved into new lofts. They have access to southern California's best public-transport network, and are the sort of people you would expect to take advantage of it. Yet last year a consortium of local property owners revealed that just 11% normally did so, while another 17% generally walked. Almost everybody else drove.

The politicians and planners are gambling that, by arranging Angelenos in a more conventional pattern, they can change their behaviour. Perhaps it will work. But if they are wrong, an already crowded city will simply gum up.

And when it does, you might have Mr. Yaroslavsky to blame. But why should he care? Those who live in the suburbs and outside of either his district or the city limits can't vote him out -- and that, in a nutshell, is why transportation and land planning in Southern California is such a mess.