While prime mortgages have a serious delinquency rate of 4.98 percent FHA loans are up to a stunning 9 percent. This is incredibly high given that this is a loan product that has been booming recently. Subprime loans are a dwindling segment of the mortgage market. In 2007 subprime loans made up 14 percent of all outstanding loans whereas today they are 9 percent and moving lower. However, FHA loans in 2007 made up 6 percent of all loans and are now up to 16 percent of all outstanding loans. We should be concerned about the delinquency rate because we will be on the hook for this. Of course it should come as no surprise that many that can barely save 3.5 percent to buy a home are more likely to encounter financial problems and increase a new category of distressed inventory.Woj’s Thoughts - First of all, the last housing bubble should have taught us that low-interest loans with minimal down payments and lax credit restrictions is a recipe for disaster. The private lenders have apparently learned this lesson, so the government has stepped in to take their place. Sure, this plan may support house prices in the short-run, but in the long-run it creates an undue burden on households with socialized losses. One could argue this is a prime example of the potential troubles involved in public banking.
2) 'Central banks should admit their mistakes': an interview with the Bank of England's Andy Haldane by William Davies
Looking back at the way my thinking has been moving over the last few years, the stories I’ve been telling have been in the spirit of evolutionary economics. Questions such as – why is it that we found ourselves traversing along this or that path, for the economy or the financial system? Usually, if you can explain why it is we’re on that path, it gives you some reasonable insight as to what behaviours were driving it and how you might need to alter those behaviours to get on a different path. My proposed stories about the crisis were not that behaviours were driven by stupidity or wickedness, but rather that the rules of the system had been designed in ways that may have made sense individually, but the actions of those individuals and institutions were added up, it made for a system that did fairly crazy things.
For example, the notion of ‘too big to fail’ is a form of evolutionary equilibrium founded in a set of self-reinforcing state interventions, each of which individually made sense. Because if a bank goes bust, it may make perfect sense for a government to ride to the rescue, which in turn gives rise to a set of incentives for those running the banks, which makes the next bank failure even bigger, which states then have to deal with. This creates a ‘too big to fail equilibrium’. And therefore to tackle that evolutionary problem you need to break the cycle. In the case of banks, you can fine them, you can regulate their behaviour, but unless and until this structure of incentives is altered, to change this fundamentally, you won’t reverse the cycle.
I think one of the great errors we as economists made in pursuing that was that we started believing the assumptions of economics, and saying things that made no intellectual sense. The hope was that, by basing models on mathematics and particular assumptions about ‘optimising’ behaviour, they would become immune to changes in policy. But we forgot the key part, which is that the models are only true if the assumptions that underpin those models are also true. And we started to believe that what were assumptions were actually a description of reality, and therefore that the models were a description of reality, and therefore were dependable for policy analysis.
I think we’re bound to enter a period in which to have authority, to command respect, we’re going in addition to need to be understood. Maybe for the majority of that 318-year history it was quasi-automatic, that when the Bank spoke others listened. When the Bank asked, others did. And I think that these days, the world is much more likely to question, to ask why and to legitimately expect a good answer in response.
So I think looking ahead, central banks – this isn’t remotely just about the Bank of England – are going to need to listen as often as they speak, to explain themselves as clearly as they’re able (warts and all), to say when they’ve got it wrong, to admit to mistakes when they’ve been made. Mistakes will be made – that is in the nature of public policy. The important thing is that they are made, when they are made, for the right reasons. That they’re honest mistakes, they’re technical mistakes, that anyone could have made given how uncertain the world is. That’s what protects you. That’s what gives you authority. It sounds perverse that admitting to mistakes can be credibility enhancing, can be authority enhancing. But my very strong view is that that is the only thing which can protect you, can enhance understanding and therefore authority.
This is a world in which central banking is more conversational, it’s certainly more humble about what’s possible. It explains its uncertainties, and that sometimes it might not know, but that not knowing is not a reason for not talking. It will be more responsive to external commentary, including external criticism, it will explain when it thinks that criticism is wrong, and accept when it thinks that criticism is right. That won’t protect us from the wider world, and why should it? But it will, longer term, give us that authority that you spoke about. It’s the only thing that I think can give us that longer term. That’s quite a shift from where public policy has come from. Certainly a massive shift from where central banking has come from. I sense there’s no escaping it.
3) Why I Should Blog More by Eli Dourado
My standard advice for those few younger people who ask me for it is simply to produce a lot of external value. Don’t worry about being compensated for it right away. If you succeed in producing things that are of value to others, they will want you around, and you will have plenty of rewarding opportunities you would not have had otherwise.
So I resolve to follow my own advice. I’m not claiming that my blog posts are revolutionary, but some people seem to enjoy them, and I like making people happy. Therefore I am planning to blog more. Check back soon, and in the meantime feel free to consider this a request for requests.Woj’s Thoughts - Eli is a PhD Candidate in Economics at George Mason University, where I will be starting in a couple weeks, so I may qualify in that limited group. Either way, after nearly two years of maintaining this blog I fully agree with his perspective. If I can consistently provide blog posts that offer value to readers, I have no doubt that the experience will prove rewarding for my career.