Beauty and the Borrower
Beautiful people are more likely to get loans and to pay less interest than average-looking borrowers with near-identical credit credentials, a New York University associate professor of finance, Enrichetta Ravina, finds in a paper cited this week on the Stumbling and Mumbling blog.
Examining the photos and financial profiles of more than 7,000 online loan applicants, Ms. Ravina found good-looking applicants were more likely to get a loan by 1.41 percentage points, and paid 81 basis points less than their mediocre-looking counterparts with the same credit ratings.
Yet, despite standing a better chance of landing a loan and paying less, good-looking borrowers pose a significantly higher credit risk, she writes. Better-looking borrowers are, on average, three times as likely to default on their loans than average-looking applicants. Beauty, especially, "is associated with substantially higher delinquency rates," the professor writes.
Lenders' personal "preferences and perceptions" about borrowers has just as much of an impact on the loan supply as "statistical discrimination" of financial information, Ms. Ravina writes.
"This is evidence that discrimination in favor of the good-looking, which is common in labour markets, might be" a matter of taste, the Stumbling and Mumbling blogger, Chris Dillow, writes.
In her report, Ms. Ravina also notes one troubling consequence of lenders' basing their decisions on personal perception: Black borrowers pay between 139 and 146 basis points more than white borrowers with similar financial profiles.
A SAFER, PURPLER $5 BILL The Federal Reserve this week is doing its part to strengthen the American dollar not against inflation, but against counterfeiting. Yesterday, Fed officials unveiled a redesigned $5 bill meant to deter counterfeiters with a slew of new security features.
The most noticeable safeguard: its purple color.
To be distributed to customer banks this week, the new $5 bill retains President Lincoln's portrait on the front. But its color scheme has changed to include a light shade of purple in the center that fades to gray near the edges of the note.
"I am sure Abraham Lincoln will not be upset" about the change, the blogger behind World Financial Blog, Michael Szumielewski, writes. The "update adds complexity to the bill to make counterfeiting more difficult."
To make the note more difficult to counterfeit, the Bureau of Engraving and Printing has added a number of other, less-noticeable features, including two new watermarks on both sides and an embedded security thread, which was moved to the right side of Lincoln's portrait and glows blue under ultraviolet light.
The safer bills will eventually replace the older greenbacks currently in circulation, which have an average 16-month lifespan, Mr. Szumielewski writes.
Still, don't expect the new notes to protect against other looming dangers in the economy, a blogger at Nerve.com, Bryan Christian, warns.
Even as they foil counterfeiters, the bills will "be worth less every day," he writes. "Have a great recession, everybody!"
By Colin Gustafson | Fri, 14 Mar 2008 at 11:04 AM | Permalink
Why Pete Rose Didn't Fare Better in His Bets
Insider knowledge doesn't always bring a higher payoff especially when inside experts try to cheat in a market full of other, well-informed participants.
That's the conclusion of a paper written by a Rutgers University economist, Douglas Coate, and posted yesterday on the Marginal Utility blog (http://atbozzo.blogspot.com).
Examining the baseball bets of a disgraced former Cincinnati Reds manager, Pete Rose, Mr. Coate found that Mr. Rose lost $47,200 on bad wagers on the performance of dozens of Major League Baseball teams in April-May 1987. More than $4,000 of those losses were from bad bets on his own team.
So how could this major league insider with nearly three decades of experience in baseball lose so much money to gamblers who had never played the sport professionally, and had no access to any of the league's players or coaches?
Mr. Coate suggests that Mr. Rose, even as a baseball insider, did not possess as significant an informational advantage as he might have thought. In fact, the famed athlete probably failed as a gambler because he was participating in an "informational-efficient market," where other gamblers knew as much as he did about teams' strengths and weaknesses.
Mr. Rose's expertise was not an "advantage when betting on his own team, on other teams in his league that he studied and competed against, or on teams in the other leagues," the author writes.
That, or he was just unlucky: In some cases, Mr. Rose "was a better gambler when he didn't have access to information," the blogger behind Marginal Utility, Kenneth Houghton, writes.
Whatever the case, Mr. Rose's losses in the betting market provide a lesson for participants in the financial markets, Mr. Coates suggests.
"The team sports betting markets provide another test of how well markets process information," the economist writes. "Markets are efficient if the prices of the individual stock at any moment in time reflect all that is known by market participants."
MIDDLE CLASS MAKES OUT BETTER UNDER BUSH THAN CLINTON Senator Clinton has made a habit of excoriating President Bush for implementing tax cuts that, she says, benefit the rich and hurt the middle class.
But a University of Michigan professor, Mark Perry, contends (http://mjperry.blogspot.com) that the worst "middle class squeeze" in taxes of the last decade has come under tax rates imposed by President Clinton.
Citing a recent study by the research organization the Tax Foundation, Mr. Perry writes that federal income taxes actually fell at every income level under the Bush administration's tax breaks compared to the 1999 rates of the Clinton administration.
According to the data he cites, married taxpayers with $50,000 of household income saw the largest percentage decreases in taxes of any demographic in the country, paying 21% less under Mr. Bush than they did under Mr. Clinton.
For wealthy single taxpayers who make $125,000 a year, the tax rate decreased by a much smaller margin than for the middle class, declining 10% under Mr. Bush's cuts.
"In other words, some middle-class taxpayers received twice the tax cut on a percentage basis as some of the rich," Mr. Perry writes. "So much for the claim that 'the Bush Administration and Congressional policies are failing middle-class Americans.'"
By Colin Gustafson | Mon, 10 Mar 2008 at 10:17 AM | Permalink
Fedspeak as Balm for Investors
When the chairman of the Federal Reserve, Ben Bernanke, speaks tomorrow about mortgage foreclosures, pay attention to his words. Fedspeak is a language of its own, as lawmakers saw when Mr. Bernanke presented a stark picture of the American economy to Congress last week.
His testimony was padded with "understatements, spin, and happy talk," the blogger Barry Ritholtz writes (http://bigpicture.typepad.com).
But while Mr. Bernanke's words may seem to understate the economy's dire condition, Mr. Ritholtz believes that the Fed chiefs "dollops" of sugarcoated truth are exactly what skittish investors and traders need to hear.
The alternative a bluntly worded account of slowing growth, rising prices, and the sinking dollar "would send the market into a panic," Mr. Ritholtz writes. "The Dow would see a 1,000 point intra-day drop."
To prove his point, the blogger offers his own, tongue-in-cheek revision of Mr. Bernanke's recent congressional testimony: "Gentleman, this is a major problem. And our internal, non-public projections forecast it is only going to get worse for the next four quarters." If this were Mr. Bernanke's testimony, be sure a repeat of 1987's stock market crash would not be far behind.
In reality, Mr. Bernanke called the situation "distinctly less favorable." But "just imagine," the blogger writes. If he "told the full and unvarnished truth, it would be beyond ugly."
By Colin Gustafson | Mon, 10 Mar 2008 at 10:14 AM | Permalink
Facts About NAFTA and Jobs
The leading Democratic presidential candidates have been arguing that the North American Free Trade Agreement has devastated America's workforce by allowing Canada and Mexico to siphon off manufacturing jobs.
But a University of Michigan professor, Mark Perry (mjperry.blogspot.com/), writes that this protectionist argument is just empty rhetoric and he's got facts and figures to prove it.
Ignore "all the political rhetoric about NAFTA, free trade, and globalization causing manufacturing job losses," he suggests. "By almost all measures, NAFTA has been a success."
In the 14 years since NAFTA was implemented, for instance, jobs have grown by more than 20%. Unemployment has dropped to 5.1% from an average of 7.1% during the 14-year period preceding the agreement. Additionally, between 1994 and 2008, business-sector wages rose 19.3%, compared to a less impressive increase of 11% between 1979 and 1993.
Meanwhile, exports to Canada and Mexico have spiked. And while American manufacturing jobs are declining, the sector's output has grown steadily over the past two decades, as workers become more productive.
"Manufacturing output and productivity in the U.S. are both at an all-time high," Mr. Perry writes. "We're able to produce more and more output with fewer and fewer workers."
SUING DRUGMAKERS AFTER FDA APPROVAL Two economics bloggers are at odds over whether patients should be able to sue pharmaceutical companies whose drugs are proven to be defective after they've received approval from the Food and Drug Administration.
In October, the Supreme Court will hear arguments over whether FDA approval for a product gives its makers legal protection against personal-injury lawsuits a protection that the Bush administration has supported.
A columnist for the Atlantic, Megan McArdle (meganmcardle.theatlantic.com/), agrees with this stance: "Call me a crazy libertarian, but shouldn't regulatory approval get you a pass on lawsuits?" she asks.
"If the government experts, who are presumably highly motivated to avoid catastrophes, can't spot the danger," she writes, "why do we expect the drug companies to?"
A George Mason University professor, Tyler Cohen (marginalrevolution.com/), contends that patients should retain the right to sue drugmakers.
The threat of litigation, he argues, would spur companies to be more vigilant in their inspections at a time when the FDA, by its own admission, lacks the manpower to regulate all of the products it oversees.
"We simply can't trust the bureaucrats to find the flaws with drugs," Mr. Cohen writes. "Lawsuits encourage the companies to look for problems once a drug is already approved. Regulation does not."
By Colin Gustafson | Wed, 5 Mar 2008 at 6:03 PM | Permalink
Ambac's Bailout Shows Little Faith
A troubled bond insurer, Ambac Financial Group Inc., may be inching closer to a deal that could salvage its top-notch credit rating, but a skeptical blogger, Yves Smith (Naked Capitalism), writes that the proposed rescue plan is a token gesture that does little to help its chances for survival.
The blogger's skepticism comes two days after Ambac reportedly started talks with a group of banks on plans to raise about $3 billion of capital to forestall a rating downgrade. Such a rating cut would undermine Ambac's ability to guarantee debt. Yesterday, the blogger said the plan is fraught with concessions that disclose just how little faith the banks have in Ambac's future.
The deal, he writes, "is a big vote of no confidence."
Why? For starters, instead of agreeing to buy equity in Ambac, the banks appear to have required the insurer to raise billions of dollars in new shares on its own, then agreed to buy up all of the remaining stocks that the insurer fails to sell to shareholders. This deal could signal one of two possibilities: Either enough of the banks "have taken deep enough write-downs that they don't think they have much at risk or they believe this rescue will be inadequate." Rather than offering a $500 million credit line, the banks appear to have required Ambac to sell $500 million in debt. For the banks, the sum is "peanuts," the blogger writes. "But they aren't even willing to take that risk. They are instead making Ambac raise the dough itself, on what is sure to be very costly terms. ... This precedent of offering only token support will make it easier" for the banks to do "little or nil next time."
SLAPPING DOWN IDEA OF HOUSING 'SLIP' Hours after the National Association of Realtors described the decline in existing home sales for January as a mere "slip," a market strategist, Barry Ritholtz, dished up a few choice words of his own to describe the downturns in the housing market. "Plummet, plunge, nose-dive, crash, tumble or freefall might work," Mr. Ritholtz wrote (bigpicture.typepad.com/). "But 'Slip?' Gee, that doesn't quite capture the true essence of the data."
In a press release esterday, NAR noted a 0.4% drop in the pace of existing home sales across America in January 2008 a "slip" that marked some of the worst declines in home sales since the Great Depression of the 1930s, analysts said. Mr. Rithiltz argues that the NAR's emphasis on a 0.4% drop fails to show the broader and bleaker picture of the housing slump on a local level. In the Northeast, for instance, existing home sales in January 2008 were 25.7% below the level in January 2007, even as the region's median home price rose 3.1% from last year, NAR's data show.
"Delve beneath the national average into the details," Mr. Ritholtz writes, "and you find all manner of ugliness."
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 HOUSING SALES A chart posted on The Big Picture blog shows that existing home sales in America declined in January 2008, despite three months of lowering mortgage rates. (Credit: ECONODAY) |
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For more insight from the country's leading economics blogs, go to nysun.com/blogs.php.
By Colin Gustafson | Tue, 26 Feb 2008 at 9:34 AM | Permalink
Trimming Expectations To Spur a Rate Cut
The chairman of the Federal Reserve, Ben Bernanke, is all but certain to slash interest rates again, this time to as low as 2%, but only after market participants have tempered their expectations, an economist at the University of Oregon, Tim Duy, writes (Economist's View
Defying some investors' predictions last week, Mr. Bernanke stopped short of lowering the Fed Funds rate yet again, while leaving open the possibility of further rate cuts in the future. The move signals that Mr. Bernanke, while committed to implementing another cut, first wants market participants to brace for a "sluggish" economy and incorporate a somber outlook into their own nearterm market forecasts, Mr. Duy writes.
This will result in a greater impact for the interest rate cuts when Mr. Bernanke implements them.
After two previous rate cuts in January failed to buoy markets for more than a few days, Mr. Bernanke's credibility took a blow, Mr. Duy writes. And with mortgage market problems proving more intractable, Mr. Bernanke is trying to "reassert control over expectations" before resorting to another cut.
"The Fed," a fellow economics professor, Mark Thoma, writes, "is looking for some level land where they can pitch a tent, rest up for a while, and assess the economic geography before setting out again in one direction or another."
USING MARKET FORCES TO CONTROL GUNS A week after a gunman killed five Illinois college students before killing himself, economist Gary Becker argues that steep prices and harsher penalties, not tighter gun controls, are the only surefire deterrent to further gun violence.
The University of Chicago professor writes (Becker-Posner blog) that current gun controls fail to keep firearms out of the hands of criminals and the emotionally troubled, instead driving them to obtain guns on the illegal market. So rather than tightening the requirements for buying legal firearms, lawmakers should squelch consumer demand by implementing steep sales taxes on legal guns while meting out longer prison terms for those caught trafficking them illegally. "Like the tax on gasoline, cigarettes, and some other goods," Mr. Becker argues, "a gun tax should be several hundred percent of the untaxed price to discourage purchases. What's more, a sizable punishment to illegal suppliers would raise the price of guns in the illegal market in order to compensate sellers for the risks of punishment."
As a result, fewer criminals would try to obtain guns illegally, Mr. Becker writes, and fewer lawabiding citizens would feel the need to pay higher prices for guns in order to protect themselves from criminals. "The demand for guns would be reduced in both markets," he writes.
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 FLAT-RATE INCOME TAX A new research paper published by the National Bureau of Economic Research and cited by the Carpe Diem blog argues that Russia's implementation of a flat-rate income tax system in 2001 caused a sharp decline in tax evasion while spurring increased tax revenues. (Credit: National Bureau of Economic Research) |
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For more insight from the country's leading economics blogs, go to nysun.com/blogs.php.
By Colin Gustafson | Tue, 19 Feb 2008 at 9:48 AM | Permalink
The Rising Demand For Dollars
Robust demand for dollars among foreign central banks could exacerbate the nation's trade deficit and stymie economic growth, economist blogger Yves Smith warns.
His admonition comes a day after fellow blogger Brad Setser hailed recent evidence of a growth in the dollar holdings of foreign central banks, a development that could allay fears about shortfalls in the foreign purchase of American securities (RGE Monitor).
Both bloggers note that large overseas dollar reserves help prevent the currencies of emerging economies, like China or the Persian Gulf states, from appreciating against the low-valued American dollar.
"Central bank demand for dollars has not waned," Mr. Setser writes. "The scale of the increase in emerging market government assets right now is truly mindblowing."
But yesterday, Mr. Smith questioned whether the apparent growth in foreign dollar reserves was really such a positive sign (Naked Capitalism).
"Is this such a cause for cheer?" he asks. "While it's better not to have a train wreck, the resumption of the global imbalances pattern supports a US pattern of complacency about its trade deficit and low savings rate."
STOCK PERFORMANCE AND PRESIDENTIAL PROSPECTS
Linking trends in the stock market to changes in the presidential nominating contest may make for lively talk-show palaver.
But when it comes to actually showing a correlation, the proofor lack thereofis in the data, notes blogger Paul Kedrosky.
Mr. Kedrosky writes (Infectious Greed) that he was intrigued by a recent news segment in which a guest suggested that health care stocks would perform better now that Senator Clinton was no longer the presumptive Democratic nominee. Noting that Mrs. Clinton "has a reputation for wanting to make a... potentially profit-limiting change" to the health care market, Mr. Kedrosky decided to test this theory. He created a scatter diagram comparing prediction data of the likelihood of a Clinton nomination to health care stocks.
Did the theory hold up?
Not really: "Based on the scatter diagram," he writes, "you have to work awfully hard to make the Hillary health care 'put' argument.
"It doesn't get better if you get marginally more analytical and throw a linear regression at the problem. ... You might try a logit regression, with a categorical dependent variable and a stratified independent variable, but you know what? I don't have the time or interest."
For more insight from the country's leading economics blogs, go to nysun.com/blogs.php.
By Colin Gustafson | Fri, 15 Feb 2008 at 10:08 AM | Permalink
Linking Poverty With Death
It's widely known that severe poverty and high death rates go hand in hand. What is an open question, however, is the "causation" between the two, a University of Oregon economist, Mark Thoma (Economist's View), observes: Do ill people die in poverty because they're too unhealthy to work? Or does poverty lead to substandard living conditions, lack of medical care, and early death?
Mr. Thoma looks at an article from a professor of international econonomics at the Graduate Institute in Geneva, Switzerland, Richard Baldwin, for the answer.
Mr. Baldwin writes that the odds of death after age 50 rise dramatically if a person's daily income declines by as little as a few dollars. What's more, women who do not work outside the home, but live with a working-age adult, die earlier if their household's breadwinner makes less money on a daily basis. These findings, which come from a Massachusetts Institute of Technology study of impoverished communities in India, Indonesia, and Vietnam, show it is highly unlikely that their poverty is due to poor health. In fact, if anything it is the opposite: Their poor health arises from being poor. "We are tempted to interpret the evidence accumulated
as revealing, at least in part, that poverty does kill," Mr. Baldwin writes.
MARGINAL TAX RATES FOR RICH AND POOR Some economists argue that higher marginal tax rates discourage wealthier Americans from making more money for fear that the government will simply take a larger cut from their paycheck in taxes. Leftleaning economists defend the marginal rates as a fair way to protect the poor.
A Harvard University economist, Gregory Mankiw (Greg Mankiw's Blog), contends that upwardly mobile Americans at both ends of the income spectrum get hurt by the marginal rate system. For instance, a low-income earner who jumps from a $35,000 salary to $25,000 gets snagged in a so-called poverty trap forfeiting eligibility for government subsidies while paying higher taxes. This poverty trap, he argues, can effectively cancel out the increase in earnings. Meanwhile, a wealthier person may be dissuaded from jumping to a higher income bracket for similar reasons.
"Have you ever turned down a money-making opportunity that you would have accepted if it paid twice as much?" he asks. "For many high income earners, the answer is yes, which means the tax system is distorting their behavior and reducing the size of the economic pie."
For more insight from the country's leading economics blogs, go to nysun.com/blogs.php.
By Colin Gustafson | Wed, 13 Feb 2008 at 10:11 AM | Permalink
Sovereign Wealth Funds and Transparency
Two economist bloggers are voicing skepticism this week about the International Monetary Fund's efforts to establish a code of conduct among sovereign wealth funds.
For months, IMF officials have been pressuring these funds many of which own large stakes in American banks that have been hobbled by the mortgage crisis to be more "transparent" in their activities. The goal, officials say, is to ensure that the funds don't use their financial leverage to pursue their political objectives.
But blogger Yves Smith writes (Naked Capitalism) that such regulatory efforts are a charade, as most of the funds are driven largely by commercial, not political, interests.
Blogger Brad Setser, a fellow at the Council on Foreign Relations, holds a more balanced perspective on the matter (RGE Monitor):
"Sovereign funds are motivated by returns: none has a mandate to lose money," he writes. "As a result, most funds are unlikely to make investments that result in large losses
to produce political gains."
That said, sovereign wealth funds often are more inclined to pursue ostensibly commercial interests if there is a political benefit, as well, Mr. Setser notes. As evidence, he cites Dubai and Qatar's recent interest in Nasdaq as part of their competitive efforts to emerge as the Persian Gulf's regional financial center.
"Most sovereign funds," he writes, "seem quite keen to do 'deals' that offer the prospect of both strong financial returns and spillovers that benefit their home country."
AT ODDS OVER 'CREATIVE CAPITALISM' Nearly a month after Bill Gates urged corporate leaders to invest in poor nations, two University of Chicago economists are at odds over whether these altruistic calls for "creative capitalism" were a message the business community really needed to hear.
In a speech last month at the World Economic Forum in Davos, Switzerland, the Microsoft founder argued that companies could gain both profits and recognition by using market forces to aid the impoverished.
But professor Richard Posner doubts (Becker-Posner Blogthe relevance of this message contending that charitable investment, if not profitable, will only put a company at a competitive disadvantage.
He adds that if there are indeed profitable opportunities to help the poor, firms naturally will gravitate to them. "It does not require Gates's urging for businesses to seek to exploit them," he writes. Mr. Posner's colleague, Gary Becker, appears to agree but to a degree. "I do not see anything counterproductive with Gates and others giving encouragement to corporations to be more concerned with goals like distinction along with an interest in making profits," he writes. "The real test is how viable such motives are in a competitive market environment."
For more insight from the country's leading economics Web logs, go to nysun.com/blogs.php.
By Colin Gustafson | Tue, 12 Feb 2008 at 10:17 AM | Permalink
Looking Beyond Neoclassical Paradigm
When American economists debate economic development policy in Third World nations, they traditionally follow two prevailing schools of thought: the free market argument or the interventionist belief.
But as blogger Yves Smith notes (Naked Capitalism), the prevailing two-school debate has obscured the fact that other, nontraditional "frameworks" of economic development theory are also valuable.
"It's important to recognize biases" in traditional theory; "otherwise you have no hope of correcting for them," he writes. Citing a recent article by Thomas Palley, Mr. Smith notes that the free market argument, or so-called Chicago School, claims that free markets, not public policy, can improve the development of foreign economies. By contrast, the interventionist argument, or so-called MIT School, argues that real world economies are afflicted by market failures, which policy interventions can help solve.
While acknowledging the value of both arguments, Mr. Palley believes they both assume there is one "economics" and therefore fail to give due credence to other disagreements about development, trade, and globalization.
"The great challenge is not to admit that there are many recipes" for economic development, Mr. Palley writes, "but rather to create space for other perspectives on economic analysis and policy."
TURNING TO NORWAY FOR ANSWERS With the subprime meltdown spreading to other sectors of the economy, Americans should consider taking a page from the Scandinavian playbook to dig themselves out, market researcher Barry Ritholtz writes.
In a Web log entry (The Big Picture) yesterday, he notes that the deterioration of the American financial situation shows many of the same features, including loose capital regulations and strong lending growth, that were present at the onset of the 1987 Norwegian banking crisis.
"We seem to have drunk the same heady and dangerous brew here in the U.S." Mr. Ritholtz writes. "I call it a Long Island Financial Iced Tea five liquors mixed with reckless abandon, invariably producing a pounding hangover."
In Norway, the government refused to bail out speculators and allowed the markets to figure out their own solutions, including writing capital down to zero before intervening with public funds. In the process, he writes, the Norwegians avoided moral hazard.
In America, the government may be wise to follow a similar path, only intervening on behalf of monoline insurers such as Ambac and MBIA after the market fails tofinda solution,Mr.Ritholtz adds.
"The alternative leads us to a situation where grossly speculative profits remain private, but systemic risk is public," he writes. "This would be a wholly unsatisfactory conclusion."
For more insight from the country's leading economics blogs, go to nysun.com/blogs.php.
By Colin Gustafson | Mon, 11 Feb 2008 at 10:24 AM | Permalink
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