Barcelona passions

I examined a doctoral thesis the other day - a pretty good one, too. The acknowledgements normally don't make for exciting reading, and just before I moved on to the next section, I found the following...

You have to admit, as ringing endorsements of a city go, it's hard to beat.

applications...

Was it just yesterday that we finished admitting students for the class of 09-10? And here we are again, looking at the first hopeful applicants for 2010-11. Of course, it's still early days, but having 7 applicants already in the second week of December is a pretty good start. Here, I have used a small travel map generator to highlight the countries on the globe from which we have received applications already. So far, I like what I see. Since financial aid decisions are based on merit, and we allocate by late March, it's a good idea for anyone thinking of applying to ITFD to get their paperwork in early...

Swords into plowshares...

and alimony payments into rocket launchers and then, via some minor piracy and blackmail, into hard cash... sometimes life is better than any Hollywood comedy could ever be. Via the Financial Post comes this heart-rending story of the Somali divorcee who got lucky with her payout from the ransom for Spanish fishermen:

Piracy investor Sahra Ibrahim, a 22-year-old divorcee, was lined up with others waiting for her cut of a ransom pay-out after one of the gangs freed a Spanish tuna fishing vessel.

"I am waiting for my share after I contributed a rocket-propelled grenade for the operation," she said, adding that she got the weapon from her ex-husband in alimony.

"I am really happy and lucky. I have made $75,000 in only 38 days since I joined the 'company'."

You can pay with a rocket launcher in lieu of alimony? Who knew? The numbers seem pretty compelling, and you can get in on the act in cash, kind, or with your own life at risk:

One wealthy former pirate named Mohammed took Reuters around the small facility and said it had proved to be an important way for the pirates to win support from the local community for their operations, despite the dangers involved.

"Four months ago, during the monsoon rains, we decided to set up this stock exchange. We started with 15 'maritime companies' and now we are hosting 72. Ten of them have so far been successful at hijacking," Mohammed said.

"The shares are open to all and everybody can take part, whether personally at sea or on land by providing cash, weapons or useful materials ... we've made piracy a community activity."

I particularly like the bit about "community activity"...

How many big booms in US real estate?

You'd think we would have a lot of data on how the price of housing has moved over time -- after all, it's the single biggest investment most people make in their lives. Oh, and housing is at the heart of that small meltdown in world financial markets that you might have heard about. Actually, you would be quite wrong. Eugene White from Rutgers, who is spending two weeks visiting us at CREi, has a new paper arguing that existing price indices for the 1920s and 1930s are off by a large factor. Case-Shiller, for example, relies on a survey of home owners to figure out what price movements were before 1932. Now, I haven't looked at the fine print, but it's pretty clear that one wouldn't want to write this history of prices of pretty much anything based on what people remember... Eugene finds that evidence from construction volume suggests a much bigger boom (and bust) in US real estate in the 1920s than previously thought. Standard histories - like Kindleberger's book on manias - mention speculation in Florida, but do not have much to say about nationwide price movements. This would imply that the pre-2007 mantra ("house prices have never gone down") is wrong.

I am prepared to believe that we got the house price series wrong (and actually, Tom Nicholas of Harvard B-School has a new series for Manhattan that suggests we can do much better than the data currently used). Crucially, Eugene asks why the big bust in housing at the end of the 20s didn't have the same effect on the financial system as it did today. Financing was more conservative, with 20% down regarded as quite risky already. Bank regulation was much tighter, with strong limits on how many mortgages could be kept on the books in relation to assets. Financing housing, it seems, need not create a powderkeg...

Tucson desert reflections

Just got back from some hectic travelling - the Economic History Association conference in Tucson plus a small East Coast tour of seminars (Princeton, NYU, Penn). I somehow managed to fly twice across the pond for this (don't ask). But while air travel isn't all it was in the 1960s and 1970s (piano bars on the top deck of the 747, anyone?), there are compensations... like being able to spend a minute on photography, celebrate a 40th birthday with dear old friends from California, or getting to discuss some really nice papers (like the one by Eric Chaney on Nile floods and the power religious elites in ancient Egypt - I know nearly nothing about ancient Egypt, but whoever picked me should be thanked warmly).

Spanish house prices - lower than thought

For a while, the Spanish housing market seemed like Wile E. Coyote -- running over the edge of a cliff, and staying miraculously suspended up in the air until he looks down. While the Spanish boom in prices was bigger than in the US or Ireland, prices have fallen less than 10% according to the official statistics (which nobody believes - too much black money changes hands at the notary office). Because the market is so intransparent, figuring out what people actually pay is not for the timid. A valuation company in Spain, Tecnocasa, tried to take the bull by the horns, so to speak. Their report finds that the smallish price declines are partly the result of unmeasured quality changes. Put another way -- prices have come down much more than we think. It's just that people bought an awful lot of really terrible homes at the height of the boom. Today, the same people buy something much nicer. The compositional shift - towards more high-quality homes, with luxury amenties like an elevator - is not properly captured in statistics on sale prices. As you can see from the table, once you adjust for price, Barcelona housing is down over 20% instead of the unadjusted 14% (yoy). Not all figures are equally believable; I am hard-pushed to find a decline of 51% in Valencia credible. Be that as it may, I find the economics quite interesting -- the more desperate people were at the height of the boom, the more rubbish they bought. If the quality gradient is steep, then compositional shift will lead to illusory house price stability.
Do I believe it? Only partly. Housing in Barcelona still costs more per square meter than in Manhattan. If you compare like with like (Village=Born, Eixample + Saria = Upper East Side, etc.), the premium is about 20%-30%. The weak dollar helps, but be that as it may -- salaries are very low compared to Manhattan ones, relative to house prices, and the financial system is certainly no better in producing sustainable house prices than in the US (30 year fixed mortgages, anyone?). So the quality adjustment may be part of the story, but the underlying mispricing is still Elephant-sized, if you ask me.

more crisis round-tabling...

If nothing else, the financial crisis seems to have created a lot of demand for people to sit around round or square tables, and to debate in front of their peers. I am on this afternoon at the Barcelona Trobada, the local version of the all-UC meetings in California. The session chair, Jordi Gali, gave us some homework to make sure we all come prepared:

1. In your opinion, what has been the impact of the crisis on:

(i) how the outside world perceives economists and economic research?

(ii) how you perceive the value of economic research?

2. Do you think the economics profession deserves part of the blame for

the great financial crisis as some (even famous colleagues) would claim?

So I did some background reading, from revisiting the "famous" Krugman piece to the now infamous "Crisis? What crisis?" papers by Chari, Christiano, and Kehoe. The latter's abstract is worth reproducing:

Facts and Myths about the Financial Crisis of 2008
Patrick J. Kehoe - Monetary Advisor
V. V. Chari - Consultant
Lawrence J. Christiano - Consultant

The United States is indisputably undergoing a financial crisis and is perhaps headed for a deep recession. Here we examine three claims about the way the financial crisis is affecting the economy as a whole and argue that all three claims are myths. We also present three underappreciated facts about how the financial system intermediates funds between households and corporate businesses. Conventional analyses of the financial crisis focus on interest rate spreads. We argue that such analyses may lead to mistaken inferences about the real costs of borrowing and argue that, during financial crises, variations in the levels of nominal interest rates might lead to better inferences about variations in the real costs of borrowing. Moreover, we argue that even if current increase in spreads indicate increases in the riskiness of the underlying projects, by itself, this increase does not necessarily indicate the need for massive government intervention. We call for policymakers to articulate the precise nature of the market failure they see, to present hard evidence that differentiates their view of the data from other views which would not require such intervention, and to share with the public the logic and evidence that burnishes the case that the particular intervention they are advocating will fix this market failure.

Some economists, when faced with diatribes like Krugman's, sound a bit like General Buck Turgidson. When scolded by the President about the fact that despite the "human reliability program", an air force general ordered his wing of nuclear-armed B-52's to attack the Soviet Union, Turgidson says:

Well, I don't think it's quite fair to condemn the whole program because of a single slip-up, sir!

Having said that, I think I will talk a bit about unreasonable expectations -- why the public thinks its a good way to measure the value of economics in terms of predictive power, and why that makes little sense.

Noisy business cycles

If you read the Krugman piece in the NYTimes, and think that macro has becoming a field of warring tribes with nothing to say to each other... you may be more right than I would like, but it doesn't mean that there is no way to heal the breach. At the CREi seminar this Monday, Marios Angeletos gave a talk on Noisy Business Cycles (forthcoming in the NBER macro annual). The paper marries many elements of real business cycles (RBC) models with noise about the state of the aggregate economy. Because agents do not know how the economy is doing overall, even very small technology shocks can translate into large aggregate fluctuations. The result is an economy that has a strong RBC flavor, but behaves in a Neo-Keynesian way -- noise is going to look like demand shocks. I normally don't as much out of theory papers as I would like, but this one was so clearly presented that I wished we had had another 30 minutes to see some of the applications and extensions...

Moving on...

It's always nice to hear from our former students, and all the more so when they are doing well. Juan Montecino, who attended the ITFD master as part of our inaugural year 2008-09, just dropped me a line from Washington, DC, where he is working for Center for Economic and Policy Research for a think tank called the Center for Economic and Policy Research. He is covering international economic developments, with a special eye on IMF policy and Latin America. Recently, he put his skills to use in the policy paper IMF-Supported Macroeconomic Policies and the World Recession: A Look at Forty-One Borrowing Countries. We hope to see more policy research from Juan in the future!