2009-01-18 (Sunday) by Gregory Tucker.

I saw this article on the NY Times website. It was interesting though not particularly shocking–people are cutting back on services or substituting them with DIY efforts.

Separately I am reading a book called Natural Capitalism which, among other things, advocates a utility, service-based model for a number of products which today are largely purchased.

An example I thought of recently was roofing on houses. Consumers typically purchase their roof, which can cost several thousand dollars and last for 10-20 years. Recently homeowners without sufficient cash flow would use a HELOC or 2nd mortgage to acquire the roof. Discarded roofing materials typically end up in the landfill.

In a utility model, homeowners wouldn’t purchase their roof but would lease their roof from a service provider, who would repair, service, and replace the roof on some regular basis. Ideally the service provider could control its costs by designing roofing materials that could be repaired, reused, or recycled easily. The renter would pay a fixed monthly or annual rate for the service, and wouldn’t have to worry about environmental factors such as moss or hail damaging their roof–the service provider would provide all repairs.

I see an economic benefit–namely consumers could not delay roof replacement in order to save money in the short term–what realtors call “deferred maintenance”. They must make payments in good times or bad, provding more consistent revenue flows for the service provider.

As always I see issues with this model. What happens if the renter can no longer afford to pay. Is it ethical to remove their roof, exposing the house to certain damage from the elements? Is it even legal? And if renters know this, will they be tempted to sign contracts for the purpose of breaking them almost immediately?

Posted in Environment, Economics | Print | 1 Comment »

2008-12-29 (Monday) by Gregory Tucker.

http://www.businessweek.com/magazine/content/08_52/b4114024610745.htm?chan=magazine+channel_news

I believe Businessweek has come up with an answer to a previous question: why don’t we allow the bankruptcy courts to sort out this mess, while taxpayers guarantee the loans that allow the companies to restructure.

1. Bankruptcy does not automatically modify the contracts with workers.
2. Bankruptcy does not automatically renegotiate the agreements with dealers
3. Creditors can scuttle bankruptcy proceedings if they choose, forcing full foreclosure and sales of assets.

I still believe Chrysler should be killed, but it is too late for that now.

Posted in Economics, USA | Print | 1 Comment »

2008-12-26 (Friday) by Gregory Tucker.

Today, while reading Natural Capitalism, I ran across the following excerpt that nicely sums up the state of the automobile industry today:

The automobile industry of the late twentieth century is arguably the highest expression of the Iron Age. Complicated assemblages of some fifteen thousand parts, reliable across a variety of conditions, and greatly improved in safety and cleanliness, cars now cost less per pound than a McDonald’s Quarter Pounder. Yet the industry that makes them is overmature, and its central design concept is about to be overtaken. Its look-alike products fight for small niches in saturated core markets; they’re now brought on price via the Internet like file cabinets, and most dealers sell new cars at a loss. Until the mid-1990s, the indusry had become essentially moribund in introducing innovation. As author James Womack has remarked, “You know you are in a stagnant industry when the big product innovation of the past decade is more cupholders.” Virtually all its gains in efficiency, cleanliness, and safety have been incremental and responded to regulations sought by social activists. Its design process has made cars ever heavier, more complex, and usually costlier. Thes are all unmistakable signs that automaking has become ripe for change. By the 1990s, revolutions in electronics, software, materials, manufacturing, computing, and other techniques has made it possible to design an automobile that would leapfrog far beyond ordinary cars’ limitations.

The fact this was written in 1999 and still holds true today makes it all the more important. Since then the industry’s greatest innovations are the Flex Fuel and hybrid engines, both of which are still just incremental improvements over the traditional car design premise. The Prius is a minor departure that hasn’t yet changed the basic paradigm of car design.

Patrick Emerson, Prof. of Economics at OSU, suggests we should allow Chrysler and GM to enter bankruptcy, and limit government assistance to guaranteeing loans in bankruptcy. This mechanism is well-established, does not require any major feats of political courage, and contains the legal authority to renegotiate agreements with the unions and suppliers. I agree, but I am concerned about the downstream effects on the entire ecosystem of parts suppliers and contractors. The government, in this case the Federal district courts, would become overburdened with bankruptcy cases and will instigate the government to a much greater degree than can be accomplished otherwise.

BusinessWeek recommends  the end of Chrysler. We should either allow the company to fail, or have GM absorb it. I would allow Chrysler to fail, for the simple reason of moral hazard–Cerberus Capital Management is well-capitalized and could save the company, but is refusing to do so, in order to get a free handout from the government. Let it fail. My only concern is a repeat of the prior–what would happen to the ecosystem of upstream suppliers if Chrysler went into bankruptcy? How would that affect the viability of Ford and GM? Otherwise the move would be positive for Ford and GM.

Natural Capitalism: Creating the Next Industrial Revolution. Paul Hawken, Amory Lovins, and L. Hunter Lovins. 1999.

http://oregonecon.blogspot.com/2008/12/detroit-and-chapter-11.html

http://www.businessweek.com/bwdaily/dnflash/content/dec2008/db2008128_251483.htm

Posted in Economics, USA | Print | 1 Comment »

2008-11-29 (Saturday) by Gregory Tucker.

Traditionally, when the banks wish to borrow from the Federal Reserve, they must deposit high quality securities, traditionally US government securities. In the midst of the crisis, the Feds loosened their loan criteria. As a result, hundreds of billions of dollars in potential junk has made it into the hands of the Federal Reserve.

Amid the news of the attacks in Mumbai and Black Friday shopping-related deaths, news of the Citibank bailout seems ancient history. The recent Citibank bailout has increased the likelihood that the Feds will “consume” hundreds of billions in losses. There’s more: The Fed is buying $100B of Fannie/Freddie debt via the FARP program.

The Fed doesn’t raise revenues through bonds or taxes–their primary recourse is to deflate the currency. In practice we all pay the bailout a little at a time through reduction in the value of the currency. None of this implies the Citibank bailout was the wrong policy. Citibank isn’t completely off the hook, and the taxpayers could receive some compensating benefit. The regulators and policy makers are in triage right now, and Citibank is one of the firms that must be saved in order to save the economy.

The train wreck, if it happens, may wait for Obama to take office, but the train was a runaway long before he even received the Democratic party nomination.

Posted in Economics | Print | 1 Comment »

2008-11-26 (Wednesday) by Gregory Tucker.

The most recent numbers for Portland were poor again. Prices for September 2008 (the latest available) are down 1.31% from August, and down 8.62% from September 2007. All told Portland has declined 9.03% from its peak in July 2008, and all trends point to continued declines.

The graph above shows how the market has behaved since January 1987, the first data available from Case-Shiller. The data from January 1987 to June 2004 shows an extremely reliable trend (confidence 99.33%), and a bubble that began with the introduction of “funny money” financial products like Subprime and Alt-A loans. If current post-peak declines remain constant, Portland pricing will intersect the historical trend around December 2009, with further price reductions around 11%, or 19% from the bubble peak.

I cannot predict what will happen after 2009, but I am predicting further declines throughout 2009.

Posted in Economics, Portland | Print | 1 Comment »

2008-11-24 (Monday) by Gregory Tucker.

Here are some nice observations on risk. 

Risk in the case of the meltdown of the balance sheets of the world’s most important financial institutions is quite different than the type of risk that financial institutions and insurance agencies were used to dealing with. What characterizes what we might term “normal risk” are three things: it is exogenous, stationary and uncorrelated. 

Although non-standard risks are difficult to plan for and manage, we must do so nonetheless. Risk models that breakdown when risks are endogenous, moving, or correlated is like building a car whose seat belts when the driver falls asleep, or whose car bag fails over 10Mph.

Transparency is a core issue. Risks cannot be managed if they cannot be measured. If government is to become the insurer of last resort, then it has the right (and obligation) to ensure transparency of the markets. The CDO and DSO markets are very opaque, to the benefit of nobody except a small handful of inside players.

Posted in Economics | Print | 1 Comment »

2008-11-18 (Tuesday) by Gregory Tucker.

There is a good article here about unemployment levels in economic cycles. Unemployment peaks about five to six quarters after the economy troughs. IF (all caps big IF) the economy would start to recover around the middle of 2009, the job market won’t start to recover until late 2010 at the earliest. 

Posted in Economics | Print | 1 Comment »