Comments

Like other users of netcomments, I suddenly found that my comment facility wasn’t working and the netcomments.co.uk site had vanished – you get a redirect to a hosting service. I guess this explains why businesses don’t want to trust their vital operations to Application Service Providers (for those who don’t follow fashion, these were the Next Big Thing in mid-2000). Following the lead of Tim Dunlop, I’ve moved to Haloscan – I hope they are better. Talking of Tim, check out his stoush with the Rittenhouse Review. I thought global warming was a hot topic, but I’ll make sure never to mention the Pope.

The Great Home Equity Fallacy

US Home Sales Surged in July, prompting statements like this:
“A continued solid gain in prices of existing homes — a proxy for housing wealth– suggests that rising home equity will continue to buffer any weakness in equity wealth and sustain household spending,” said Maury Harris, chief economist at UBS Warburg.”
Exactly, the same argument has been pushed by Alan Greenspan.
In economic terms this simply doesn’t stand up. As the name suggests, households live in houses. The services of the housing stock are consumed by households, and any increase in the value of housing for one household is a loss for others. The only way the household sector as a whole can gain from rising house prices is to sell to immigrants or for non-residential use.
It follows that a consumption boom based on rising home prices is, in the words of the Bible, a house built on sand.
(This argument needs to be qualified by the special features of the US mortgage market, discussed below. Arguably, it’s not households who are in trouble but the institutions who lend to them. But the boom is just as unsound either way).

Satellites and global warming II

Ken Parish responds to my post on satellites, making a small but important error in doing so. He attributes the view I quoted to the IPCC then makes the reasonable point that, just because you are one of the 2000 scientists who worked on the report doesn’t mean you endorse everything in it. In fact, the statement I quoted was from the report of a panel assembled by the US National of Academy of Sciences specifically to examine the issue of the apparent discrepancy between satellite and ground data. It had 15 members, one of whom was John Christy. Judging by Christy’s evidence to the US Senate, cited by Ken, Christy would not have written exactly the same report as that of the panel, but he signed his name to it nonetheless, and did not append any dissenting notes as he could have done if he wished. I don’t think it’s “fast and loose” to quote a joint report on a specific topic as evidence of one author’s views on that topic.
To illustrate my point about the fragility of arguments based on short time series take a look at the graph (Fig 1) in Christy’s evidence and drop out the first five years. Even eyeballing it, you can see that the discrepancy between the trends would just about disappear. (As drawn, the level of the satellite data is lower, but that’s a graph artifact).

Satellites and global warming

At the urging of Ken Parish, I’m returning to the topic of global warming, but I’ll do my best to keep things civilised. One issue raised by Ken is the discrepancy between ground level and satellite measurements of global warming. I have followed this one fairly closely and on one crucial aspect of debate, I have a fair bit of professional expertise.
The big expert on satellite measurements of climate is John R. Christy of the University of Alabama. His data, which started in 1979, initially appeared to show a cooling trend in the troposphere. Since satellite data seemed free of many of the errors that affect surface measurements, these results were seized on by global warming ‘sceptics”.
However, it was discovered in 1998 that the satellite data had problems of their own, arising from a failure to correct for the gradual decay in their orbits. Correcting for this, and adding more data, the satellite data now shows a slight warming trend, but not as much as the surface data. These facts were enough for an NAS panel, including Christy, to publish a report Reconciling Observations of Global Temperature Change which concluded that
“Despite differences in temperature data, strong evidence exists to show that the warming of the Earth’s surface is undoubtedly real, and surface temperatures in the past two decades have risen at a rate substantially greater than average for the past 100 years”

Of course, some sceptics could not bear to give up their best bit of evidence and have put a lot of weight in the remaining discrepancy. Speaking as someone who has taught and researched the statistical analysis of time series, I can say that putting this kind of weight on 20 years of inconclusive data is not justified, even if such events as the eruption of Mt Pinatubo in 1981 had not added to the usual background noise.

The satellite data does raise some issues – for example it shows that the link between tropospheric and surface level temperatures is not as tight as was once thought, but the idea that it represents serious evidence against the hypothesis of human-induced global warming has been thoroughly refuted.

The perils of Posner

US Federal judge, bestselling author and highly-cited economist Richard Posner has been taking a hammering in the Oz blogworld lately. First there was a discussion of his book on public intellectuals, where the reaction ranged from lukewarm (me) to scathing (Don Arthur). Along the way, Tim Dunlop and Ken Parish weighed in with some acute observations. Now his contribution to law and economics in general is up for debate, with Ken panning him again and Jason Soon offering a very qualified defence.
I’ve read a fair bit of Posner’s stuff over the years, and I can see why he elicits this kind of reaction. He’s very bright, but tends to be glib and superficial, and takes too much delight in being deliberately shocking. (Actually, I’ve got a fair bit in common with him, and have tried hard to train myself out of these kinds of faults).
More fundamentally, I think he’s focused on the least convincing ideas in Coase, namely that judges and the common law should make judgements in line with efficiency. I’m not a big fan of judicial legislation, though I dislike even more the kind of spurious literalism that allowed people like Garfield Barwick to impose their own political views while posing as conservatives. I prefer an ‘original intent’ approach to the interpretation of the law, with sensible modification in the light of changing social and technological conditions.
I find a lot more interest in the other great interpreter of Coase, James Buchanan, though I think he is also fundamentally wrong in trying to find an unchallengeable base for property rights in some sort of contractarian myth.
What does all this mean for the tortious liability of ski-lift operators? I’ll tell you next time.

Banking's Future Lies in its Past

On of the big problems of policy debate, particularly on the “left”, is that it’s considered unthinkable to advocate a return to the institutions of the past, even when they performed demonstrably better than those that replaced them. That’s why it’s encouraging to read Martin Mayer, a guest scholar at the Brookings Institution, saying that Banking’s Future Lies in its Past, that is, that it was a mistake to repeal the Depression-era Glass-Steagall act which required complete separation between commercial and investment banking. Of course, Mayer doesn’t advocate a return to the exact policies of the past, but a modernised version taking advantage of the controls made possible by new technology.

What I'm reading this week

Barchester Towers, one of Anthony Trollope’s ‘clerical novels’. As the bishop is reported to have said, there’s nothing better on a Sunday afternoon than to curl up in bed with a good Trollope.
By the way, did anyone watch the adaptation of Trollope’s The Way we Live Now. I don’t have a copy, so I couldn’t check it the BBC had updated some of Melmotte’s rhetoric to make it even more uncannily familiar, but the obvious lesson in relation to financial speculation is plus ca change, plus c’est la meme chose.

Jaguar

I just installed Mac OS 10.2, and put on the T-shirt. Since the worldwide release started today at midnight, Australasian Mac-heads were the first to get access to the new OS. I didn’t bother going out at midnight – I figured a few hundred Kiwis would be ahead of me anyway, and there’s no point going out in a Canberra winter night to be #314 in the world. So far, there’s a definite improvement in graphics and a subjective improvement in speed. I’ll be interested to see what MacFixIt and others have to say.

Scary stories #3

One of least-known disaster scenarios for the US economy arises from the peculiar structure of US mortgage contracts. Unlike Australian mortgages which have either a variable interest rate or a fixed rate and fixed term, US contracts typically have a fixed rate, but allow early repayment without penalty. In effect, this means interest rates are variable but only downward, since householders can refinance whenever rates fall. They are doing this in droves right now for 30-year and 15-year terms, producing A New Refinancing Boom in Mortgages
For those who like the jargon of finance markets, US mortgages are like fixed-rate contracts with a bundled put option – comparing the terms with Australian mortgages this option appears to be free, but it’s very valuable to the borrower and potentially very costly to the lender.
If US long-term interest rates rise significantly, lenders will be stuck with a lot of long-term mortgages at low rates while they have to finance their activities at the high rates. They will have to bear the difference. Thanks to the securitisation of mortgages it’s unclear who will bear this loss, but the loss is potentially massive. It was precisely this feature of US mortgage arrangements that generated the S&L crisis two decades ago, but no lessons seem to have been learned. Although interest rates aren’t likely to vary as much as they did in the 1980s, the ease of refinancing means that the volume of the problem could be huge even for a rise of a few percentage points in the longterm bond rate.