News: Real Estate, Risk, Economics. Sept. 30, 2014

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Table of Contents
(Click to sections below.)

1) Government consults on extending LIBOR powers to more financial benchmarks – News stories – GOV UK

2) Europe's Austerity Zombies by Joseph E. Stiglitz – Project Syndicate

3) Iceland: Bankers Convicted, Unemployment Down | naked capitalism

4) Micro evidence on Chinese outward direct investment | vox

5) Divide between homeowners and renters is growing – LA Times

6) Sen. Warren Wants Hearings Over New York Fed's Relationship With Banks – Real Time Economics – WSJ

7) The Rising Dollar and Macroeconomic and Policy Prospects | Econbrowser

8) Coatesville eyes hefty fines for abandoned properties owned by banks

9) In metro Phoenix's housing market, there are the haves and have-nots

10) A Puzzle | askblog

11) Earthquake Insurance Is Costly Protection For Your Home: Do You Need It? – MainStreet

12) Millennials Moving to Markets with Jobs, Baby Boomers Downsizing to Lower-Cost Markets

13) BP Podcast 089: From High School Dropout to 300+ Real Estate Deals with Engelo Rumora

14) The rise of China and the future of US manufacturing | vox

15) Four things not to do in an economic crisis – Forum:Blog Forum:Blog | The World Economic Forum

16) Meet Thomas Hoenig, The Regulator Who's Making Big Bankers Sweat – MoneyBeat – WSJ

17) A third US dollar bull market getting underway | George Magnus

18) The new normal of monetary policy | Jeremie Cohen-Setton at Bruegel org

19) Paying for Productivity by Laura Tyson – Project Syndicate

20) Millennials Maintain Multifamily Momentum, Spur Sustained Investment – CoStar Group

  1.    Government consults on extending LIBOR powers to more financial benchmarks – News stories – GOV.UK

    The government has today launched a consultation on extending the new legislation the [UK] government put in place to regulate LIBOR to cover further benchmarks in the foreign exchange, fixed income and commodity markets.

    Let's hope they get a grip.

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  2.    Europe's Austerity Zombies by Joseph E. Stiglitz – Project Syndicate

    Joseph E. Stiglitz:

    … every downturn comes to an end. Success should not be measured by the fact that recovery eventually occurs, but by how quickly it takes hold and how extensive the damage caused by the slump.

    Viewed in these terms, austerity has been an utter and unmitigated disaster, which has become increasingly apparent as European Union economies once again face stagnation, if not a triple-dip recession, with unemployment persisting at record highs and per capita real (inflation-adjusted) GDP in many countries remaining below pre-recession levels. In even the best-performing economies, such as Germany, growth since the 2008 crisis has been so slow that, in any other circumstance, it would be rated as dismal.

    The most afflicted countries are in a depression. …

    … One of the longest-standing propositions in economics is the balanced-budget multiplier — increasing taxes and expenditures in tandem stimulates the economy. And if taxes target the rich, and spending targets the poor, the multiplier can be especially high. But France's so-called socialist government is lowering corporate taxes and cutting expenditures — a recipe almost guaranteed to weaken the economy, but one that wins accolades from Germany.

    The hope is that lower corporate taxes will stimulate investment. This is sheer nonsense. What is holding back investment (both in the United States and Europe) is lack of demand, not high taxes.

    They aren't listening.

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  3.    Iceland: Bankers Convicted, Unemployment Down | naked capitalism

    If nothing else, the Iceland example challenges the hypothesis that busting the top bankers will undermine confidence in the system. Anyone who remembers September 2008 to March 2009 will recall that confidence in financial institutions was so deservedly low that it could hardly go lower.

    And please, spare us any talk of how hard it would be to prosecute bank executives. Plenty of people have set forth legal theories with supporting evidence….

    Our confidence would have gone up.

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  4.    Micro evidence on Chinese outward direct investment | vox

    Heiwai Tang and Wenjie Chen:

    We also find that relative to domestic private and foreign-invested enterprise, state-owned enterprises (SOEs) are more likely to invest abroad, consistent with the conventional view that the Chinese government is the mastermind behind the country's ODI [Outward Direct Investment] flows.

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  5.    Divide between homeowners and renters is growing – LA Times

    …median rent in the area has outpaced inflation by 2.3% since 2007, and the share of renters who spend 35% or more of their income on housing has climbed to just above half. That large burden is partly a function of higher prices for apartments, housing watchers say, and partly of incomes that have been stagnant for years.

    "This trend has been going on for some time. Generally it's an issue of income," said Larry Gross, executive director of the tenants group the Coalition for Economic Survival. "Renters are a little younger or very low income. They're earning less, and their rent burden is increasing."

    Add your comment.

  6.    Sen. Warren Wants Hearings Over New York Fed's Relationship With Banks – Real Time Economics – WSJ

    U.S. Senator Elizabeth Warren (D., Mass.) on Friday called for a congressional hearing into allegations that regulators at the Federal Reserve Bank of New York were too close to the banks they supervised.

    It would help to get to the bottom of things, to find out exactly where the Fed stands right now, more about why the Fed didn't do what it should have, and whether there's still time to do the right things.

    Add your comment.

  7.    The Rising Dollar and Macroeconomic and Policy Prospects | Econbrowser

    Menzie Chinn:

    …it's not clear that a strengthening dollar is an unambiguous good — particularly in a situation where the output gap is still substantially negative. A higher dollar renders less competitive American goods and services in international markets. Even though the extent of the appreciation is small at the moment, continued appreciation could prove problematic. From Kennedy/Bloomberg:

    …this week [Federal Reserve Bank of NY President William Dudley] became the first Fed official to comment on the U.S. dollar since the Bloomberg Dollar Spot Index touched its highest level on a closing basis since June 2010. "If the dollar were to strengthen a lot, it would have consequences for growth," the 61-year-old Dudley, a former Goldman Sachs Group Inc. economist, said at the Bloomberg Markets Most Influential Summit in New York.

    "We would have poorer trade performance, less exports, more imports," he said. "And if the dollar were to appreciate a lot, it would tend to dampen inflation. So it would make it harder to achieve our two objectives. So obviously we would take that into account."

    William Dudley said the exact same things we did.

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  8.    Coatesville eyes hefty fines for abandoned properties owned by banks

    Coatesville City [Pennsylvania] Council is considering adjustments to its property maintenance ordinance to include penalties on abandoned properties owned by banks and lien holders.

    "If we can hold them accountable and make them pay a fine (hopefully) they will respond positively," City Manager Kirby Hudson said Friday.

    The city is considering including a day-to-day fine for vacant, unkept properties owned by banks to reduce the number of dilapidated properties in the city.

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  9.    In metro Phoenix's housing market, there are the haves and have-nots

    In metro Phoenix's housing market, there are the haves and have-nots, those homeowners who have equity and those who don't.

    Anyone who bought a house or refinanced in the Valley between February 2005 and July 2008 still most likely owes more than their house is worth, according to the Arizona Regional Multiple Listing Service.

    Homeowners who purchased before May 2004 and didn't refinance between early 2005 and mid-2009 should have equity in their house, said Tom Ruff, real-estate analyst with the Information Market, owned by ARMLS.

    Add your comment.

  10.    A Puzzle | askblog

    Kevin Williamson writes,

    New York City is not only poorer than the New York State average, its median household income is, in absolute dollar terms, lower than that of such dramatically less expensive areas as Austin, Texas, or Cleveland County, Okla., where the typical household income is a few thousand dollars a year more than in New York City but the typical house costs less than a third of what the typical New York City home costs.

    So why don't people move from NY to cheaper cities, until something closer to parity is restored in the cost of living? Some possibilities:

    4. NY's rent controls and other housing regulations have created a lot of inframarginal winners whose housing costs are well below those of the marginal resident. (Think of those who are able to buy their apartments when they turn co-op at ridiculously below-market prices.)

    That nails a great deal of it. There are plenty of other subsidies besides rent control too.

    Add your comment.

  11.    Earthquake Insurance Is Costly Protection For Your Home: Do You Need It? – MainStreet

    Purchasing insurance to protect your home in the event of an earthquake is not a straightforward decision since premiums and deductibles are expensive.

    Homeowners need to evaluate the construction of their home and how close they live to fault lines before making a decision, said Diane Beatty, regional vice president at NFP, the White Plains, N.Y. national insurance broker.


    Add your comment.

  12.    Millennials Moving to Markets with Jobs, Baby Boomers Downsizing to Lower-Cost Markets

    RealtyTrac analyzed Census population data between 2007 and 2013 in more than 1,800 counties nationwide to discover which markets are seeing the biggest shifts in both baby boomer and millennial populations, overlaying that data with information on median prices, price appreciation and rental rates to create a heat map of their migration patterns. The analysis further focused in on the top 10 counties for increases and decreases in both millennials and baby boomers.

    Add your comment.

  13.    BP Podcast 089: From High School Dropout to 300+ Real Estate Deals with Engelo Rumora

    On The BiggerPockets Podcast we sit down and chat with Engelo Rumora, a real estate investor with a fascinating story that involved dropping out of high school, playing professional soccer, and building up a massive real estate investment business across two continents! Don't miss this incredible interview where we cover numerous topics ranging from getting started, flipping houses, networking with potential lenders, finding (and working with) mentors, running a growing business at a young age, and a lot more! Listen:


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  14.    The rise of China and the future of US manufacturing | vox

    Daron Acemoglu, David Autor, David Dorn, Gordon H. Hanson, and Brendan Price:

    … Could China's rise be behind US manufacturing's fall?

    The first step in our analysis is to estimate the direct impact of import competition from China on US manufacturing industries. Suppose that the economic opening in China allows the country to realise a comparative advantage in manufacturing that had lain dormant during the era of Maoist central planning, which entailed near prohibitive barriers to trade. As reform induces China to reallocate labour and capital from farms to factories and from inefficient state-owned enterprises to more efficient private businesses, output will expand in the sectors in which the country's comparative advantage is strongest. China's abundant labour supply and relatively scarce supply of arable land and natural resources make manufacturing the primary beneficiary of reform-induced industrial restructuring. The global implications of China's reorientation toward manufacturing — strongly abetted by inflows of foreign direct investment — are immense. China accounts for three-quarters of all growth in manufacturing value added that has occurred in low and middle income economies since 1990.

    For many US manufacturing firms, intensifying import competition from China means a reduction in demand for the goods they produce and a corresponding contraction in the number of workers they employ. …

    What do our findings imply about the potential for a US manufacturing resurgence? The recent growth in manufacturing imports to the US is largely a consequence of China's emergence on the global stage coupled with its deep comparative advantage in labour-intensive goods. The jobs in apparel, furniture, shoes, and other wage-sensitive products that the United States has lost to China are unlikely to return. Even as Ch ina's labour costs rise, the factories that produce these goods are more likely to relocate to Bangladesh, Vietnam, or other countries rising in China's wake than to reappear on US shores. Further, China's impact on US manufacturing is far from complete. During the 2000s, the country rapidly expanded into the assembly of laptops and cell-phones, with production occurring increasingly under Chinese brands, such as Lenovo and Huawei. Despite this rather bleak panorama, there are sources of hope for manufacturing in the United States. Perhaps the most encouraging sign is that the response of many companies to increased trade pressure has been to increase investment in innovation (Bloom et al. 2011). The ensuing advance in technology may ultimately help create new markets for US producers. However, if the trend toward the automation of routine jobs in manufacturing continues (Autor and Dorn 2013), the application of these new technologies is likely to do much more to boost growth in value added than to expand employment on the factory floor.

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  15.    Four things not to do in an economic crisis – Forum:Blog Forum:Blog | The World Economic Forum

    The plan involves the creation of new money, by a central bank or by the Treasury/Ministry of Finance. As the new monetary policy is adopted, the old monetary policy ? quantitative easing ? can be withdrawn. The new money should be used to finance a large stimulus budget deficit and boost household incomes.

    The principal purpose of the new money injection is to finance the first round of increased public expenditure or tax cuts. Beyond that, and when multiplier effects take hold, the equivalent of the new money injection could be withdrawn. This new combination of fiscal and monetary policies is termed "overt money financing".

    What overt money financing does is as follows:

    • Represents the most powerful monetary and fiscal policy combination
    • Does not increase either interest rates or public debt (as does bond financing)
    • Can be applied if there is or is not an independent central bank, and it could be implemented by the Treasury/Ministry of Finance acting alone
    • Can be applied if eurozone countries remain inside the zone or leave (see Bassone and Wood 2013)
    • Does not create asset price bubbles

    This is essentially Greenbacking: the equivalent of issuing debt-free United States Notes in the US versus Federal Reserve Notes, which are bond-financed. It's what we've been calling for for many years. We're glad the idea is making the rounds. Its the wave of the future.

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  16.    Meet Thomas Hoenig, The Regulator Who's Making Big Bankers Sweat – MoneyBeat – WSJ

    …Mr. Hoenig has said he wants to go even further by forcing banks to break out investment banking from commercial banking, essentially breaking apart the biggest firms.

    That would mean reinstating Glass-Steagal. We're all for it. It never should have been undone.

    The whole deregulation wave that swept through the entire economy is the direct cause of the Great Recession turned Lesser Depression, which if it doesn't end soon enough, might end up not being the Lesser.

    Add your comment.

  17.    A third US dollar bull market getting underway | George Magnus

    George Magnus:

    It isn't that the US economy is on fire, despite the 4.6% annualised growth in GDP in Q2 2014, following very weak performance at the end of 2013 and the start of this year. And it certainly hasn't resolved important structural shortcomings in labour markets, income formation, income inequality, the tax code, private investment, and longer-term fiscal accounts. But relatively speaking, it's doing a lot better than both Japan and Europe.

    It has been able to put blue water between the financial and banking crisis and its own economic prospects. Banks are intermediating credit again, at least to commercial and industrial companies. Nominal GDP growth has recovered to grow at an underlying pace of around 4%. The risk of deflation is certainly a lot lower than in Europe and Japan. The housing sector is off the floor, and capital spending by companies and non farm payroll jobs are rising. The underlying economy has improved enough for the Federal Reserve to bring QE to an end in October, and markets are trying to decipher when the Fed will raise policy rates over the next year or so, and how far the process might go. As these events draw nearer, we should expect still low US bond yields to adjust to reflect such expectations and benefit the US dollar. Always provided, of course, the US economy, itself, doesn't have a relapse or sink back into a recession — at least any time soon.

    That's a big "provided."

    George Magnus goes through the recent historical cycles of the strength of the US dollar and what it did to other economies. It's a very good overview. He's a very knowledgeable fellow.

    Add your comment.

  18.    The new normal of monetary policy | Jérémie Cohen-Setton at

    We hope you understand the fundamentals of Modern Money Theory before tackling this article. It's a very informative piece because it ties together several plans that have been floating around as fairly certain but just haven't been put together like this in such a short post. Don't be embarrassed if you have to read it twice or go out searching for background info. That goes for "economists" too.

    Nice work, Jeremie Cohen-Setton.

    Add your comment.

  19.    Paying for Productivity by Laura Tyson – Project Syndicate

    Laura Tyson argues for profit-sharing:

    Strong productivity growth is an important policy goal. But it is not enough to increase most workers' wages or most families' incomes. Reconnecting productivity gains and wage gains requires both policy actions, such as an increase in the minimum wage with a link to productivity growth, and changes in corporate human-resources practices, such as broader reliance on profit-sharing programs.

    Such programs have intuitive appeal. Employees who have a direct stake in a company's profitability are likely to be more motivated and engaged, and turnover is likely to be lower. This intuition is confirmed by empirical research.

    Some 20 years ago, Alan Blinder of Princeton University corralled a number of economists, including me, to examine existing studies on the link between profit-sharing and productivity. The overwhelming majority of the studies found a strong positive effect. Shared Capitalism at Work, a recent book edited by Douglas Kruse, Richard Freeman, and Joseph Blasi, confirms this conclusion with more recent evidence.

    Various forms of profit-sharing — including grants of options and restricted stock, annual profit-based bonuses, and employee stockownership plans — have been growing as a share of labor compensation since the 1960s. But most workers are not covered by such plans, and the biggest beneficiaries have been CEOs and top managers, a significant fraction of whose pay is tied to productivity, as reflected in profits and stock performance. Such incentive pay schemes have driven the outsize increases in compensation for the top 1% of the wage and salary distribution.

    We've always been big fans of profit-sharing.

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  20.    Millennials Maintain Multifamily Momentum, Spur Sustained Investment – CoStar Group

    There's still plenty of need to build apartment complexes.

    The multifamily sector, especially rental apartment buildings, continues to be a hot sector for commercial real estate investors as it demonstrates sustained underlying strength.

    Even as construction of new apartment buildings hit the highest monthly construction pace since the beginning of 2006, the latest absorption rates for unsubsidized, unfurnished, newly built apartments have kept pace. The Census Bureau reported that the latest 3-month and 6-month absorption rates for apartments had risen to 64% and 83%, respectively.

    Driving this strong demand is an increase in the number of tenant households, which have pushed apartment vacancy rates down to the lowest level since 2000, and on average, inflation-adjusted rents in the U.S. have returned to their prior peak levels of 14 years ago, according to Freddie Mac's latest U.S. Economic and Housing Market Outlook issued this past week.

    Millennials Playing a Large Role in Shaping Demand

    Notably over the past four quarters, all the growth in net household formations has been among renters. The decline in homeownership rates has been primarily concentrated among younger households. For example, for those 35 years and younger, homeownership rate has fallen from 43.6% to 35.9% over the past decade.

    Add your comment.

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