Economics

During my long plane flights this week, I used some of my time to catch up on reading back issues of The Economist. Here were a few of the stories I found particularly interesting in the January 6-12, 2007 issue: “Medicine at the Top of the World” (p. 65): LYING in an intensive-care ward is a world away from climbing Everest, but a connection will be drawn this spring when 45 scientists and 208 volunteers tackle the mountain to bring back information about oxygen deprivation. The reason they are going is that hypoxia (a lack of oxygen in cells, which can lead to death) is the one thing that links practically all patients in intensive-care wards—and there is no better place to study it than in the thin air of the world’s highest mountain.The story describes the Xtreme Everest expedition, which will take 250 people up Mount Everest, setting up mobile labs at various elevations to study hypoxia. The volunteers will climb up to 5,300 meters, and 16 climber-scientists will ascend to the summit to become the first to have blood drawn at the top of the world’s tallest mountain. The research will be used to try to identify the genetic basis of people’s ability to handle hypoxia, which couldn’t be easily be conducted on patients in intensive care due to not having enough of them in one place at the right time. “The logic of privacy” (pp. 65-66): ...

The Arizona Republic has just caught on to the fact that there’s a lot of mortgage fraud going on in Phoenix: A wave of mortgage fraud is rippling through pockets of the Valley, inflating home values through scams called cash-back deals. Left unchecked, cash-back deals cost homeowners and lenders millions of dollars and could erode confidence and values in Arizona’s real estate market. The fraud involves obtaining a mortgage for more than a home is worth and pocketing the extra money in cash. Neighbors may then discover home values in the area are exaggerated. Homeowners stuck with overpriced mortgages may never recover the difference. And lenders end up with bad loans that, in the long run, could hurt the Arizona real estate market, the largest segment of the state economy. While the extent of the fraud is unclear, an Arizona Republic investigation into these cash-back deals found organized groups of speculators have bought multiple homes this way, leaving whole neighborhoods with inflated values. Add to these the individual deals done by amateurs who hear others talk about the easy money they made from cash-back sales. State investigators and real estate industry leaders want more enforcement and greater public awareness to stop the spread of cash-back deals before the damage mounts. “Mortgage fraud in the Valley has become so prevalent people think it’s a normal business practice,” said Amy Swaney, a mortgage banker with Premier Financial Services and past president of the Arizona Mortgage Lenders Association. Under federal law it is illegal to misrepresent the value of a home to a lender. Everyone who is a party to the deal is subject to prosecution. Felecia Rotellini is a Notre Dame law school graduate and former assistant attorney general who is now superintendent of the Arizona Department of Financial Institutions. Her agency regulates mortgage lenders, state banks and credit unions in the state. Alarmed by what she was hearing from lenders and real estate agents, she has just pulled together state and federal regulators to form an Arizona mortgage fraud task force. “People need to understand these cash-back deals are illegal and stop,” she said. “We are going after mortgage fraud." I think this is likely to be too little, too late. When I was actively suing telemarketers using illegal prerecorded calls to residences in 2003, the worst offenders were mortgage brokers. In the process of going after some of them, I found signs that some of them were engaged in other illegal activities as well, such as defrauding other lenders, defrauding their customers, defrauding the IRS and Arizona Department of Revenue, and transferring assets between entities prior to filing bankruptcy to evade creditors. I found the Arizona State Department of Banking (now known as the Arizona State Department of Financial Institutions), which regulates mortgage brokers, to be completely uninterested in investigating–though they did send some warning letters after I won judgments against brokers, which prompted some of them to pay their judgments. They said that they did not have resources to investigate my claims of violations, even though I offered up specific areas of the law that they are supposed to enforce (they don’t enforce the Telephone Consumer Protection Act or FCC regulations). There’s more on this subject at Ben Jones’ Housing Bubble Blog. UPDATE (January 22, 2007): Arizona Senator Jay Tibshraeny has introduced a bill making mortgage fraud a felony. But it’s already criminal activity covered under current laws–adding more laws against it doesn’t do anything to cause those laws to be enforced.

Those of you who read this previous blog entry about Gapminder may be interested to see that Google has collaborated with Gapminder to produce this tool. (Hat tip to Radley Balko.)

Glen Whitman at Agoraphilia points out how the common example of cognitive bias that “80% of us believe that our driving skills are better than average” can be a correct description of reality, when the median is greater than the mean. By example, the mean time to conception for women trying to get pregnant is 7 months, but 50% of such women are pregnant within 4 months and 75% pregnant within 6 months, so 75% of such women do “better than average.” ...

Trump Mortgage started business this April, with alleged seasoned pro E.J. Ridings appointed to head the organization. Ridings claimed that honesty was one of the differentiators for Trump Mortgage, but it turns out he’s misrepresented his experience. He claimed to be “a top executive at one of Wall Street’s most prestigious investment banks,” when in fact he was a retail stock broker for Morgan Stanley’s Dean Witter Reynolds subsidiary for less than three months, and was only a registered broker for six days of that period. Ridings said he was an “established leader” at a leading New York mortgage boutique, but was only “a relatively minor player” at GuardHill Financial from June 2003 to April 2005, working as an entry-level mortgage originator. Ridings also claimed 15 years of experience in the financial industry, but all that anyone can dig up besides his Dean Witter time (that began in 1998) and his GuardHill position are in documents from the NY State Banking Commission which say he was also a day trader for two years and worked for a year at subprime lender Equity Funding prior to GuardHill. That’s a total of less than six years of financial experience. Ridings claims he also had financial experience in his earlier jobs–running a company that sold nutritional supplements and health drinks, and a cleaning service. Trump Mortgage has lost six residential mortgage professionals in the last six months, and may not reach $1 billion in residential mortgage originations, despite Ridings predicting that they would hit $3 billion in 2006. The mortgage business is not a business I’d want to be in right now, as the U.S. housing bubble deflates.

Washington Post, Sunday, December 24, 2006; B06 The largest employer in the world announced on Dec. 15 that it lost about $450 billion in fiscal 2006. Its auditor found that its financial statements were unreliable and that its controls were inadequate for the 10th straight year. On top of that, the entity's total liabilities and unfunded commitments rose to about $50 trillion, up from $20 trillion in just six years. ...

Jeffrey Sachs argues that higher taxes and social safety nets produce better results than laissez-faire capitalism. Historical Comments Einzige (2006-12-21): Stefan Karlsson, Swede and undoubtedly one of the horrible "ideologues" that Sachs is attacking, responds here. Einzige (2006-12-21): Another ideologue responds, as well as linking to yet another ideologue's ideological response. Leo (2006-12-21): Oh, my, is Milton Friedman even buried yet? Shouldn't there be a 90 day moratorium on such articles in memory of? Seriously, this is an interesting article. I wonder how the poverty spending numbers are affected by charitable giving, supposing there is some relevancy, that is, between a nations poverty spending and charitable giving. ...

Einzige has posted the latest graph for notices of trustee’s sales in Phoenix, and concludes: It would seem, now, that the question is no longer “Is there a housing bubble?”, but “How big is the pop going to be?" Check it out here. Historical Comments Einzige (2007-01-06): A bit of an update, in lieu of putting up a whole new graph (which I will do in February): December saw a slight dip in the numbers, with the total getting to “only” 1407 notices recorded–79 less than November. ...

Famed economist and champion of freedom Milton Friedman has died. Some nice obituaries: The New York Times. The Financial Times. Catallarchy: “RIP: Milton Friedman (1912-2006)" and “Milton Friedman Video” (the latter posted by his grandson, Patri Friedman) Long or Short Capital: “Long Milton Friedman." David Friedman’s Blog. (Milton Friedman’s son) The Agitator: “Milton Friedman, RIP” Technology Liberation Front: “RIP Milton Friedman” The Only Republican in San Francisco: “Friedman passes away” UPDATE (November 27, 2006): Catallarchy has produced a series of postings on various aspects of Milton Friedman’s life and work from different perspectives as a tribute.

For the first time in the last decade, year-over-year median home prices in the metropolitan Phoenix area have dropped, from $263,000 to $256,900, down from the peak of $267,000 in June 2006. Former housing bull Jay Q. Butler of the Arizona Real Estate Center at ASU says: Even though mortgage interest rates have been declining for the last few months, limited home appreciation and household income continues to raise concern about the ability of some homeowners to maintain their homes. … This may be especially evident for those that have used some of the more creative financing instruments, such as option payment plans and initially low interest rate adjustable mortgages.Florida is seeing growing foreclosures, especially among those with Adjustable Rate Mortgages (ARMs) with negative amortization options. There are $200 billion in ARMs resetting their rates in 2006 and another $1 trillion plus will be resetting in 2007, expected to lead to more foreclosures. This will apply further downward pressure on prices, and we should expect to see some of the same here (an increase has already been seen in Maricopa County notices of trustee sales), though I think Arizona has had a lower percentage of ARMs, interest-only, and negative amortization option loans than other parts of the country.