Economics

Integrity Bank of Georgia, set up to run on Christian principles, has failed. Integrity’s employees regularly prayed before meetings or in branch lobbies with customers, while the bank gave 10 percent of its net income to charities. “We felt if we prayed and obeyed God’s word and did what He asked, that He would help us be successful,” the bank’s founder, Steve Skow, told the Journal-Constitution in 2005. The executives seem to have done OK, though: CEO Steve Skow earned $1.8 million that year, while senior lender and executive vice president Doug Ballard earned $847,222. A typical community bank CEO, banking consultants said, earn roughly $300,000 per year.(Via Pharyngula.)

One of my prized possessions, now in a box in a closet somewhere, is a T-shirt that says on its front “This T-shirt is a munition.” Underneath it is some machine-readable barcode that encodes the RSA public-key encryption algorithm expressed in Perl. As the seller of the shirt advertised, “it’s machine washable and machine readable." When I bought and regularly wore that shirt, taking it out of the country was a crime punishable by up to a $1 million fine and 10 years in federal prison. This is because U.S. rules under the International Traffic in Arms Regulation (ITAR), then enforced by the Department of Commerce, ruled that strong encryption qualified as a munition subject to export controls and requiring a special license for export. After the Dan Bernstein case was decided in 1996, computer source code printed in a book (human readable format) was not subject to export controls, but computer source code in a machine readable format, such as on my shirt, still was. So I could wear my other T-shirt with RSA Perl code on it, which had a program in the shape of a dolphin, out of the country, but not the machine readable “This T-shirt is a munition” shirt. The implication was that you could take a copy of Bruce Schneier’s Applied Cryptography out of the country without an export license, but not a disk containing the very same code fragments printed in the book. This website authored by Adam Back, written at the time, proposed some possible motives for government restrictions on cryptography. What the ITAR regulations on cryptography did for Internet software development was prohibit web browsers and server software from implementing the strong encryption necessary to protect electronic commerce from being exported from the United States. The result was that this development work simply occurred offshore. There were no barriers to importation of the software into the U.S., only to export it out. So the software was developed and sold by companies in places like Canada, Russia, and Estonia, which had no such inane restrictions. Finally, in 1999, the U.S. wised up and relaxed the ITAR restrictions on encryption, allowing export without a license to most countries (the exceptions being countries with links to state-sponsored terrorism). But ITAR is still around, and still having the unintended effect of pushing business out of the United States. The current victim is commercial satellite production. In 1999, ITAR authority over satellite technology export was shifted from the Department of Commerce to the Department of State, and since that time the U.S. share of commercial satellite manufacturing has dropped from 83% to 50%. The company Alcatel Alenia Space, now known as Thales Alenia, took steps in the late nineties to eliminate all U.S.-manufactured components from its satellites, with the result that it has subsequently doubled its market share to over 20%. The European Space Agency, Canada’s Telesat, and the French company EADS Sodern, that makes satellite control and positioning systems, have all been phasing out their use of U.S.-supplied components. They’ve done this because dealing with U.S. vendors increases costs (due to regulatory compliance costs) and causes unpredictable delays in the supply of parts. Nevada’s Bigelow Aerospace delivered an aluminum satellite stand to Russia in 2006, which Robert Bigelow described as “indistinguishable from a common coffee table.” But because it’s associated with a satellite and officially part of a satellite assembly, it is covered by ITAR and had to be guarded by two security guards at all times. Even commodity items like screws and wiring, when part of a satellite, are covered by ITAR regulations. The purpose of ITAR is to prevent key U.S. technologies with military applications from being leaked out to other countries that might be hostile to the U.S. But the effect of its overly broad application has been to shift the development of that technology to other countries and reduce the ability of U.S. companies to compete in the commercial satellite business. Congress should look to reform ITAR–when export controls are so badly broken as to have nearly the opposite of the intended effect, they clearly need to be relaxed. (Satellite and ITAR info via “Earthbound,” The Economist, August 23, 2008, pp. 66-67.) ...

This is a video of a presentation at the TED conference by Robert Neuwirth, author of Shadow Cities: A Billion Squatters, A New Urban World, about how the growth of squatter cities represents the cities of the future, as a growing percentage of the world’s population will live in such cities. I find it fascinating how such extra-legal cities which tend to operate beyond the fringes of the law, are places of considerable freedom and opportunity despite their poverty. Another similar book is Ian Lambot and Greg Girard’s City of Darkness: Life in Kowloon City, about the squatter city of Kowloon Walled City on the peninsula south of Hong Kong, where squatters developed their own systems of property rights and rules in the absence of government intervention.

I received a letter in the mail from Chase Bank offering me a fee waiver on a mortgage refinance to “lower [my] monthly payments,” “to save interest,” and to “Save up to $1,000 in waived fees." The letter gives me two options for “a fixed-rate first mortgage tailored to fit [my] needs - and with a new low rate.” Option one is a 20-year fixed-rate mortgage at 6.13% (6.26% APR) with a payment of principal and interest that is described as giving me “monthly payment savings” of $178 and “total annual savings” of $2,132. Option two is a 10-year fixed-rate mortgage at 5.63% (5.80% APR) that is described as giving me “total interest savings” of $12,817. There’s just one problem with this. My current mortgage is a 30-year fixed-rate mortgage at 5.25%. I currently make extra principal payments every month so I am paying more than what my new monthly payment would be for option two of their refinance offer, the 10-year fixed-rate mortgage. This means that both option one and option two are losers–neither will save me a cent. If I keep doing what I’m doing now, I’ll have my mortgage paid off in nine years, paying less in interest and in total than in either option one or option two. By choosing option one I could choose to pay less per month without being penalized (except due to the higher interest rate), but I’d pay significantly more over the term of the loan–more than $50,000 more. By choosing option two, the “total interest savings” would only occur by comparison to my current loan if I were not making extra principal payments. But compared to what I’m actually doing, it again would cost a bit more (by a few thousand dollars), and I wouldn’t have the flexibility of paying less in a given month if necessary that I have now with my current loan. In short, Chase Bank has knowingly sent me an offer with two options that will cost me more money than my current loan, given how I am currently paying it off (and have been for as long as I’ve had the loan). But they’ve tried to describe them to me as though they will save me money, when they won’t. Don’t accept one of these offers unless you either need to (e.g., it will give you lower monthly payments and you’re struggling to make your current payments) or it will genuinely save you money in the long term (e.g., it has a lower interest rate that saves you more than any fees that may be rolled into the new loan).

Chris Anderson’s book, The Long Tail, showed how the Internet has made it possible for business models that focus on small niche markets rather than mass markets to be successful. While a bricks-and-mortar bookstore will typically have at most a couple hundred thousand titles and make most of its money from bestsellers, Amazon.com can list millions of titles and makes a quarter to a third of its revenue from the “long tail” of books that are not in the top 100,000 sellers. One might think that putting science journals online would mean that more obscure articles would get greater readership, but a study by James Evans published in Science argues that as more journals are published online, fewer articles are being cited, and those that are tend to be more recently published. While the ability to search online by keywords means that an author of a scientific paper is unlikely to overlook any published paper containing those keywords, it also means that authors are less likely to look at other articles published in the same issues or run into articles that may be related in the big picture but don’t contain the selected keywords. Evans found that for each additional year of back issues available online, the average age of articles cited in that journal fell by a month. He predicts that for the average journal, adding five years of back issues online results in a drop in the number of articles cited per year from 600 to 200. The concern here is similar to the concern about online social networks that become narrowly focused–that people are missing exposure to ideas that they might have previously come across, now that they can select more specifically the items they want. I’m not sure how seriously to take this concern. In my own case, I don’t feel like the Internet is causing me to overspecialize, rather it’s providing me with access to all sorts of information I wouldn’t previously have run into. I don’t feel like the Internet is in danger of subdividing into sections of compartmentalized information the way that Bill Bishop’s book, The Big Sort, suggests people are forming physical like-minded clusters of neighborhoods. I wonder if Evans would have found different results if, instead of looking at journal citations, he looked at the role being played by electronic publications such as blogs and mailing lists, where I suspect there is increasing interdisciplinary cross-pollination. (Via The Economist, July 19, 2008, p. 89.)

I bought my first house 10 years ago, in July, 1998. Prior to the purchase I was living in a nearby apartment complex, paying $435/month for a 2-bedroom, 1 bath. I (over)paid $86,500 for the house, putting 3% down, so my monthly payments, at roughly $600, were ~35% higher than my rent–a reasonable premium to me, considering I’d suddenly be living and building equity in “my own place." Today, zillow.com says the house is worth about $192,000, and monthly payments at 3% down would come to just under $1300/month. By comparison, you can still rent that 2 bedroom apartment for around $600. Doing the same math again, I don’t think I’d come to the conclusion that the “ownership premium” is really worth it. Would you? You might be wondering what my little story has to do with July’s notices of trustee’s sales–which, at 6412, as you can see from the graph, were lower than June’s. Bush’s housing bailout bill recently became law, which may mean that we have just passed the peak for home foreclosures–and soon we may even see a stop to falling home prices. Great news for current home owners, but, as my personal anecdote suggests, not-so-great news for housing affordability in general. The bailout essentially is a subsidy to current home owners at the expense of future home owners. Because it will prop up current prices beyond where they would have naturally fallen, housing affordability will remain low, encouraging the spawning of all sorts of new government programs to help address “the affordability gap” (or some such wealth-transfer justificationist nonsense)–making money cheaper than it actually is, which will in turn encourage sellers to raise their prices still further while at the same time creating homeowners out of people who probably aren’t fiscally responsible enough to be ones. Is this sounding familiar, yet? As a non-homeowner who is making twice what he made in 1998 but would have an extremely hard time justifying paying $1300/month to own a crappy house, I would have preferred if Congress could’ve just left well enough alone. ...

A few years ago, people were using their homes as ATMs to purchase all sorts of consumer goods including cars. More recently, desperate home sellers were offering to throw in a “free” car with the purchase of a house. Now at least one auto dealer is offering to pay your mortgage. This morning I heard a commercial for one of the local Phoenix Nissan dealers (one that receives frequent complaints from people who appear to not pay very close attention to what they are purchasing). The ad offers to make your mortgage payments for the rest of the year when you buy a car from them, even if your mortgage is as much as $2,000, without changing the sale price of the car. I suspect that means without lowering the sale price of the car below the point of profit. It doesn’t strike me as a sensible way to avoid foreclosure.

The Arizona Republic is catching up with reality: Foreclosures across metro Phoenix number 16,647 for the first half of the year compared with 9,966 during all of 2007 and 1,070 in 2006. … “It has become more of an equity problem than a subprime problem,” said Tom Ruff, a real-estate analyst with Information Market. … Notice of trustee sales, or pre-foreclosures, also continue to climb. There were 35,111 pre-foreclosures filed in Maricopa County through July. That compares with 30,166 for all of 2007.The article also notes that the median resale price for a home in Phoenix is now $210,000, down 30% from the peak in 2006. More people are speculating about reaching a bottom. That would be nice, but we’ve still not seen a peak on preforeclosures, which set another record in June (6929, vs. 6416 in May). For comparison, the total sales volume in June was 5748 (and 5656 in May), according to the Arizona Realtor’s Association. (These stats via Einzige, thanks!)

Via Long or Short Capital comes a children’s story authored by FDIC Chairman Sheila Bair. The blog gives two versions of the story, first from the Amazon description of the book: Rock and Brock may be twins, but they are as different as two twins can be. One day, their grandpa offers them a plan-for ten straight weeks on Saturday he will give them each one dollar for doing their chores. But there is a catch! Each dollar they save, he will match. Rock is excited-there are all sorts of things he can buy for one dollar. So each week he spends his money on something different-a toy moose head, green hair goo, white peppermint wax fangs. But while Rock is spending his money, Brock is saving his. And each week when Rock gets just one dollar, Brock’s savings get matched. By summer’s end, Brock has five hundred and twelve dollars, while Rock has none. When Rock sees what his brother has saved, he realizes he has made a mistake. But Brock shows him that it is never too late to start saving. ...

The New York Times says that some banking analysts (two of which are mentioned by name) predict that “as many as 150 out of the 7,500 banks nationwide could fail over the next 12 to 18 months.” If that were to happen, that would likely exhaust the Deposit Insurance Fund of the FDIC, which will be spending $4 to $8 billion to cover the insured deposits of failed IndyMac bank. The Deposit Insurance Fund had about $52.4 billion at the end of 2007. The worst case scenarios I’ve seen frequently discussed are hyperinflation and a Greater Depression. The way to survive the former would be to keep funds in more-stable foreign currencies and gold; for the latter it would be better to stay in cash and bonds (so long as none of the bonds default). A diversified set of investments is still your best bet, in my opinion. UPDATE (September 12, 2008): The Economist (August 30, 2008) reports that the FDIC has 117 banks on its watch list, compared to 90 at the end of March, and reports that the drawdown on the Deposit Insurance Fund for IndyMac is sufficient to trigger a required funds “restoration” plan within the next 90 days. ...