Category: speculation

Hong Kong’s “citizens dividend”

I have previously discussed Hong Kong’s land tenure system, under which the land is publicly owned, but improvement owners have security of tenure in exchange for paying significant land rent.  One result is that most working people don’t have to pay any sales or income taxes.  Another is that land is efficiently used.

But there are a couple of concerns:

  • Since Hong Kong doesn’t collect all the economic rent, speculation can still drive up the cost of housing as well as any activity which uses land (and they all do).
  • Wealthy mainland residents are moving to Hong Kong to take advantage of the increased liberties which HK residents get, further driving up costs for local people.

Now we read that every HK has declared a sort of citizens’ dividend, every permanent resident will get HK$6,000 (US$773, currently).  Bloomberg calls it a “handout,” but I think “share of economic rent” might be more appropriate.  Opponents of the move say it will be inflationary, and certainly it could lead to higher economic rent, with speculation driving land costs even higher. Of course, if people expected the government to collect all the economic rent, speculation would not occur. While the cost of living might still increase, giving an equal dividend to every resident would tend to flatten the income distribution, helping the poor much more than the wealthy.

 

Saudi housing bubbling

Suppose you are a king. And suppose you have a restless, mostly young population, high unemployment, with most people having to rent because housing and land are too expensive. Few people can get mortgages, because they involve large down payments and high interest rates. Also suppose that you have a big country, lots of land relative to population, and a huge government surplus. What to do?

You could examine why housing is so expensive, and whether there’s a way to make more land available. Maybe that’s happened in Saudi Arabia, but recent news reports give no indication.  Instead, the Saudi solution is to encourage the mortgage industry and expand credit.  Will that make housing cheaper?  Will that make it easier for an underemployed population to get decent housing? Or will it drive up the price of land and feed what seems to be an already-building bubble?  It may be that the Saudi objective is to get more of their people into debt-slavery so they’ll faithfully serve the state.  I don’t know.

What really puzzles me is how mortgage interest fits into an Islamic-dominated state.  Possibly this is like the “Islamic Finance” offered by some U S banks, where no interest as such is charged, but either the price is inflated to compensate for the fact that it will be paid gradually, or the “homeowner” is technically a renter until enough rent has been paid to cover the cost plus what, to others, would be interest.

Bloomberg says the King pledged more than $82 billion for housing, but does not say whether this comprises direct government grants, or is simply some amount of debt which homebuyers will contract.  It also says that

Saudi Arabia’s mortgage law will change the way home finance is regulated, from registering mortgages to prosecuting police officers who refuse to carry out eviction orders.

This will be interesting to watch, preferably from a distance.

More about Saudi housing and morgages:

 

Inside Job gets outside

Prize-winning documentary Inside Job was posted for free download at archive.org a few days ago.  It was withdrawn late yesterday or this morning, but in the interim I had a chance to watch it. It was pretty much as I expected: A very well-documented expose of the forces which brought down the world economy, emphasizing that they have been rewarded, not punished, for doing so, and essentially escaped prosecution (some paid fines amounting to a small part of their takings.)  It’s well put together, director Charles Ferguson seems to be a skilled and persistent interviewer, getting on-camera answers even from some of the guilty parties.  Ominous music reflects our ominous economic future, lots of shots showing the Manhattan skyline, other centers of wealth, as well as foreclosed houses and abandoned developments.

As a documentary with a point of view, this film says “The guys who drove us off this cliff and unpunished and still in charge,” which might lead one to suppose that, if only they could be caught and punished, perhaps our long-term future would become brighter.  These guys own the government, of course, so exactly how a prosecution would work isn’t clear.  Elliott Spitzer’s experience, reported in the movie, does not make one optimistic.

The problem, as I see it, is that Inside Job doesn’t tell the story from the beginning.  I would represent the principal causes of the global financial crisis as the five connected items below

5  Regulatory capture and control of the government

↑

4  Concentration of financial power

↑

3  Securitization

↑

2 Loans against capitalized rent

↑

1  Private collection of economic rent

 

IJ describes 5 quite well, addresses 3 and 4, but doesn’t get into the fundamentals.  As long as, and to the extent that, we have private collection of economic rent, we will continue to suffer from economic crashes.  Inside Job needs a prequel explaining the root cause of the problem.

Paradox of geoist publicity

Innovative geoist group Prosper Australia are promoting a homebuyers’ strike against that country’s still-high housing prices. It’s getting them worldwide publicity and certainly seems to be in the interest of non-homeowning Aussies, encouraging them to avoid leveraging themselves in a soon-to-burst land bubble.

But what is the message?  The message is, “don’t get yourself deeply in debt to buy a house that may put you underwater in a few months.” I hope the message also is “We at Prosper Australia understand the economy and know how to fix it.  Pay attention to us.”

Whether that’s getting thru, I don’t know.  But the campaign can’t hurt.

How to prevent economic Ebola?

Economic Ebola is “the virus that infects scientists and engineers and causes them to go to Wall Street rather than create something of societal value,” says Paul Kedrosky.  Graduates with quantitative skills are offered salaries up to five times what they could make in productive work, so of course many of them spend their time finding ways to scrape a few million from high-velocity financial markets, rather than designing products or processes that would actually increase society’s satisfaction.

“Let’s save the world by keeping our engineers out of finance,” says Vivek Wadhwa. [Well, they’re not really our engineers, they belong to themselves, but we’ll skip that for now.]  A fine idea, but how to do it?  One answer might be a financial transaction tax, a tiny levy on each financial trade which could remove the profit from “financial engineering.” It would have no real effect on “long-term” investors who hold a position for more than a day. Seems like a good idea, but of course there will need to be a definition of what is a “financial transaction” for tax purposes, and clever people will find a way to design a transaction which doesn’t meet the criteria.

Maybe a better approach is to eliminate or scale back some of the things that make financial engineering lucrative.  For instance, if a land value tax prevented private collection of land rent, the mortage/financial crisis we’re still in would have been much smaller, or perhaps not possible at all.  We might want to go back to the classical concept of usury, forbidding all transactions where interest is charged for the use of money.  (People can still get compensation for lending money, but it would be as some agreed share of the profits which the investment generates, keeping the lender conceptually closer to the borrower.)

Of course we could start with something simple, like having the government take over insolvent banks, prosecuting and imprisoning criminal executives, letting stockholders, bondholders, and others who have unwisely trusted the bank to absorb the financial loss.  That alone would make financial engineering a lot less appealing.

Vivek Wadhwa

Lambert’s Law of Rent

“All rents tend toward fraud”

Lambert has proposed this as “Lambert’s Law,” but since there appears to already be a “Lambert’s Law” in the field of physics, we could name this one “Lambert’s Law of Rent.”  Based on, tho not directly derived from, the Law of Rent.

Lambert goes on to assert that “a parasitic class of rent-seekers has paralyzed and hollowed out the economy,” which sounds correct to me.  Lambert’s post (which actually is not about economic rent) is here.

The logical conclusion, of course, is that public policy should seek to collect for the benefit of the community those rents that cannot be eliminated.

Bank bails itself out

The subhead of this  (1/1/11) Tribune article summarizes well:

$15 million Marquette Bank program offers subsidized home loans to buyers who purchase homes in subdivisions of client builders

You’re a bank.  You made some construction loans (or were they even land acquisition loans?) to residential builders who are now unable to repay. If you repossess the land you surely will have to recognize a loss; maybe your capital ratios will be endangered.  What do you do?

You lend money to buyers on favorable terms, which they use to buy houses in those subdivisions.   You hold the loans in your own portfolio, so they need not conform to recently-tightened underwriting standards. Win-win, at least for the bank and the borrowers.

Speculators pay > $250,000 for Chicago taxi medallions

Chicago Dispatcher reports that the City of Chicago has auctioned another 50 taxi medallions.  Ten of these were reserved for working cabbies and went for $150,599 to $180,101. Of the remaining 40, half were bought by Paul Widmarck for $259,999 each, and the other half by Leonid Sorkin for prices ranging from $252,800 to $254,700.   I assume that the total proceeds, something under $12 million, will be used to help plug the City’s current budget deficit.  I suppose that’s better than giving medallions away, but a policy of collecting annually the rental value of a medallion would provide a continuing income stream to the City and prevent speculation.

The ten owner-operator medallions “are designated, and must remain, Owner/Operator Medallions.”  It will be interesting to see how this is enforced over the years.

The speculative prices over $250,000 compare to past sales which, to my knowledge, have never exceeded $200,000.  Shortly before the sale, Chicago Dispatcher provided a graph of medallion price trends.  Certainly looks like a speculative bubble to me.  But you probably should ignore me.  Had I had been prescient enough to know what would happen to medallion prices, I would have bought a couple dozen (on credit) five years ago.

Is waste paper our major export?

There is a meme floating around the Internet (for example, here):

Do you know what our biggest export is today?  Waste paper.

and

The United States has lost a total of about 5.5 million manufacturing jobs since October 2000.

The former assertion seems based on 2007 data reported here, which indicates (without giving a specific figure) that waste paper fills more shipping containers leaving the U S than any other product.  A big volume, surely, but is it our largest export, either by dollar value or physical volume?

Take a look at the U S Statistical Abstract, 2010 edition, table 1272 (download the pdf for the international trade section here).  Latest data shown is for 2008.  Total value of “pulp and waste paper” exported: $7.744 billion.  This is less than 1% of total exports ($1287.442 trillion).  A few larger figures are Coal ($8.196 billion), Vehicles ($98.871 billion), “Television, VCR, etc” ($24.379 billion).  There are eight different categories of chemicals, five of which each exceed $7.744 billion.  And $115.248 billion of “agricultural commodities,” including Corn ($13.931 billion) and “Vegetables and fruits” ($14.040 billion).

I don’t have data on physical volume, but many of the products I mentioned above typically do not travel in shipping containers.  In fact, one reason for export of waste paper might be that many containers would otherwise have to return empty to Asian ports.

As for the loss of manufacturing jobs, certainly there has been a decline, largely because manufacturing workers have become more productive.  The Statistical Abstract only shows manufacturing data back to 2000, but during the period 2000-2008 the constant-dollar manufacturing GDP increased by over 10%, just slightly more than population growth.

I won’t deny that there are serious problems with the U S economy, and I won’t deny that the net outflow of dollars (largely due to petroleum consumption and “defense” expenditures) is unsustainable.  It would be a good thing to remove obstacles which hinder American labor from producing in America, such as taxes on production and encouragement of nonproductive speculation.  A more balanced flow of trade would likely be a byproduct. The more important result would be higher incomes and a better standard of living for working people.