Economics

Every time I drive past downtown Austin and look out over the many new luxury condo towers, I comment that the developers of those condos must be ‘shitting bricks’ with the economic downturn.
Well, the Austin Business Journal reports today that “At least 700 condominiums — almost a dozen buildings — slated to be built in Central Austin are either on hold indefinitely or scrapped altogether.” Gee, who’d have thought?!
At least those developers can get out while the getting is good. The developers of projects that are already in development or completed aren’t so lucky.

An article in Slate, Waiting Doom: How hospitals are killing E.R. patients, explains how long emergency room wait times are often to the hospital’s financial advantage:

The first source [of patients] is [the ones] who come in through direct and transfer admissions. They are more likely to come with private insurance and need procedural care, both of which maximize profits. The second source is E.R. patients, who are more likely to be uninsured or have pittance-paying Medicaid and less likely to need high-margin procedures. Do the math: If you fill your hospital with the direct and transfer admissions and maroon the E.R. patients for long periods, you make more money.

Yet another side-effect of America’s sick health care situation.
(via Eliot Gelwan’s blog Follow Me Here…)

I’ve never exactly understood in what way Fannie Mae and Freddie Mac were public or private entities, but I’ve had the vague understanding that the federal government somehow guaranteed home loans through these organizations. Now that they’re heading toward insolvency, it’s time to understand this stuff.
Apparently, my vague understanding was common but wrong. According to Robert Reich:

Investors in Fannie and Freddie have always believed that the loans issued by the two giants were guaranteed by the federal government but technically they aren’t. The guarantee has always been assumed but has never been put into law explicitly, and the liabilities have never been carried on the federal books.

Though it’s not obligated to do so, Dr. Reich believes that if Freddie Mac and Fannie Mae are heading for insolvency, the federal government will have to bail them out in order to combat the deepening economic crisis:

As a practical matter, we’re facing a Bear Stearns squared. Fannie and Freddie are way too big to fail — especially now. There’s no question the government will have to take over the companies, which means taxpayers will get stuck with the tab yet again.

Finally, here’s the heart of the problem:

Fannie and Freddie are treated like giant investor-driven entities as long as they’re healthy and their investors and executives are doing well. But when they start to go down the tubes they become public entities with public responsibilities, and the rest of us have to bail them out.

In reference to my last post, here’s an article that details the cost of ownership for three hybrids: the Toyota Prius, and Honda Accord and Civic. Interesting numbers. I need to adjust some of the assumptions and then run the similar calculations for my year-old Scion tC.
UPDATE: In comments, my Costa Rican friend Ruben Alfaro points out that the comparison in that article is between a Prius and non-hybrid Civic and Accord. So, I’m full of shit in what I originally wrote below.
Every time I talk about buying a hybrid, I specifically refer to the Prius, and Katie corrects me ‘or a Civic.’ Well, here’s the reason for my mentioning just the Prius: the article says that the Prius gets 46 mpg, while the hybrid Civic only gets 29 mpg. I don’t get the Civic numbers; that’s hardly different from the conventional Civic.

The sudden rise in gas prices is affecting all Americans, and people are finally coming to the realization that those prices are here to stay. Here are the things we’re doing and thinking about in response to the increase in costs:
First, let me give some context. We live in the Austin suburb of Pflugerville, which is about 16 miles northeast of downtown Austin. I work on the near northwest side of Austin, and my commute to work is about 16 miles each way. Katie teaches part-time at St. Edward’s University which is just south of downtown Austin. During the semester, she has to drive to campus three days a week. The city of Pflugerville is not a part of the Austin-area transportation authority, so there is no public transportation in our area. We own a 2002 Honda Odyssey minivan, which gets 20-24 mpg in city driving, and a 2007 Scion tC which gets 25-28 mpg in city driving.
OK, here we go…
Budgeting more money for gas
This is the big one. Gasoline is now costing us a couple hundred dollars more per month than before. We’ve changed our budgeting and are eliminating other inefficiencies in our monthly budget to free up the gas money. So far, we’ve managed not to change anything major in our monthly spending, thankfully.
Weighing the gas cost for pretty much every trip by car
I used to never consider the cost of gasoline when driving around town. That quick trip out for one item sounds a lot more frivolous when you consider that it costs $4-8 round-trip just for the gasoline. Now we’re making fewer spur-of-the-moment trips and trying to group errands together. I also used to often find some errand to run at lunch, just as an excuse to get out of the office for a while. Not so much any longer.
Considering trading in our cars for more fuel efficient ones
I’ve run some back-of-the-envelope numbers for trading our minivan for a Prius and trading my Scion tC for something cheap and very fuel efficient, like a Honda Fit. Calculated at $4.00/gallon, each scenario results in at most $100/month savings, probably less. That’s a slim enough margin that I’m not going ahead with either of them right now. If gas continues to rise in price, we’ll reassess again.
Carpooling
One guy who works in my office lives in our neighborhood, so I asked him about carpooling. No decisive results. I also asked another neighbor who works near my office. Also no positive results yet. I signed up on a bunch of sites that match you with other prospective carpoolers, but there doesn’t seem to be enough of them on any of the sites to find good matches. The next step is to post flyers around my neighborhood. I’ll decide whether to do that after we get back from vacation soon.
Job change for Katie
Katie is currently employed as an adjunct professor at St. Edward’s University, which is on the other side of Austin. She only goes to campus three days a week for each of the two 15-week semesters, so her commute isn’t terribly bad to start with. But she’s looking into getting certified to teach secondary education and trying to get a job at the high school or the middle school that are two blocks from our house. In addition to doing away with her commute, that would put her close to the kids.
Buying a small motorcycle/scooter
I would have no problem commuting by scooter to work. I used to drive a motorcycle. But the only way to make this really worthwhile would be to replace one car with a scooter. Otherwise, the additional costs of the scooter–registration and insurance–would just cancel out the gas savings. But with kids, this just isn’t a good option. Maybe if Katie does get employed near home, it’ll work, but I’m doubtful.
Budgeting the cost of gas into our vacation this year
We frequently drive to the mountains of New Mexico for vacation, and we’re doing it again this summer. It’s a 750 drive each way, so we usually end up driving 2000+ miles for the whole vacation. In the past, we didn’t think much about the cost of gas; we just charged the gas and paid it out over the next couple of months after vacation. This summer, however, we’ve decided that’s not feasible; it would take too long to pay off and add/or add too high a burden to our monthly budget after vacation. So, we’ve budgeted the cost of gas into our vacation costs and will be paying as we go this time.
Moving
We’ve pondered the idea of moving further into Austin, but so far, this is not a serious consideration. Most importantly, we have lived in Pflugerville for ten years, and we have made a life for ourselves here. The kids are settled into their schools and social circles. Furthermore, we know most of our neighbors, a lot of other people in the community, and many of the kids’ teachers. Not only would we have to start over if we moved, but in an urban setting, that intimacy with the community would be much more difficult to obtain (that’s a reverse on the usual urban/suburban stereotypes). My point here is not that we prefer the suburbs; but that we’ve already put down roots here, which happens to be a suburb, unfortunately. And we don’t take lightly the prospect of having to start over anywhere in that regard.
Cost and lifestyle changes are a less significant factor. If we moved into town, we’d have to move into a much smaller house. In fact, to live in the Austin neighborhood we like, we’d probably have to move into a townhome that’s half the size of our current house. We’re not nearly as concerned about the comfort factors of our current suburban lifestyle as we are about the social factors mentioned above.
Finally, compared to other cities and even other suburbs within Austin, we don’t live all that far from the center of the city and our jobs. The commuting is a pain in the butt and becoming more expensive, but it’s not nearly as bad as many other suburbanites deal with.

I had no idea that people used home equity loans to buy cars until I ran across this NYT article today: Auto Industry Feels the Pain of Tight Credit. Our economy is even more fucked than I’ve previously predicted (and given my economic pessimism, that says a lot).

Forbes just published an article about top ten most recession-proof American cities.
The selections are based primarily on low unemployment, home prices that continue to rise, and the likelihood that the local economy will continue to grow.
By all three of those criteria, it’s no surprise to me that Austin came in at #3.
But what I find strange is the inclusion of San Jose and Seattle in the list. Home prices in those cities may have continued to rise, but as I understand it, those are among the cities hardest hit by the hyperinflation in home prices. In fact, the article mentions that the median home price in San Jose is over $830,000.
Perhaps the economy in those cities is healthy enough that it will continue to attract enough people to support those ridiculous prices, but from what I’ve read, the cities with home prices that have been speculated into the stratosphere will be hit hard by the building recession. It won’t take many job losses in those locations for that house of cards to come tumbling down.
Of course, this is Forbes, which seems to operate in a different reality than I do. The only mention made in the article to the possible severity of the recession is this: “In his statements to Congress’ Joint Economic Committee earlier this month, Federal Reserve Chairman Ben Bernanke predicted the economy would possibly move into recession in the first half of 2008 but begin to rebound in the second half.”
I guess America’s Relatively Recession-resistant Cities wouldn’t have made nearly as catchy a title.

Almost two years ago, I became interested in the housing bubble and the bizarre mortgages being offered to support it. I’ve been convinced for almost that long that the current mortgage crisis was coming.
Since the shit did indeed start hitting the fan, I’ve asked myself numerous times: if someone like me with a minimal knowledge of economics and no real stake in investments could see this coming, why did professionals in banks, mortgage companies, and investment companies run headlong off this cliff?
The only answer I can come up with is that it’s plain ol’ greed. Either they were making so much money at the time that they deluded themselves that it would continue, or they cynically hoped to make theirs and get out before the crash. Either way, it’s not a very comforting answer. We see this cycle repeated with every new generation (or more frequently): the savings and loan crisis, junk bonds, etc.
My friend Rafe Colburn alludes to this in a new blog post:

Why were banks so eager to sign people up for such incredibly risky mortgages?
The reason is that they had already originated as many good mortgages as they could, and there was still more demand for mortgage backed securities. So mortgage brokers had to find more mortgages to sell, and the easiest way to do it was to loan money to people who really shouldn’t be buying a house, or to convince people to upgrade into larger houses that they couldn’t afford by offering them low monthly payments.
So when you search for the source of the crisis, look in the direction of the big investors who were willing to buy up any old mortgage backed security, no matter what its risk profile was. Those people put billions and billions of dollars on the line, and funded an avalanche of loans sold to the confused, the ignorant, the overly optimistic, and the dishonest.

Economist Kevin A. Hassett offers an only slightly tongue-in-cheek economic analysis of halloween.
For instance:

The first law of economics [is] that lump-sum transfers are more economically efficient than in-kind transfers. If you are going to give a gift to somebody, you should just give them the money. They will be a better judge of the best way to spend it.
…
At Halloween, each house on a typical American block picks out one type of candy, and they give that exact same candy willy-nilly to everyone who shows up at the door. It’s an economic nightmare.

If you can’t change the Halloween gift-giving habits of your typical American family, he also offers a workaround:

Many schools prohibit children from taking Halloween candy onto the premises. That is exactly the wrong policy. Schools should encourage all children to bring their entire haul to school, and allow them a lengthy period to trade candies among themselves. That way, the Take 5s and the 100 Grand bars will find their way to individuals who cherish them.

I love it. I can’t wait for his Valentine’s Day analysis.

I try to keep up with basic US economics, and I am very concerned that the US (and thus much of the world) is going to face a severe recession in the next few years. There are many causes, but the primary one is the international monetary house of cards that has allowed Americans to maintain our current lifestyle.
We Americans buy lots of imported goods from the likes of China and oil from the likes of Saudi Arabia. In turn, these countries buy bonds to finance our federal deficit spending. The federal government then devalues the dollar in order to make imported goods cheaper and to keep the whole process going.
But as the value of the dollar falls, so does the value of foreigners’ investment in US federal bonds. These supplier countries begin taking such measures as buying less American debt, pricing their goods in other and more stable currencies. It’s a balancing act for them: on the one hand, they want to limit their losses on dollars; on the other hand, they need to continue to enable Americans to buy their goods.
It’s not a cycle that’s infinitely sustainable. At some point, it all comes crashing down. The question is only when and how quickly.
UPDATE: Even the CEO of Wells Fargo bank said recently: “We have not seen a nationwide decline in housing like this since the Great Depression.”