The Housing Crisis in 500 Words

We often hear terms like "housing bubble", "mortgage backed securities" and "sub-prime mortgages", but what are they exactly?

A person who wants a house gets a mortgage, usually from a broker.  The broker sells it to a small bank, which sells it to an investment firm.  This investment firm gets thousands of these and bundles them together.  He/she slices them up and sells them to investors on Wall Street. These are called mortgage backed securities.  Investors love these and want to keep buying them.  Because of that, they buy a lot and everyone down the chain (investment firm, small bank and broker) is happy.  

This process continues, but eventually everyone that would normally be approved for a mortgage has gotten one.  But, investors still want to buy more of these mortgage backed securities.  So, everyone down the chain is encouraged to get other people to get mortgage loans.  These are people that in normal times wouldn’t be approved for a mortgage loan.  These people have bad credit – lot’s of debt, not enough in savings and low income…. But the broker knows that he can sell a mortgage, regardless of if the person will be able to actually pay it off.  The individual himself loves the idea that he’s finally been approved for a loan and can actually get the house he’s always wanted. Because of this and the fact that everyone in the chain is getting paid, the process continues.

Meanwhile, housing prices are going up quickly.  Some people believe that housing prices in America will never go down.  This was a fantasy.  But, at some point people’s incomes don’t raise quickly enough to match the rising house prices.  Therefore, people begin to not be able to pay off their mortgages.  This means that all of the sudden, everyone in the chain (but most importantly the investment firms and investors on Wall Street) have millions of sub-prime mortgages.  Investment firms begin to lay people off and before you know it they are belly up.  Stocks drop and chaos ensues. 

In normal times, a person would get a mortgage from a bank and that bank would hold onto it for 30 years or so until that person paid it off.  In other words, it would stay in one place.  But, starting in the early 2000s banks and investment firms began to sell them as was mentioned above.  So, these companies began to only care about the short term gains rather than the long view of if the individual could pay off the mortgage or not.  It was always going to be “someone else’s problem”. 

Because of all of the financial pain that these companies went through, they eventually became very reluctant to lend credit.  This meant that people couldn’t get mortgages, people couldn’t get loans to start small businesses and even some countries have had a hard time continuing their modernization. That’s why the recession that we were in and the slow economic growth that we’re currently experiencing is called a credit crisis.  

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The Takeaway: Knowing this context, it’s hard to imagine the American GDP growing at or above 3% without a comprehensive solution to the ongoing  mortgage crisis.

What We Can Learn From Kyrgyzstan

How Kyrgyzstan can save America at home…

Kyrgyzstan, a landlocked mountainous former Soviet state recently had a presidential election.  Don’t stop reading!!!  At this point you’re probably wondering, why the heck should I care?   Well, here’s why: 

Once the new president was elected, one of the first decisions he made was to announce that he would shut down the U.S. Manas Air Base once its lease expires in 2014. It's our only major base in Central Asia, and it's been a crucial conduit of arms and supplies to the war in Afghanistan.  Kyrgyzstan is essentially telling Americans thanks for everything, but that it’s time for us to leave.

While this might initially sound like another blow to America (everything in the news seems to be about American decline), I disagree.  Recently, President Obama announced that the Iraq War was “over”, announcing that all U.S. troops would be coming home by the first of the New Year.   These two developments should help Americans see that America has been spread too thinly throughout the past decade.  We’ve had too many commitments – both financial and with “boots on the ground” – with too many countries throughout the world. 

A reality of the twenty-first century:  The United States has to manage its foreign policy resources more carefully. That means we will likely do fewer massive military operations like Iraq. That's good though, isn’t it?  Those kinds of operations have proven to be incredibly expensive and rarely produced the benefits that justified the costs.

This is not to say that America will become isolationist.  We have, for example, achieved a good outcome in Libya with far fewer dollars and lives lost than we did in Iraq.  We've shared the responsibility with other stakeholders, the Europeans.

Geo-politically, this is all fine and dandy, but what about at home?   By spending trillions of dollars in Iraq and Afghanistan, we fell in areas at home like education, innovation and infrastructure.  Pundits disagree about what the Obama Doctrine is, or if one even exists.  For our country’s sake, let’s hope this doctrine begins and ends by first asking this question before invading any country or territory:

Could an intervention be successful while keeping costs under control - both human and financial? 

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The Takeaway: We need to invest more at home and more shrewdly abroad.

A Different Take on an Old Problem

A new take on a popular theory...

David Brooks, columnist for the New York Times, recently wrote an article discussing inequality in America.  This has been a popular topic throughout the past several years with the economy being as shoddy as it has been, and even more so since the Occupy movements began earlier this fall.  In his article, which you can read in its entirety here, Brooks agrees with many that inequality really is a serious problem facing the United States. What caught my eye was Brooks’ argument that it was not the divide between the 1% and the 99% that is championed by the Occupy movement, which he calls “Blue Inequality”.  Rather, it is a different kind of inequality – Red Inequality – that was at the heart of the America’s problems.   I’ll attempt to summarize below:

“Blue Inequality”

First and foremost, it is important to note where “Blue Inequality” exists:  major cities.  Think New York City, Los Angeles, Boston, San Francisco, Seattle, Dallas, Houston and the District of Columbia. In these places, it’s not uncommon to see the top 1 percent of earners accelerating upward, accumulating more income and wealth.  Brooks then cites some research on who these top 1 percenters are. 

According to this research, “roughly 31 percent started or manage non-financial businesses. About 16 percent are doctors, 14 percent are in finance, 8 percent are lawyers, 5 percent are engineers and about 2 percent are in sports, entertainment or the media.”

Brooks believes that this type of inequality is real, not imagined.   If you live in or around these big cities, you see stores and entire neighborhoods catering to the top 1 percent. You see a shift in social norms. Up until 1970 or so, a chief executive would have been embarrassed to take home more than $20 million. But now there is no shame, and top compensation zooms upward. 

Also, you can see the “superstar effect”. Within each profession, the top performers are now paid much better than the merely good or average performers. 

If you live in these big cities, you see people similar to yourself, who may have gone to the same college, who are earning much more while benefiting from low tax rates, wielding disproportionate political power, gaining in prestige and contributing seemingly little to the social good. That is the experience of Blue Inequality.

"Red Inequality"

Red Inequality is experienced in small towns like the notorious Scranton (not just from The Office, mind you!), Des Moines, and Naperville. In these places, the crucial inequality is not between the top 1 percent and the bottom 99 percent. It’s between those with a college degree and those without. Over the past several decades, the economic benefits of education have steadily risen.  Let the numbers speak:

In 1979, the average college graduate made 38 percent more than the average high school graduate, according to the Fed chairman, Ben Bernanke. Now the average college graduate makes more than 75 percent more. 

Moreover, college graduates have become good at passing down advantages to their children. If you are born with parents who are college graduates, your odds of getting through college are excellent. If you are born to high school grads, your odds are terrible.  This speaks to a lack of social mobility, a hallmark of the “American Dream”.

In fact, the income differentials understate the chasm between college and high school grads. In the 1970s, high school and college grads had very similar family structures. Today, college grads are much more likely to get married, they are much less likely to get divorced and they are much, much less likely to have a child out of wedlock. 

Today, college grads are much less likely to smoke than high school grads, they are less likely to be obese, they are more likely to be active in their communities, they have much more social trust, they speak many more words to their children at home. 

Brooks believes that Red Inequality is much more important than Blue Inequality.   He claims that though Blue Inequality is a problem, it’s not as big of a problem as:

• The tens of millions of Americans who have dropped out of high school or college…
• The 40 percent of children who are born out of wedlock…
• The nation’s stagnant human capital…
• The nation’s stagnant social mobility and the disorganized social fabric for the bottom 50 percent…

I essentially agree with all of Brooks’ points.  However, I feel as though I need to add one more: Both Blue Inequality and Red Inequality stem from the same causes.  Focusing on the Blue Inequality in the face of Red Inequality may not be the most accurate stance to take.  Hopefully though, it will spur the necessary policy and moral changes that will begin to fix and propel America into the 21^st century.  

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The Takeaway: Whether your red or blue, we're not as different as we think.

We're Getting Hot, Hot, Hot

Global carbon dioxide emissions are worse than we thought.  According to the U.S. Department of Global emissions, carbon dioxide emissions grew globally by 564 million tons, which is an increase of about 6%. It’s the biggest increase in emissions on record, almost as much by itself as the entire nation of India emits in a year.

That’s crazy!  It’s like we just gained another India.  

This is not good in the light of recent research by a group of climate skeptics (those still exist?) confirming what most already believe:  Earth’s warming, and it’s warming fast.  What’s worse you ask?  Well, the Department of Energy numbers show that carbon dioxide emissions have grown faster than the Intergovernmental Panel on Climate Change’s worst-case scenario estimates from just 2007—estimates that at the time were widely criticized for being too alarmist. The growth in emissions puts the planet on a path to warm 10 degrees or so by the end of the century.

So, remember when climate skeptics claimed that people like Al Gore were alarmists, trying to shock us into thinking that climate change was a real threat?  Well, as it turns out these “alarmists” were actually underselling the real problem.  It’s worse than they thought.  Can you imagine Earth being 10 degrees warmer (on average) by the end of the century?   Think of what that will do to sea levels and sea temperatures?  Warmer oceans increase the frequency and severity of hurricanes, so people that live on the southern and eastern coasts of the U.S. could be hit harder.

So what do we do?  Well, if there was a painless solution we’d have already done it.   It is important to note that of the countries that signed the Kyoto Protocol (the U.S. refused to sign), many of them have reduced that emissions.  However, what often goes unnoticed is that many of these countries have sent their manufacturing to China.  So in addition to outsourcing jobs, these countries have also outsourced their carbon dioxide emissions.

News like this brings things into perspective though doesn’t it?  The upcoming presidential election, political bickering the Kardashian wedding (just kidding…wait, people do actually think this is important, never mind) all seem petty compared to the biggest problem facing our planet: learning to live within the confines of Earth’s resources. 

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The Takeaway:  It’s getting hot, hot, hot.   We’re to blame, so we’re the ones that have to fix it.

Winnter-Take-All Economy

For my entire life I've heard the phrase, "the rich are getting richer and the poor are getting poorer".  Is this actually happening?  If so why?

I recently stumbled across a very interesting article in Foreign Affairs discussing this very phenomenon.  The author, Robert C. Lieberman, argues against convention wisdom that increasing inequality has been caused entirely by market forces.  He argues that congressional policies have “skewed the playing field towards the rich”.  Read the whole article here.  I've tried to summarize Lieberman's article below:

Current Situation:

·         The share of total income going to the top one percent has increased from roughly eight percent in the 1960s to more than 20 percent today.

Income inequality in the United States is higher than in any other advanced industrial democracy and by conventional measures comparable to that in countries such as Ghana, Nicaragua, and Turkmenistan.
It breeds political polarization, mistrust, and resentment between the haves and the have-nots and tends to distort the workings of a democratic political system in which money increasingly confers political voice and power.

Typical Explanations:

It is generally presumed that economic forces alone are responsible for this astonishing concentration of wealth.

Technological changes, particularly the information revolution, have transformed the economy, making workers more productive and placing a premium on intellectual, rather than manual, labor.

Rise of global markets -- itself accelerated by information technology -- has hollowed out the once dominant U.S. manufacturing sector and reoriented the U.S. economy toward the service sector. The service economy also rewards the educated, with high-paying professional jobs in finance, health care, and information technology. At the low end, however, jobs in the service economy are concentrated in retail sales and entertainment, where salaries are low, unions are weak, and workers are expendable.

Observers of Globalization generally fall into one of two camps:

Champions of globalization portray these developments as the natural consequences of market forces, which they believe are not only benevolent (because they increase aggregate wealth through trade and make all kinds of goods cheaper to consume) but also unstoppable. 

Skeptics of globalization, on the other hand, emphasize the distributional consequences of these trends, which tend to confer tremendous benefits on highly educated and highly skilled elites while leaving other workers behind.

New Explanations: Public Policy

·         Public policies have concentrated and amplified the effects of the economic transformation and directed its gains exclusively toward the wealthy.

·         Congress has cut tax rates on high incomes repeatedly and has relaxed the tax treatment of capital gains and other investment income, resulting in windfall profits for the wealthiest Americans.

·         Labor policies have made it harder for unions to organize workers and provide a countervailing force to the growing power of business; corporate governance policies have enabled corporations to lavish extravagant pay on their top executives regardless of their companies' performance; and the deregulation of financial markets has allowed banks and other financial institutions to create ever more Byzantine financial instruments that further enrich wealthy managers and investors while exposing homeowners and pensioners to ruinous risks.

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The Takeaway:  Public policy really matters. 

Halloween

THE MORAL ANIMAL and Why We Are the Way We Are: The New Science of Evolutionary Psychology

Why are we the way we are?  How did we come to be this way?  Will we change in the future?   

 These are some of philosophical questions that I have pondered since I was old enough to ask them.  Though I have never phrased it this way before, for nearly my entire life I have been preoccupied with human nature or the human predicament.  Robert Wright, the author of The Moral Animal powerfully writes that: “The human species is the human predicament” (Wright, 11).  It is logical then, that I would choose a book about the human species to help answer some of the existential questions that I have been asking for as long as I can remember.  The Moral Animal is worth reading because it provides a wonderful introduction to evolutionary psychology, explains human nature in a relatively new way and is backed by substantial evidence.

Robert Wright’s thesis in The Moral Animal is that evolution, and specifically the revolutionary new science of evolutionary psychology will be able to explain the moral characteristics of the human species.  He attempts to do this by synthesizing the many disparate aspects of evolutionary psychology.   This relatively new field of science holds that not only did humans’ physical organs develop through Darwin’s theory of natural selection, but so did humans’ mental organs.  Differences in how humans’ brains perceive, process and react to the word around them either contributed to humans’ survival or died out.  These important differences affect social behavior and status, sex, and gender relations.  In other words, that elusive thing called human nature has been deeply shaped by natural selection. 

            Because of this, sexuality, family, friendship, society and ethics are all examined through humans’ genetic legacy.  The most unique feature of the book is its organization.  Not only does Wright compare humans to other higher primates such as chimpanzees and bonobos, but he compares them Charles Darwin, the man.  Wright argues that Darwin’s life within Victorian culture can be interpreted as developing from various genetic impulses.  Darwin’s sex life (or lack there of) is used as a vehicle to discuss polygamy and differences between males and females.  His family is used to outline the idea of kin selection and later as a transition to compare kin selection to reciprocal altruism. 

            This book is ultimately worth reading because it explains human nature in a relatively new way.  Though it is obviously redundant, there is nothing more elementary to humans existence than human nature.  Therefore, humans should be jumping over each other trying to hear any new explanation for what it is or how it came to be.  Unfortunately, it seems that the general public is unwilling to try to connect ideas like those espoused in The Moral Animal to their own lives.  Because of this, Robert Wright goes to great lengths connecting evolutionary psychology to the everyday lives of humans in all cultures. 

            Wright shows his readers the relevance of evolutionary psychology to the differences in sex and parenting between males and females.  The book is worth reading just for this section!  Differences in sexual desires and practices between males and females are well-known to most.  Cliché  assumptions about men preferring to have more sexual partners than females is very often true.  From the perspective of evolutionary psychology, there is a time when having more sex just isn’t  worth the trouble for the female (Wright, 36).  The internal motivation to pass on her genetic material is present (as it is with most humans), but because she is limited to the number of children she can have, it is more worthwhile for her to get some rest or find something to eat.  That way, she can be as healthy as possible when she does find a male she would like to mate with.

            Wright does a wonderful job of contrasting this with the male situation.  Unless the male is on the brink of starvation (and thus facing a situation that could curtail his chance to procreate), the male will be motivated to engage in sex with each new potential partner.  He will see it as a chance to pass his genetic material on.  Robert Wright cites two other evolutionary psychologists – Martin Daly and Margo Wilson – who wrote that for males “there is always the possibility of doing better” (Wright, 36).  Because females carry the offspring and are most likely care for it, they often do not always have the possibility of doing better.  This huge difference between males and females in the human species and others provides wonderful insight into why there is so much discrepancy between males and females when it comes to sex.  If all Americans understood this, how it would affect society?  Perhaps it would not affect it much at all, or perhaps profoundly. 

            The second reason that The Moral Animal is worth reading is that it does a fantastic job of highlighting the connectedness of all peoples throughout time.  According to Wright, the more that evolutionary psychologists and anthropologists study cultures, the more similarities they find.  This is reassuring because it shows that differences between peoples should be respected, not seen as something that demands changing.  Wright uses credible evidence, citing many anthropologists, psychologists and sociologists to show that all people have a “thirst for social approval” and a “capacity for guilt” (Wright, 9).  He ingeniously refers to these as “knobs of human nature”, claiming that the tuning of these knobs differs from person to person (Wright, 90).  Using the term “knobs” is a great way to explain this idea because it has such a visual component to it.  At no other point in The Moral Animal does Wright’s argument have more clarity. 

            The only section of the book that lacks enough quality research and evidence deals with a computer simulation program called TIT FOR TAT.  This computer program basically simulates what it would be like if everyone treated other individuals the way in which those individuals treated them.  Hence the title of the computer program “tit for tat”.  Through its simulations, the program found that if the “eye for an eye” belief was used by everyone, more people would tend to treat each other positively.  At first, even Wright seemed to be skeptical about it.  He poses the question: “Game theory and computer simulation are neat and fun, but how much do they really add up to?” (Wright, 202).  What is frustrating is that he answers the aforementioned question with this: “Compared to what?” (Wright, 202).  He states that there is not a surplus of rival theories with which to compare and thus it should win by default.  While it can explain the most about human nature at the present time because there is a lack of other viable theories, it does not necessarily make it science per se.  

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The Takeaway:  In addition to our physical features, human nature has been largely developed through natural selection.