On the roof of the Ponce de Leon Hotel.St. Augustine, Florida
Ilargi: There are quite a few commentators these days who claim that the next bubble to be sucked out of Mainstreet America and launched into the infinite spaces above lower Manhattan will be the cap and trade "mechanism" that's being refined for maximum monetary output, as we speak, by the fine few who serve government and banks alike and simultaneously.
They may be right. But there's another scheme being "fine-tuned" that would seem to qualify for a shot at the 'next bubble' title.
Now, first off, I have to admit I have completely ignored this scheme, the Obama administration's health care reform plans. I've seen headlines flash by, I watched fake news reports on waiting lines in Canada, that kind of thing. But, to be honest, it doesn't interest me at all. And that has nothing to do with not caring about the lives and welfare of Americans. The reason I’m not interested is that the entire "discussion" has been disingenuous from the start, and is therefore guaranteed to lead to failure.
"Universal" health care plans have been running in many rich western countries for decades, and while there are no perfect systems, and cost pressures build up there as well, the satisfaction level to date is generally high, much higher than in the US. While at the same time the costs of these systems are way lower than anything the US has been able to come up with. So why the extensive talk, why does the US need to re-invent the wheel? Just look around and pick a tried and true system, like Norway, France, Germany. They're all cheaper and they all function better. And if you don't believe that, ask yourself why none of these countries is presently involved in exasperating talks about their systems.
So why does Washington try to invent the wheel? The answer is easy. The difference between US and Western European health care lies exclusively in the political power acquired by corporate industries, in this case -mainly- a combination of drug manufacturers (closely linked to the chemical industry) and insurance companies (which are in turn closely linked to Wall Street banks). The US needs to fabricate its own system because it needs to satisfy the perverted influence industry has on not just health care itself, but also on the political process.
US health care spending is over 15% of GDP, and within 10 years it will be 20% (there's your bubble). That means today’s dollar total is about $2.2 trillion (that's Britain's entire GDP), and we're on our way to $3 trillion. If the US would adopt a Western European system, it might save 50% of these costs. And a few very powerful corporations would lose $1 trillion per year in revenues. That's all you need to know about the reason why there will be no significant reform. Sick people are big business. And big business runs the nation.
The link between drug manufacturing and the chemical industry is obvious. The same chemical giants also have close ties to the military. What is less known are their connections to the food industry. Firms like DuPont, Dow, Syngenta and Monsanto have, under various names and guises, made enormous profits from fertilizers and pesticides ever since the Green Revolution started over half a century ago. In the past two decades, they have moved into the industry of food itself. Genetically modified seeds are taking agriculture by storm, and they're all property of the world's chemical giants, which are now routinely referred to as agribusinesses. A long cry, at first glance, from the Monsanto that for instance infamously supplied the US army with Agent Orange.
The companies have further solidified their control over all aspects of our food by linking up with traditional food conglomerates like Cargill, Tyson and ConAgra, essentially forming a closed circuit of control over world food, a circuit that tightens as time goes by and all seeds are contaminated with GM technologies.
Meanwhile, they are still also what they started out as: chemical giants. As such, they control much of US health care. And therefore have a huge influence in Washington, much like Goldman Sachs and General Electric (which, accidentally, has a large chemical division).
Now, if I were an innocent little simple child, I might conclude from this that all these companies really have to do is make Americans eat the food they control, make sure that food makes them sick, and cash in big again at the other end, in medical care. The corn syrup produced at one end of this "food chain" is in everything these days, and it's a main ingredient in the current obesity epidemic in the US, which brings along large additional medical costs, an estimated $147 billion per year in fact. Obesity habitually leads to diabetes, and you can guess who provides the insulin. A few years ago, the increase in childhood diabetes led one doctor to proclaim that we're raising a generation of blind amputees. The numbers keep on rising exponentially.
One columnist today claimed that obesity doesn't cost money, but it saves billions of dollars, because obese people live on average 7 years shorter than their non-obese neighbors. That sort of cynicism seems to be the leading policy guideline for both industry and government. And that's why there will be no health care reform.
I'm Forever Blowing Bubbles
Treasurys Slump On Poor 5-Year Auction
A second disappointing sale of Treasury notes Wednesday sent prices lower and raised concerns that the government might have to spend more on funds for the economic rescue.
The $39 billion auction of five-year notes - the largest such sale ever - wasn't bid heavily enough to prevent the Treasury from paying a higher rate on its borrowing. The yield on the new 2.625% notes due July 2014 was 2.689%, compared with 2.63% in pre-market trade.
Investors had been braced for a poor performance, following tepid demand for the new two-year notes Tuesday. This second blow, coming just a month after the Treasury pulled off a triumphant, $104 billion round of fundraising, sent prices tumbling early afternoon. Long-dated notes have since recovered, with the 10-year up 6/32 for a 3.67% yield, but the shorter maturities are all lower on the day.
As the auctions get bigger, so does anxiety over their reception. Tuesday's sale of a record $42 billion in two-year notes wasn't bad in historic terms, but it didn't bode well for the remaining $67 billion to come this week. Market watchers are already disconsolate over Thursday's $28 billion seven-year sale. "Today's definitely not-good five-year auction really raises the bar in terms of negative expectations for tomorrow's seven-year auction," noted Miller Tabak & Co. strategist Dan Greenhaus.
Wednesday's statistics certainly weren't as pretty as last month's when the ferocity of bidding took the market by surprise, and seemed to put to rest fears that investors could be souring on U.S. debt. Bids at this auction exceeded the amount on offer by just 1.92 times, the lowest since September last year, and well below the 2.58 seen last month. Indirect bids, a gauge of participation among foreign central banks, came in at 36.7%, nowhere near the 62.8% seen at the June auction.
Rising yields affect not only the government's borrowing costs, but those of consumers and businesses, since the 10-year is commonly used as a pricing benchmark for mortgages and corporate borrowing. But the effect so far shouldn't be overstated. The 10-year yield has jumped from a low of 3.29% early this month, but it's still well below the 2009 peak of 4%. Policymakers have tended to downplay concerns about the recent increases in yields, pointing out that renewed optimism about the economic recovery is also partially to blame, as investors switch from defensive positions in government debt to riskier assets.
But William Dudley, president of the Federal Reserve Bank of New York, was cautious on the economic outlook earlier Wednesday in a speech to the Association for a Better New York. He said unemployment was likely to remain "elevated" and capacity utilization "unusually low" for some time. But the speech focused mainly on quashing fears that the Fed's assistance programs could lead to a glut of credit that ultimately stokes inflation. "Keeping inflation and inflation expectations well anchored around a low level is essential," he said. At the same time, though, the central banker left the door open to extend the Term Asset-Backed Liquidity Facility, which caters to consumer lending, beyond its year-end expiry.
Life Insurers Post Losses
Life insurers Lincoln National Corp. and Hartford Financial Services Group Inc. both reported second-quarter losses on charges and investment losses. Both companies pointed to some positive signs during the quarter. Hartford noted a 2% increase in written premiums for its personal lines insurance, which includes auto and homeowners insurance. Lincoln said net flows into its individual annuity business more than doubled from the first quarter, to $1 billion, though they were still down from the year-ago quarter.
Lincoln's shares dropped 2.5% to $17.60 in after-hours trading, while Hartford's stock jumped 4.6% to $6.03, as Hartford appeared to top Wall Street expectations while Lincoln narrowly missed. The shares for both companies have dropped by at least two-thirds from September. Of the six life insurers cleared to participate in the Treasury Department's Troubled Asset Relief Program in May, only Hartford and Lincoln elected to access the funds. Hartford received $3.4 billion in funding, while Lincoln took $950 million of the government's approved $2.5 billion while raising about $1.2 billion on its own.
Lincoln reported a loss of $161.4 million, or 62 cents a share, compared with a year-earlier profit of $124.7 million, or 48 cents a share. It was the company's third consecutive quarterly loss.
The latest results included a 65-cent-a-share charge related to the sale of its U.K. arm and 84 cents in charges related to investment losses and other items. Lincoln's operating income, which excludes realized investment gains and losses, fell to 81 cents a share from $1.24. The quarter also included a restructuring charge of 7 cents a share. Revenue dropped 22% to $1.95 billion.
Analysts polled by Thomson Reuters expected per-share operating earnings of 83 cents on revenue of $2.52 billion. Analyst estimates typically exclude unusual items.
Hartford reported a loss of $15 million, or 6 cents a share, compared with a year-ago profit of $543 million, or $1.73 a share, a year earlier. It was Hartford's fourth consecutive loss. The latest results included a deferred acquisition costs unlock gain of $360 million, or $1.11 a share. Hartford had $649 million in net realized losses, compared with a net loss of $156 million a year earlier. Included in that loss was a $300-million payment it made to investor Allianz SE that was triggered by Hartford's acceptance of the TARP investment.
The executive-compensation restrictions that come along with TARP funds could complicate Hartford's search for a new chairman and chief executive to replace Ramani Ayer, who plans to retire by the end of the year. The operating profit was $1.90 a share, down 22% from $2.22 a share a year earlier. Analysts projected per-share earnings of $1.16. Assets under management fell 15% to $352.1 billion.
Hartford has said it will focus on its U.S. property/casualty and life-insurance operations and consider a sale of its institutional markets businesses. It also stopped writing new business in Japan.
Hartford again cut its 2009 operating earnings target to break-even to 20 cents a share, from its already drastically reduced view of 5 cents to 45 cents. Analysts were looking for a loss of 21 cents.
June durable-goods orders fall 2.5%
Weaker orders for automobiles and airplanes translated into a worse-than-expected 2.5% decrease in durable-goods orders in June, the Commerce Department estimated Wednesday. It was the first decrease in the past three months. Economists surveyed by MarketWatch had been forecasting a 0.6% decline, banking on weakness in the auto sector to prevail over modest improvements in other industries.
Orders rose a revised 1.3% in May, down from the prior estimate of a 1.8% increase. Despite the sharp drop in the headline number, the details of the report showed some signs of stabilization in new orders. Excluding a 12.8% fall for transportation equipment, durable orders rose 1.1% in June. Orders for metals, machinery and electrical equipment had large gains.
"The rebound in 'core' orders dovetails with other evidence from the industrial sector suggesting manufacturing conditions have brightened over the past few months," said Anna Piretti, economist at BNP Paribas, in a note to clients. "However, we feel that part of this improvement reflects a normalization from the panic-driven lows reached in the fourth quarter and first quarter rather than the beginning of a sustainable pick-up," Piretti wrote.
Shipments of durable goods fell 0.2% in June, for a record eleventh straight monthly decline. Inventories of durable goods fell 0.9%. Orders plunged 38.5% for civilian aircraft and dipped 1.0% for motor vehicles. The monthly durables report is highly volatile, largely because of swings in demand for civilian aircraft and other extremely expensive items. Orders for the second quarter were not as bad as the severe decline in the first quarter. Consumers regained some appetite for items built to last.
The Commerce Department will release its first estimate for second-quarter gross domestic product on Friday. Today's report "had only a minor positive impact on our second-quarter GDP forecast, which we still see at negative 1.2%, but provides a more positive starting point for some flattening out in business investment in the third quarter after a record collapse over the prior few quarters," said the economic team at Morgan Stanley Research.
Orders for nondefense capital-equipment goods excluding aircraft rose 1.4% in June after a sharp 3.5% decline in May. Such core capital goods orders are considered the best gauge of capital spending by businesses. Shipments of core capital goods -- a figure that feeds directly into calculations of GDP -- fell 0.1% in June. Orders for electronics, excluding semiconductors, fell 2.5% in June. Orders for fabricated metals declined 0.2%. Orders for primary metals rose 8.9%, the biggest gain since July 2004. Orders for electrical equipment rose 0.9%. Orders for defense capital goods tumbled 28.3%. Excluding defense, orders fell 0.7%.
Study Estimates Cost of US Obesity at $140 Billion
A new study has quantified the costs of a growing problem in America - obesity. And experts are trying to develop strategies to reverse the trend. Two-thirds of American adults, and one out of five children are above what doctors consider a healthy weight for their size, and those numbers have been increasing. People who are above their healthy weight are, not surprisingly, not as healthy.
It's no wonder experts talk about an "epidemic" of obesity. "Obesity and with it, diabetes, are the only major health problems that are getting worse in this country, and they're getting worse rapidly," says Dr. Thomas Frieden, head of the U.S. Centers for Disease Control and Prevention. He adds that the rate of obesity has doubled over the past generation.
A new study published this week puts a dollar estimate on that epidemic - $140 billion a year in extra medical costs. Obese people spend on average $1,500 a year more for medical care on average than a person of healthy weight. And of course, says Frieden, the financial burden is only part of the story. "Beyond the economic costs are the disability, the suffering and the early deaths caused by obesity. And this is something that we as a society need to take more action to address."
Obesity is defined based on a body mass index (BMI) of 30 or higher. For example, if you weigh 100 kilograms and your height is 180 centimeters, your BMI is 31, which is considered obese. A separate category - overweight - applies to people who are above what is considered a healthy BMI, but not so much that it's classified as obese.
The new study on the costs of obesity is published online by the journal Health Affairs. Lead author Erik Finkelstein says those costs have nearly doubled over the past decade. About half of the expense is paid for by government programs like Medicare, which insures older Americans. "Their average expenditures are about $4,700 [per year] if they're normal weight, and if they're obese that number rises to about $6,400," Finkelstein says.
Finkelstein is affiliated with RTI International, a North Carolina research institute. He says much of the higher medical costs of obese older Americans is due to increased use of prescription drugs, as obese people are more likely to have chronic disease requiring medication. "Clearly, obesity is costly. We've shown that to be the case. And in fact, I would argue that the only way to show real savings in health expenditures in the future is through efforts to reduce the prevalence of obesity and related health conditions, specifically improved diet and physical activity."
Finkelstein's research was one of the topics discussed in Washington this week at the CDC's first-ever national Conference on Obesity Control and Prevention. CDC director Thomas Frieden told reporters that the burden of obesity is not shared equally. "The rate of obesity among African-Americans and among Hispanics is significantly higher than the rate among white Americans. In addition, we know that there's a very tight correlation between obesity and poverty, such that those who are living in poverty are much more likely to become obese."
A recent report in a CDC publication outlines a variety of ways to head off the spiraling obesity epidemic. William Dietz, head of the CDC's obesity unit, says the report identifies a number of strategies to help people get the weight off, or keep them from gaining weight in the first place. "Strategies to support choices of healthy food and beverages, strategies to encourage breastfeeding, strategies to encourage physical activity or to limit sedentary behavior, or strategies to create communities that support physical activity," says Dietz.
Some of the recommendations: smaller portion sizes in restaurants, fewer beverages sweetened with sugar, increased physical activities in school, improved access to walking. Eric Finkelstein, the researcher who quantified the financial costs, says Americans have to do something. "So many differentials are involved that the only thing we do know is that in the absence of action, it's unlikely that costs associated with obesity are going to decrease."
And as ingrained as things like eating habits and activity levels might be, CDC Director Thomas Frieden says there's reason for hope. He cites the success of higher taxes in reducing smoking by half among teenagers in New York. "In the case of soda and other sugar-sweetened beverages, evidence from a couple of sources, including industry sources, suggests that higher prices will strongly discourage people from consuming soda and other sugar-sweetened beverages." If the U.S. public health establishment wants to get people to exercise more, eat less and avoid fattening foods, it has a big challenge ahead.
What’s Wrong With a Single-Payer System?
Gail Collins: David, your writing on health care has been incredibly thoughtful, so I’m going to take this opportunity to poke you a little. Then I’ll shut up so you can talk. The other week I said I agreed with you about the critical importance of cost controls. Then I asked — O.K., I sort of demanded — that you denounce the Republican leaders in the Senate who were flinging around proposals to make it illegal to investigate cost controls at all. You basically said that was a stupid thing to do, but that the Republicans weren’t really the problem since they aren’t in charge.
But actually, they are. And so are we. The reason the country can’t solve the health care mess is because the people with the biggest bullhorns don’t speak honestly and clearly about it. Nobody understands the Democratic plan, and that scares the public. The irresponsible Republicans are just waiting to make whatever comes out sound terrible. The responsible Republicans are working to come up with a compromise that’s going to be even more incoherent than the Democratic version.
My version of reality is that:
- A.) Since something like a third of the cost of health care is in administration, and the problem with reorganizing health care has to do with all the multitudinous plans and policies, a single-payer system would be far and away the most cost effective answer. We don’t talk much about it because it isn’t politically possible. But it isn’t politically possible because we don’t talk about it. The opponents of a public plan are afraid that people would all gradually migrate toward it, causing the insurance industry as we know it to wither away. Wouldn’t that be a good thing?
- B.) There have to be limits on what doctors can prescribe. The president pretends the only limit will be on useless tests and drugs that have an equally good, cheaper alternative. But useless and equally good are in the eye of the beholder.
There are already limits unless you have a really, really good insurance plan, but a lot of the country either has very good coverage or imagines their coverage is good because they haven’t really tested it. They’re afraid of change. Yelling "rationing" every three seconds totally poisons the discussion. And that is no little matter. I’ve already gone on longer than I promised, so there’s no C.
David Brooks: Gail, as you know, I begin and end my days by reciting Congressional Budget Office reports. I even put on tefillin, just to make it seem holy. So let me begin my reply with the sentence from the latest report. It’s from a section in which the C.B.O. analyzes what the House plan, with the strong public program and all the rest, would do to health care inflation:
The net cost of the coverage provisions would be growing at a rate of more than 8 percent per year in nominal terms between 2017 and 2019; we would anticipate a similar trend in the subsequent decade. This is devastating. The plan was sold as a way to bend the cost curve, to reduce the rate of health care cost growth. Instead, the cost of the plan to the federal budget would rise by 8 percent a year, and there wouldn’t be anything close to offsetting revenues to pay for it.
This is a loud trumpet for all health care reformers. Start over. Get serious about costs. We can either pass this kind of reform and bankrupt the country or we can pass another kind of reform. End of story. Now that I’ve got that out of my system, let me say I admire your get-serious list (though my sixth grade teacher once said that if you have an A and B, you should also have a C).
I’m not crazy about the public plan. I dislike the idea of the government competing in a marketplace it regulates. I think the temptation to subsidize the public entity will be overwhelming. But I’m not vociferously against it either. That’s because:
- A.) I’m not that thrilled with the insurance companies.
- B.) I think it will save money, but not that much (the C.B.O. agrees).
- C.) (!) I think it will produce small administrative efficiencies.
Democratic politicians throw around statistics claiming that Medicare has much, much lower administrative costs than private insurers. I’ve been told by various economists that this claim is three-quarters trickery. It’s a lot cheaper to administer a targeted population that uses a lot of care than it is to administer a large population that uses little care per capita. Plus you can save a lot of administrative costs if you don’t actually regulate treatments that much.
As for your second point, that there should be limits on what doctors can prescribe, I say: "Amen to that." If I had to add a few other items to the list, I’d say putting a serious cap on the tax exemption is the way to measure the seriousness of a reform proposal. Without that, it’s not serious. And finally, I’d say that there have to be cost conscious consumers within a closely regulated market. Unless you get proper incentives for both providers and consumers, I doubt you’re going to get very far. In the current plans, all the emphasis is on the providers.
There’s a group called the Fresh Thinking Project, which has a sensible list of reform ideas. I’d only add in closing that the health care system is as big as the entire British economy. There is no way something that big and complex and dynamic can be run out of Washington. We have to try to set up a dynamic system, not trying to establish a set of rules to be imposed by fiat. The smart reformers at the Office of Management and Budget are aware of this. I’m not sure the congressional staffs are.
Why Americans hate single-payer insurance
by Paul Krugman
Because they don’t know they have it. A commenter points me to this:At a recent town-hall meeting in suburban Simpsonville, a man stood up and told Rep. Robert Inglis (R-S.C.) to "keep your government hands off my Medicare."
"I had to politely explain that, ‘Actually, sir, your health care is being provided by the government,’ " Inglis recalled. "But he wasn’t having any of it."
One of the truly amazing and depressing things about the health reform debate is the persistence of fear-mongering over "socialized medicine" even though we already have a system in which the government pays substantially more medical bills (47% of the total) than the private insurance industry (35%).
In a way, this is the flip side of the persistent belief that the free market can cure healthcare, even though there are no places where it actually has; people also believe that government-provided insurance can’t work, even though there are many places where it does — and one of those places is the United States of America.
Rates Of Severe Childhood Obesity Have Tripled
Rates of severe childhood obesity have tripled in the last 25 years, putting many children at risk for diabetes and heart disease, according to a report in Academic Pediatrics by an obesity expert at Brenner Children's Hospital, part of Wake Forest University Baptist Medical Center. "Children are not only becoming obese, but becoming severely obese, which impacts their overall health," said Joseph Skelton, M.D., lead author and director of the Brenner FIT (Families in Training) Program. "These findings reinforce the fact that medically-based programs to treat obesity are needed throughout the United States and insurance companies should be encouraged to cover this care."
The research was published online and will appear in the September print edition. Skelton and colleagues compared data from the National Health and Nutrition Examination Survey (NHANES). They looked at the prevalence of obesity and severe obesity in a study population of 12,384 children, representing approximately 71 million U.S. children ages 2 to 19 years. Severe childhood obesity is a new classification for children and describes those with a body mass index (BMI) that is equal to or greater than the 99th percentile for age and gender.
For example, a 10-year-old child with a BMI of 24 would be considered severely obese, Skelton said, whereas in an adult, that is considered a normal BMI. An expert committee convened by the American Medical Association, the Centers for Disease Control and the Department of Health and Human Services proposed the new classification in 2007. The research by Skelton and colleagues is the first of its kind to use the new classification and detail the severity of the problem. They found that the prevalence of severe obesity tripled (from 0.8 percent to 3.8 percent) in the period from 1976-80 to 1999-2004. Based on the data, there are 2.7 million children in the U.S. who are considered severely obese.
Increases in severe obesity were highest among blacks and Mexican-Americans and among those below the poverty level. For example, the percentage of Mexican-American children in the severely obese category was 0.9 percent in 1976-80 and 5.2 percent in 1999-2004. Researchers also looked at the impact of severe obesity and found that a third of children in the severely obese category were classified as having metabolic syndrome, a group of risk factors for heart attack, stroke and diabetes. These risk factors include higher-than normal blood pressure, cholesterol and insulin levels.
"These findings demonstrate the significant health risks facing this morbidly obese group," wrote the researchers in their report. "This places demands on health care and community services, especially because the highest rates are among children who are frequently underserved by the health care system."
Obesity Medical Costs Balloon to $147 Billion, Study Finds
Medical spending for obesity is estimated to have reached $147 billion in 2008, an 87 percent increase in the past decade, according to a government-sponsored study. Each obese patient costs health insurers and government programs $1,429, or 42 percent, more a year than a normal-weight individual in 2006, according to the analysis of health expenses released today by the journal Health Affairs. In 1998, the medical costs of obesity were estimated to have reached $78.5 billion.
President Barack Obama has said his administration wants to control the rising cost of health care in part through preventive medicine programs, such as those to help people lose weight or quit smoking. Medicare, the government run program for the elderly and disabled, spent $7 billion on obesity-related prescriptions drugs, such as those to treat diabetes, high cholesterol and blood pressure, the study said.
"Although health reform may be necessary to address health inequities and rein in rising health spending, real savings are more likely to be achieved through reforms that reduce the prevalence of obesity and related risk factors, including poor diet and inactivity," said the study’s authors. "These reforms will require policy and environmental changes that extend far beyond what can be achieved through changes in health care financing and delivery."
The incidence of obesity, a major cause of diabetes, stroke and heart attacks, has more than doubled in the past 30 years, according to the Centers for Disease Control and Prevention. About 32 percent of American adults are obese, according to data from the CDC’s Web site. A person is obese if their body mass index is greater than 30 or about 186 pounds for a person who is five feet, six inches tall.
Without obesity, spending by the government-funded Medicaid program for the poor would be 8.5 percent less and Medicare would be lowered by 11.8 percent, the study said. Researchers analyzed data between 1998 and 2006 from the government-sponsored Medical Expenditure Panel Survey, which collects information on health services that Americans use, how frequently they use the services and the cost. The study was conducted by researchers at RTI International in Research Triangle Park, North Carolina, the CDC in Atlanta, and the Agency for Healthcare Research and Quality in Rockville, Maryland.
Obesity does not cost the USA $147 billion a year, it saves us money
Not only does obesity not cost the USA $147 billion a year, it does not account for 10% of all health care spending either. Yes, there has indeed been a report stating that obesity does indeed cost $147 billion a year but it has to be said that just because a paper has been published it does not mean that that paper is in fact true.
It also does not matter that John Stossel is sceptical, nor the LATimes blog not sceptical: while those are usually reasonable indicators of which way an argument is going (Stossel hesitant, LATblog overboard with enthusiasm usually meaning there is no truth in the assertion) for these, while useful indicators, are not infallible.
So, instead of indulging in a he said, she said sort of shouting match, why don't we try to gather together the facts that we have about obesity, health, health care costs and see if we can arrive at a real estimate of what obesity costs us as a nation?
Let us start with that recent paper which has received so much reporting space. It is here, Annual Medical Spending Attributable to Obesity. We are not going to argue with anything they have said, not going to try and disagree, we are going to take their major finding and then point out what they have not in fact included in their calculations. We are, if you prefer, simply pointing to what they have left out and accepting everything that they have said.
Their main finding is this:
Across all payers, per capita medical spending for the obese is $1,429 higher per year, or roughly 42 percent higher, than for someone of normal weight.
From that they then count the number who are obese and thus reach that $147 billion number. We shall accept that as the gross number for health care spending upon the obese. However, we need to keep in mind the stricture of the French economist (for of course this is indeed all about health care economics) Frederic Bastiat and go off and look for what is hidden, not just what is in plain view.
What else do we know about obesity? Anything at all, other than simply the aesthetic point that we don't like seeing it in a bikini? Well, yes, we do in fact. We know that obesity kills people as well. This shouldn't come as all that much of a surprise either. We've got a great big report telling us that health care costs for the obese are higher than they are for those not bloated on calories, health care costs tend to be higher for those who are ill more often and those who are ill more often tend to die younger. So it's not great leap of logic to think that those who are obese are shortening their lifespans.
And indeed they are:
Another study used data on more than 3000 people aged 30 to 49 drawn from the Framingham heart study (Annals of Internal Medicine 2003;138;24-32). According to this prospective cohort study, among 40 year old non-smokers women who were classified as overweight lost 3.3 years of life expectancy compared with normal weight women. The corresponding figure for overweight men was 3.1 years. Among 40 year old non-smokers who were classified as obese, women lost 7.1 years and men lost 5.8 years.
We want just those last two numbers, for the obese, not for the overweight. And? you might say. So what if the obese die younger, serves them right for costing us all more or their health care, doesn't it? Ah, yes, but it also means that we don't have to spend on their health care for those years that they are in their graves rather than desperately searching for that jumbo corn dog. You might think that this is somewhat heartless, looking at peoples' lives in this manner, and you would be correct, it is heartless. It is also correct.
So how much do those years that the obese are not alive save us in cold hard (hearted) cash then? As no one at all is surprised to find out lost years of life tend to come from the end of a lifespan. As average lifespans are now well into the 70s for both men and women and the lost years are 6 or 7 on average, then we can take as a useful proxy what we spend on Medicare. For while there are indeed some who die before they qualify for that health care program, we are using averages all along here (and fairly rough and ready ones as well). If average lifspan is 77 years, you lose 7 of those by being obese then death comes at 70 and yes, you're 5 years into being eligible for Medicare.
As a rough and ready guide how about $8,000 per year per Medicare enrollee?
In 2006, Medicare spent fifteen thousand dollars per enrollee here, almost twice the national average.
Eyeballing this chart from 2003 gives us something similar as a guide.
Now we actually have our numbers. Someone who is obese costs (all numbers are averages remember) $1,429 per year more in medical care costs than someone who is not obese. Those people who are obese will die 6.5 years (averaging men and women) younger than someone who is not obese. Those 6.5 years of not life on Medicare save the rest of us $52,000 in health care costs. Or, another way of looking at it, 36 years worth of the higher costs that the obese impose upon us while alive.
Do not forget the usual number of caveats here. Shortened life spans are not in themselves a good thing, they are usually thought of as a loss of human wealth as we lose a human capable of enjoying this fabulous world. Nor is ill health a good thing, for the same reason. But this all started when the medics decided to only look at the cold cash element of obesity and that is exactly what we are doing here, looking only at that cash. Also please remember, these are very rough numbers, close to the truth but used more to illustrate the point than be the last word on the subject.
The gross cost of obesity, the visible gross cost, we have accepted from the original paper as being that $147 billion per annum. The nett cash cost of obesity, after we take off the cash savings on health care because the obese die young looks, well, a great deal smaller, doesn't it?
In fact, let us take the advice of the LATblog:
As evidence of this new "get-tough" strategy on obesity, they may well cite a study released today by the Urban Institute titled "Reducing Obesity: Policy Strategies From the Tobacco Wars."
Let us indeed take a leaf (apologies) from the tobacco book and recall Kip Viscusi's point about those who die young. Not only do we not spend on Medicare for them, they do not collect their Social Security benefits either. People who die young, but after they retire, make a profit for the rest of us taxpayers.
Far from the obese costing the rest of us money it is far more likely that the nett cost of obesity to us, the elegantly thin and sylphlike, is negative. We make a profit on it, not a loss.
Stock Trading Slowdown Is Steepest in Two Decades
Stock trading in the U.S. hasn’t slowed this much midyear in at least two decades, causing some investors to worry that the steepest Standard & Poor’s 500 Index rally since the 1930s will fizzle. [..] 84 percent as many shares changed hands daily on the New York Stock Exchange between May 1 and July 20, compared with the average from Jan. 1 to April 30. That’s the steepest slowdown since at least 1989, according to data compiled by Harrison, New York-based research firm Bespoke Investment Group LLC.
Trading on the NYSE was the slowest of the year on June 12 as the S&P 500 climbed to a seven-month high. The benchmark index for U.S. stocks then dropped 7.1 percent through July 10, when investor optimism on the equity market fell to the lowest level since March, according to data compiled by Bloomberg. The S&P 500 is up 44 percent since March 9. "People haven’t really drunk the Kool-Aid yet," said Michael Mullaney, who manages $9 billion for Fiduciary Trust Co. in Boston. "I’m not expecting us to break out of any range anytime during the summer. Before we go gung-ho bullish on the marketplace, we’re going to have to see volumes improve."
U.S. investor confidence, as measured by the Bloomberg Professional Confidence Survey, dropped this month after the World Bank said the recession will be deeper than previously forecast. The nation’s jobless rate reached a 26-year high in June and consumer optimism unexpectedly decreased. Trading usually slows this time of year. Average daily trading from May through July 20 trailed the first four months in 13 out of 21 years examined by Bespoke. In 2008, midyear volume was 85 percent of the pace in the first four months. The S&P 500 plunged 38 percent during the entire year, the most since 1937.
Chinese shares plunge as state intervention rumours sweep market
Chinese shares suffered their biggest fall in eight months today as rumours swept the market that the government was poised to intervene to end its recent rally.
The benchmark Shanghai composite index was down by as much as 7.7% in afternoon trading, despite huge interest in the flotation of China's biggest housebuilder. The index eventually closed down 5% at 3266 points, its biggest daily decline this year.
Before today's falls the Shanghai market had risen by 81% this year, staging a strong recovery following its plunge during 2008. This has prompted speculation that China's banks might curtail lending to prevent another unsustainable market bubble. Francis Lun, general manager at Fulbright Securities, said there had been a rush to take profits today before central government acts to cool the markets.
Earlier today there had been frenzied trading in China State Construction Engineering, which made its debut on the Shanghai market and saw its share price promptly double. Four billion shares in the company changed hands - around five times the number traded in FTSE 100 companies in an average session in London. James Liu, Shanghai-based deputy chief investment officer at APS Asset Management, said the runaway success of the flotation showed that there was "too much liquidity" in the market.
Mao Nan, analyst with Orient Securities, agreed that the company's shares had been quickly overvalued. "Hot money is flowing into the share market at the moment. With lots of cash at home and capital flowing in from abroad, the main problem is excessive liquidity," Nan said. China's government imposed a ban on IPOs after the financial crisis sent shares tumbling, but the block was lifted in June.
The first Chinese bull market began in August 2006, when the Shanghai composite was 1623 points. It ended in October 2007, when the index had almost quadrupled to 6124. By this stage millions of people had invested their life savings in shares or borrowed heavily, in an attempt to share in the boom. The index fell to 1678 in November 2008, and after a correction in March this year it has been climbing steadily since.
Where Bailout Money Goes to Die
When CIT Group, a medium-sized lender, faced the threat of bankruptcy recently, it raised an uncomfortable prospect for the officials in Washington managing the bailout of the financial system. CIT got $2.3 billion in bailout funds last year--yet it was still failing. And the government decided not to offer any more help. So if CIT declared bankruptcy, taxpayers would be out their $2.3 billion.
CIT averted bankruptcy, for now, but the brush with insolvency highlighted one of the biggest risks of the entire bailout scheme: that taxpayers won't get their money back. That problem has been overshadowed recently by some good news from firms like Goldman Sachs and JPMorgan Chase, which have paid back loans they got under the government's Troubled Assets Relief Program. So far, 34 companies have returned about $72 billion in TARP funds to the government, according to a bailout tracker maintained by journalism site ProPublica.
But nearly 700 firms have received bailout money, and many of them are still in rough shape. To gauge how much bailout money may be at risk, U.S. News asked the Ethisphere Institute, a private research group that studies corporate responsibility, to identify who the biggest TARP-jumpers are likely to be. Ethisphere publishes a TARP index, updated weekly, that measures the financial performance of all TARP recipients and calculates the "return" to taxpayers if the bailout funds are treated as an investment in the companies that got them. By that measure, the government has been a poor investor, losing about $148 billion so far--$1,233 per U.S. household. Ethisphere analyzed the same data, including results from the Federal Reserve's recent stress tests, to identify firms most likely to write off their debts to the federal government, either partly or completely.
Bailout architects like Treasury Secretary Tim Geithner and Federal Reserve Chairman Ben Bernanke have argued that the government is likely to get most of the bailout money back, which would make it more like an interest-bearing loan than a giveaway. But since the bailouts began last fall, a number of developments have made it clear that the feds--and the taxpayers--can kiss some of that money goodbye. Ethisphere estimates that the following nine firms could end up costing the government the most when the final bailout accounts are tallied. Together, they account for nearly $220 billion in government bailouts, including TARP money and other funds.
AIG (total bailout received: $85 billion). It's hard to imagine a more complicated bailout than this monstrous money hole. The $85 billion includes $40 billion in TARP infusions and about $45 billion in loans from a government credit line. The Federal Reserve has paid an additional $47 billion for troubled AIG securities, which it hopes to resell at some point in the future. And AIG can still tap another $30 billion in credit lines extended by the government.
All of that money has bought the feds 79.9 percent of the insurance giant—the most it can own without triggering accounting rules that would effectively nationalize the whole company. To pay back the government, AIG has developed a long-term plan to break itself up and sell off various insurance divisions and other assets. But the horrible economy makes it a fire-sale market, with many bids coming in at less than half the asking price. So it could be three to five years before all of AIG's assets have been spun off. The government's exposure should shrink later this year, when the $45 billion credit line drops to about $20 billion. But Ethisphere still predicts that the government will recoup far less than what it has plowed into the sinking firm.
Chrysler ($14.9 billion). The government gave Chrysler $7 billion to stay afloat prior to its bankruptcy filing in March. That money essentially disappeared when the company declared bankruptcy in April. Then the government provided Chrysler an additional $8 billion in financing to help it exit bankruptcy in exchange for an 8 percent ownership stake in the new Chrysler. The idea is that Chrysler will go public at some point, sell shares, and buy out the government's position. But the return to the government will probably be well below face value, since the government holds a relatively small stake in a company that's still endangered. "The government will get back materially less than its $8 billion principal," says analyst Stefan Linssen of Ethisphere.
CIT Group Inc. ($2.3 billion). A string of strapped borrowers and a heavy debt load have nearly sunk CIT, a financial firm that lends money to small and medium-sized businesses. The firm escaped a bankruptcy filing in mid-July when bondholders provided fresh funds to keep the firm operating. But the interest rate is high, and many analysts think a bankruptcy filing is still likely. The Treasury Department, meanwhile, has hinted that it has already written off CIT's $2.3 billion in TARP funds.
Citigroup ($45 billion). The huge bank posted a $4.3 billion profit in the second quarter, but that's only because it spun off its valuable Smith Barney brokerage unit. Otherwise, it would have lost money, and by almost any measure, Citi is a deeply wounded bank. Its market value is just $16 billion--one third of the government's cash investment in the company. For the foreseeable future, Citi is likely to wrestle with mounting losses on credit cards and other consumer loans. In addition to $45 billion in TARP funds, the government has guaranteed a humongous pool of dodgy Citigroup assets worth $301 billion. Citi paid $7 billion for the insurance and must absorb the first $39.5 billion in losses. But after that, the government would bear 90 percent of any write-offs. That gives taxpayers long-term exposure to Citi's troubled balance sheet. Chief Executive Vikram Pandit has insisted his firm is on a path back toward sustained profitability, which will allow it to pay back the government. But Citi hasn't announced any timeline for paybacks.
General Motors ($50.7 billion). That long-forgotten $13.4 billion bailout last December was just a down payment, it turns out. Through bankruptcy funding and other expenditures, the government has nearly quadrupled its investment in GM, in the process gaining 60.8 percent ownership of the new company. For the government to get all of its money back, Ethisphere calculates that GM would have to achieve a market value of $80 billion--which would be 43 percent higher than GM's value in 2000 when the automaker was highly profitable and much larger. With half as many divisions now and falling market share, it's hard to see how GM could ever reclaim its former glory (or profits).
Ethisphere estimates that taxpayers will be lucky if they get back $20 billion, a mere 40 percent of their investment in GM. GM argues that its implied market value, taking into account the prices its bonds are trading at and other factors, will allow a higher repayment, closer to $34 billion. And that could go up, GM insists, if the company does well.
GMAC ($12.5 billion). GM's car-financing arm also writes mortgages, which got it into deep trouble, forcing the lender to take more bailout money than any bank except for Citi, Bank of America, and Wells Fargo. Part of GMAC's funding came with the auto bailout, to help ensure that car buyers who want to buy GM or Chrysler vehicles can get loans. But Ethisphere believes that with GMAC's vast exposure to two depressed industries--cars and homes--at least $5 billion of GMAC's TARP funds are a complete write-off. GMAC says otherwise, insisting that it's taking the necessary steps to strengthen its business. "We intend to repay the full TARP investment over time and have been making scheduled dividend payments on the investment," says spokesperson Gina Proia.
Marshall & Ilsley Corp. ($1.7 billion). This bank holding company, parent of M&I Bank, is based in Wisconsin, but it made thousands of housing, construction, and commercial loans in Arizona, one of its target markets during the go-go years. With a huge housing bust in Arizona, many of those loans are now worth far less than their face value. That makes M&I one of the most vulnerable regional banks. Ethisphere believes the government could lose $1.3 billion, more than three quarters of its investment. M&I says it's confident that the government will get all of its money back, plus dividend payments. The bank also argues that it has higher "capital ratios" than many other banks of its size and points out that it recently raised $552 million through an equity offering, "clearly indicative of the market's belief that the [government's] capital will be repaid."
Regions Financial Corp. ($3.5 billion). This Alabama-based bank has been losing a bundle from bad mortgages and other loans, mainly across the South. And its CEO said recently that losses are likely to get worse for the foreseeable future. Ethisphere believes taxpayers will be lucky if they get half their money back. A Regions spokesman says the bank plans to pay back its government loans in full, pointing out that Regions has $6.9 billion more in reserves than the required minimum, and recently raised $2.5 billion in the private markets.
Zions Bank Corp. ($1.4 billion). Utah has fared relatively well during the recession, but this Salt Lake City-based bank hasn't. That's because its core markets include California, Arizona, and Nevada--ground zero for the housing meltdown. Zions has lost nearly $900 million so far this year and remains exposed to housing woes. Ethisphere tallies Zions as another 50 percent writeoff, meaning taxpayers might get back just $700 million. Zions says it has plenty of earnings power and reserves to offset future losses, and points out that it recently raised $511 million in capital from the private markets. "Zions believes the company has the long-term capacity to repay TARP in full at the appropriate time," says spokesman James Abbott.
Hurrying Into the Next Panic?
On vacation in Turkey, I am picked up at the airport by a minibus. It’s past midnight, pitch-black, the driver is speeding around corners. Only one headlight is working. And I have my doubts about the brakes. In my head I’m planning the letter of complaint to the tour company. And then the driver’s cellphone rings, he picks it up and answers it, he has only one hand on the steering wheel. Now I’m mentally compiling the list of songs to be played at my funeral.
That’s rather how I feel when people talk about the latest fashion among investment banks and hedge funds: high-frequency algorithmic trading. On top of an already dangerously influential and morally suspect financial minefield is now being added the unthinking power of the machine.
The idea is straightforward: Computers take information — primarily "real-time" share prices — and try to predict the next twitch in the stock market. Using an algorithmic formula, the computers can buy and sell stocks within fractions of seconds, with the bank or fund making a tiny profit on the blip of price change of each share. There’s nothing new in using all publicly available information to help you trade; what’s novel is the quantity of data available, the lightning speed at which it is analyzed and the short time that positions are held.
You will hear people talking about "latency," which means the delay between a trading signal being given and the trade being made. Low latency — high speed — is what banks and funds are looking for. Yes, we really are talking about shaving off the milliseconds that it takes light to travel along an optical cable.
So, is trading faster than any human can react truly worrisome? The answers that come back from high-frequency proponents, also rather too quickly, are "No, we are adding liquidity to the market" or "It’s perfectly safe and it speeds up price discovery." In other words, the traders say, the practice makes it easier for stocks to be bought and sold quickly across exchanges, and it more efficiently sets the value of shares.
Those responses disturb me. Whenever the reply to a complex question is a stock and unconsidered one, it makes me worry all the more. Leaving aside the question of whether or not liquidity is necessarily a great idea (perhaps not being able to get out of a trade might make people think twice before entering it), or whether there is such a thing as a price that must be discovered (just watch the price of unpopular goods fall in your local supermarket — that’s plenty fast enough for me), l want to address the question of whether high-frequency algorithm trading will distort the underlying markets and perhaps the economy.
It has been said that the October 1987 stock market crash was caused in part by something called dynamic portfolio insurance, another approach based on algorithms. Dynamic portfolio insurance is a way of protecting your portfolio of shares so that if the market falls you can limit your losses to an amount you stipulate in advance. As the market falls, you sell some shares. By the time the market falls by a certain amount, you will have closed all your positions so that you can lose no more money.
It’s a nice idea, and to do it properly requires some knowledge of option theory as developed by the economists Fischer Black of Goldman Sachs, Myron S. Scholes of Stanford and Robert C. Merton of Harvard. You type into some formula the current stock price, and this tells you how many shares to hold. The market falls and you type the new price into the formula, which tells you how many to sell.
By 1987, however, the problem was the sheer number of people following the strategy and the market share that they collectively controlled. If a fall in the market leads to people selling according to some formula, and if there are enough of these people following the same algorithm, then it will lead to a further fall in the market, and a further wave of selling, and so on — until the Standard & Poor’s 500 index loses over 20 percent of its value in single day: Oct. 19, Black Monday. Dynamic portfolio insurance caused the very thing it was designed to protect against.
This is the sort of feedback that occurs between a popular strategy and the underlying market, with a long-lasting effect on the broader economy. A rise in price begets a rise. (Think bubbles.) And a fall begets a fall. (Think crashes.) Volatility rises and the market is destabilized. All that’s needed is for a large number of people to be following the same type of strategy. And if we’ve learned only one lesson from the recent financial crisis it is that people do like to copy each other when they see a profitable idea.
Such feedback is not necessarily dangerous. Take for example what happens with convertible bonds — bonds that can be converted into stocks at the option of the holder. Here a hedge fund buys the bond and then hedges some market risk by selling the stock itself short. As the price of the stock rises, the relevant formula tells the fund to sell. When the stock falls the formula tells it to buy — the exact opposite of what happens with portfolio insurance. To the outside world — if not necessarily to the hedge fund with the convertible bonds — this mix is usually seen as a good thing.
Thus the problem with the sudden popularity of high-frequency trading is that it may increasingly destabilize the market.
Hedge funds won’t necessarily care whether the increased volatility causes stocks to rise or fall, as long as they can get in and out quickly with a profit. But the rest of the economy will care. Buying stocks used to be about long-term value, doing your research and finding the company that you thought had good prospects. Maybe it had a product that you liked the look of, or perhaps a solid management team. Increasingly such real value is becoming irrelevant. The contest is now between the machines — and they’re playing games with real businesses and real people.
FED NY's Dudley Dismisses Inflation Fears
FRB NY President William Dudley this morning offered the most detailed explanation yet of why the Fed believes it can control inflation once the economy turns around. In a speech delivered in New York, Dudley argued that the recovery will be so slow that the threat of inflation is still very remote, and that the Fed's ability to pay interest on excess bank reserves will prevent these reserves from acting as fuel for inflation.
Regarding the economic outlook, Dudley repeated the Fed's prediction that the US will 'likely' see moderate growth in the second half of this year. He said recovery in the housing and auto industries, the fiscal stimulus, and the expectation of inventory rebuilding are main factors in this prediction. But Dudley nonetheless said the pace of recovery will be slow, in part because real income is expected to fall as factors such as lower gas prices and reduced withholding taxes disappear, but also because of the effect of the housing collapse on consumer spending and ongoing strains in the financial markets that will constrain credit availability.
'If the recovery does, in fact, turn out to be lackluster, the unemployment rate is likely to remain elevated and capacity utilization rates unusually low for some time to come,' he said. 'This suggests that inflation will be quiescent. For all these reasons, concern about 'when' the Fed will exit from its current accommodative monetary policy is, in my view, very premature.' Even aside from this major factor, Dudley argued that the Fed's large and growing balance sheet is nothing that prevents the Fed from controlling inflation once the economy corrects. 'It is not the case that our expanded balance sheet will inevitably prove inflationary,' he said.
Specifically, Dudley said the Fed's new ability to pay interest on excess reserves is a critical tool it uses to keep banks from lending these reserves and thereby creating new credit and boosting inflation. 'Thus, through the IOER rate (interest on excess reserves), the Federal Reserve can effectively retain control of monetary policy,' he said, noting that the Fed can increase the IOER rate if banks begin to find it more profitable to lend these reserves. In addition, Dudley noted that the Fed can also conduct reverse repo transactions, sell securities, and take other steps to control inflation.
More broadly, Dudley also dismissed concerns that the $700 bln in excess reserves now held by the Fed are 'dry tinder' that will at some point lead to increased lending and higher inflation. He said banks don't need 'dry tinder' to increase lending, since Fed has already committed to supply reserves to keep the fed funds rate at its target. 'In terms of the ability to expand credit rapidly, it makes no difference whether the banks have lots of excess reserves or not,' he said.
Dudley also rejected the idea that the Fed's Treasury purchases are a problem, noting that the Fed's Treasury holdings today are smaller than they were two years ago, before the crisis hit. Dudley said the Fed wanted to buy Treasuries to put downward pressure on these securities in a bid to stimulate the economy when the fed funds rate was already near zero.
Dudley acknowledged that there are some risks inherent in the Fed's strategy, including that it could unhinge inflation expectations, but he said the Fed is monitoring these risks and sees no danger signs yet. He also predicted that the new asset purchase programs mean the Fed's balance sheet will likely grow to $2.5 trillion, 'somewhat above the peak reached last December.'
Subprime mortgage companies warn on U.S. foreclosures
Companies that service risky residential mortgages are warning U.S. officials that a key program to slow foreclosures may push some financing costs higher and derail their efforts, said a leading subprime firm. Companies forming the Independent Mortgage Servicers Coalition, service many of the riskiest mortgages made during the housing boom, making them key players in programs to rein in foreclosures. The group collects and distributes payments on more than $700 billion in loans, according to its leader, Carrington Mortgage Services of Santa Ana, California.
Their concerns about financing payments for defaulted homeowners comes as pressure mounts from Congress, regulators and state legislators for servicers to do more for the plan, which aims to slow foreclosures and modify loans. The U.S. Treasury wants the companies to spend more on its resources, including hiring staff and expanding training programs. At least four servicers from the coalition were among the 25 meeting with the Treasury on Tuesday, where new commitments were forged to increase foreclosure prevention efforts under President Obama's Home Affordable Modification Program.
But manpower isn't the main worry for the independent servicers, which don't include large banks such as Wells Fargo & Co. Implementing the program means giving delinquent homeowners more time fix their loans, which to servicers will the boost costs of extending payments to investors as contractually promised. Matching costs of servicing to public policy is growing increasingly difficult, said Bruce Rose, chief executive officer and general partner of Greenwich, Connecticut-based Carrington Capital Management, LLC, which owns CMS. Rose attended the meeting with Treasury.
"We are in a position where it's a very tough balance act, and that's weighing heavily on us now," said Rose, in an interview on Monday. "This is a classic case of an unfunded government mandate." The costs of borrowing to finance delinquent payments to bond investors far outweigh expected revenue from incentives paid by the government, Rose said. The government will pay servicers $1,000 for every loan modified, and another $1,000 a year for three years if the borrower stays current.
The group since September has approached the Treasury, the Federal Reserve and Congress for help in funding the temporary "advances" that are fully reimbursed when a loan is modified or foreclosed, Rose said. Help offered through the Fed's Term Asset-Backed Securities Loan Facility (TALF,) which allows for the pooling of advances for sale to investors, has backfired, and is increasing financing costs, he said.
The coalition -- which has included Ocwen Financial Corp, GMAC-RFC, and Fortress Investment Group's Nationstar Mortgage -- also tried unsuccessfully to arrange liquidity via the Troubled Asset Relief Program in 2008. GMAC-RFC is no longer a member, a spokeswoman said. Standard & Poor's this month delivered a blow to Carrington and other potential issuers of TALF-eligible bonds backed by servicing advances, by sharply discounting the value of the assets that would go into the deals, Rose said. For Carrington, that would mean just 64 cents of every dollar in assets would garner a AAA rating, the blessing required for inclusion in a TALF deal.
That is harsh, Rose said, since advances are first in line for repayment -- ahead of AAA bondholders -- when a bad loan is resolved. There has never been a loss on advances, but S&P told Carrington it will assume 2.0 percent losses and multiply them eight times to reflect high stress scenarios. More discounting is done for interest expense. S&P's assessment may not only hinder TALF funding, but "significantly" boost Carrington's borrowing costs, Rose said. While one Carrington lender saw S&P's assessment as baseless, another has hit the servicer with a margin call.
S&P ratings and bank credit lines give servicers incentives that run counter to public policy, he said. To reduce discounts assessed by rating companies, and to lower borrowing costs from banks, servicers would have to foreclose faster, not more slowly, as would be required under Obama's plan, he said. The funding problem could be resolved if TALF issues would accept implicit ratings, which for advances are AAA, since they are senior to the safest bonds in the security, he said.
Unless independent servicers get new liquidity, "this is going to bring (HAMP) to a screaming halt, in at least our shop," he said. "We are running out of capacity."
Carrington has modified about 45 percent of subprime loans in its servicing portfolio that were made from 2005 to 2007.
Frank Threatens Banks: We Will Make You Stop Foreclosures
A senior House Democrat threatened banks Wednesday that if they don't volunteer to save more homeowners from foreclosure, Congress will make them. In a sternly worded statement, Rep. Barney Frank said Congress will revive legislation that would let bankruptcy judges write down a person's monthly mortgage payment if the number of loan modifications remain low. Frank, chairman of the House Financial Services Committee, also said his committee won't consider legislation to help banks lend unless there is a "significant increase" in mortgage modifications.
Frank's statement was aimed at adding momentum to a deal struck Tuesday between Treasury Secretary Timothy Geithner and more than two dozen mortgage companies. The two sides agreed to set the goal of adjusting 500,000 loans by Nov. 1. But it was far from clear whether that would happen. Loan servicers say they are still trying to play catch up to a deluge of customer requests by hiring and training thousands of new employees. Banks also are trying to sort through which customers face a legitimate financial hardship.
Also, many loans have been bundled and sold to investors as securities, complicating efforts to modify the terms. Congress tried earlier this spring to pass legislation that would give people a chance to keep their homes by filing for bankruptcy. But while President Barack Obama said he supported the measure, he did little to see it through and it was defeated amid an aggressive lobbying effort by banks.
The measure failed in the Senate by a 45-51 vote, falling 15 votes short of the 60 needed to overcome procedural hurdles. "People in the servicing industry and in the broader financial industry must understand that if this last effort to produce significant modifications fails, the argument for reviving the bankruptcy option will be extremely strong, and I think there is a substantial chance that the outcome will be different," Frank said.
Foreclosures Are Often In Lenders' Best Interest
Government initiatives to stem the country's mounting foreclosures are hampered because banks and other lenders in many cases have more financial incentive to let borrowers lose their homes than to work out settlements, some economists have concluded. Policymakers often say it's a good deal for lenders to cut borrowers a break on mortgage payments to keep them in their homes. But, according to researchers and industry experts, foreclosing can be more profitable.
The problem is that modifying mortgages is profitable to banks for only one set of distressed borrowers, while lenders are actually dealing with three very different types. Modification makes economic sense for a bank or other lender only if the borrower can't sustain payments without it yet will be able to keep up with new, more modest terms. A second set are those who are likely to fall behind on their payments again even after receiving a modified loan and are likely to lose their homes one way or another. Lenders don't want to help these borrowers because waiting to foreclose can be costly.
Finally, there are those delinquent borrowers who can somehow, even at great sacrifice, catch up without a modification. Lenders have little financial incentive to help them. These financial calculations on the part of lenders pose a difficult challenge for President Obama's ambitious efforts to address the mortgage crisis, which remains at the heart of the country's economic troubles and continues to upend millions of lives.
Senior officials at the Treasury Department and the Department of Housing and Urban Development have summoned industry executives to a meeting Tuesday to discuss how to step up the pace of loan relief. The administration is seeking to influence lenders' calculus in part by offering them billions of dollars in incentives to modify home loans. Still, foreclosed homes continue to flood the market, forcing down home prices. That contributed to the unexpectedly large jump in new-home sales in June, reported yesterday by the Commerce Department.
"There has been this policy push to use modifications as the tool of choice," said Michael Fratantoni, vice president of single-family-home research at the Mortgage Bankers Association. But "there is going to be this narrow slice of borrowers for which modifications is the right answer." The size of that slice is tough to discern, he said. "The industry and policymakers have been grappling with that."
The effort to understand the dynamics of the mortgage business comes as the administration is prodding lenders to do more to help borrowers under its Making Home Affordable plan, which gives lenders subsidies to lower the payments for distressed borrowers. About 200,000 homeowners have received modified loans since the program launched in March, while more than 1.5 million borrowers were subject during the first half of the year to some form of foreclosure filings, from default notices to completed foreclosure sales, according to RealtyTrac.
No doubt part of the explanation is that lenders are overwhelmed by the volume of borrowers seeking to modify their mortgages. Rising unemployment and falling home prices have added to the problem. But a study released last month by the Federal Reserve Bank of Boston was downbeat on the prospects for widespread modifications. The analysis, which looked at the performance of loans in 2007 and 2008, found that lenders lowered the monthly payments of only 3 percent of delinquent borrowers, those who had missed at least two payments.
Lenders tried to avoid modifying the loans of borrowers who could "self-cure," or catch up on their payments without help, and those who would fall behind again even after receiving help, the study found. "If the presence of self-cure risk and redefault risk do make renegotiation less appealing to investors, the number of easily 'preventable' foreclosures may be far smaller than many commentators believe," the report said.
Nearly a third of the borrowers who miss two payments are able to self-cure without help from their lender, according to the Boston Fed study. Separately, Moody's Economy.com, a research firm, estimated that about a fifth of those who miss three payments will self-cure. When Adrian Jones fell behind on the mortgage payments for her Dallas home earlier this year, her lender asked her to cut other expenses. Jones said she eliminated movies and coffee breaks. She turned to family members for loans. When that failed to raise enough, she sold her second car.
"It hurt, but it also made sense. The debt was my responsibility," Jones said. But six months later, after catching up on the mortgage, Jones is again feeling pinched after her hours as an office assistant at an architecture firm were cut. This time, she's not sure she can fix the problem herself. "I am going to try, obviously," she said. "But it is getting harder and harder." Like Jones, those who are most determined to meet their obligations are often unlikely candidates for loan modifications.
"These are the people who will get a second job, borrow from their family to keep up," explained Paul S. Willen, a senior economist at the Federal Reserve Bank of Boston and an author of its report. ". . . From a cold-blooded profit-maximizing standpoint, these are the people the banks will help the least." Lenders also worry that borrowers may re-default even after receiving a loan modification. This only delays foreclosure, which can be costly to the lender because housing prices are falling throughout the country and the home's condition may deteriorate if the owner isn't maintaining it.
In some cases, lenders lose twice as much foreclosing on a home as they did two years ago, said Laurie Goodman, senior managing director at Amherst Securities. American Home Mortgage Services, based in Texas, was willing to modify Edward Partain's mortgage on his Tennessee home last April after business at his beauty salon slowed and a divorce stretched his budget. But after months of negotiating with his lender, Partain said he was surprised to learn that it would only lower his payments by $90 a month, instead of the $250 decrease he expected.
"At $250, I would have had a chance, but after they added in late fees and payments, I couldn't do it," he said. Partain soon fell behind on his payments again and went back to American Home Mortgage Services seeking a more affordable payment. Partain said he was told that he was ineligible for another modification because it had been less than a year since his last. A foreclosure sale was scheduled for late July.
After American Home Mortgage Services was contacted by The Washington Post about the case, the company said Partain would be considered for the federal foreclosure-prevention program and it delayed the sale by three months. Partain is relieved but anxious about the details. "You want to wait and see what figures they come up with," he said.
Administration officials have not said publicly how many borrowers they expect to re-default under Obama's program. But the experience of a separate program run by the Federal Deposit Insurance Corp. could be instructive. After taking over the failed bank IndyMac last year, the FDIC began modifying troubled mortgages held or serviced by the company. Richard Brown, the FDIC's chief economist, said the agency expects up to 40 percent of those borrowers to re-default.
Even at that rate, he said, the modification program is more profitable than doing nothing. "The idea that 30 to 40 percent re-default is a failure to a program is false," Brown said. The administration has estimated that its foreclosure-prevention program would help 3 million to 4 million borrowers by 2012. But lenders' reluctance could limit the impact to less than half that, said Mark Zandi, chief economist for Moody's Economy.com. Coupled with re-defaults, this would mean that the number of people losing their homes to foreclosure could reach nearly 5 million by 2011, he said.
Mark A. Calabria, director of financial-regulation studies at the Cato Institute, warned that political rhetoric is driving the policy discussion. "What we really need to do is have an honest debate about what are the magnitudes of people we really can help," he said. But administration officials defended their program's progress, reporting that it has surpassed an initial goal of offering 20,000 modifications a week. These officials said they have taken into account the re-default risk and possibility for self-cure in designing the effort.
Michael S. Barr, assistant Treasury secretary for financial institutions, noted that the report by the Boston Fed does not cover the period since the administration launched its initiative. "We will continue to refine the program as new data becomes available," he said. "We are committed to studying the effectiveness and efficiency of the program, and we welcome outside analysis."
Willen, of the Boston Fed, said the government program could boost several-fold the number of seriously delinquent borrowers receiving modifications. But so few people had been getting their loans modified that even a dramatic increase in the percentage would still touch only a small fraction of troubled borrowers, he said. "We're still not talking about a program that will stop a large number of foreclosures," he said. "We're talking about a program that, at the margins, will assist more people. It is unlikely we will see a sea change."
As Prices Plummet, Condo Sales in Miami Perk Up
Despite a vast oversupply of new condos in downtown Miami, sales have been brisk lately at 1060 Brickell Avenue, a twin-tower development with 570 units in the heart of the upscale Brickell neighborhood. The reason? Prices have been cut in half, to about $200 a square foot. "We reset the prices at a sharp discount, and the units are flying off the shelves," said Gary Barnett, the president of the Extell Development Company, the New York-based developer of 1060 Brickell, which was completed last year. More than 200 units have closed since the discount program began in April, he said.
Mr. Barnett, who has developed several new condominium projects in Manhattan, including 535 West End Avenue and the Rushmore, acknowledged that he and his backers lost their entire investment in 1060 Brickell, which is situated at Southeast First Avenue. He said some, but not all, of the mezzanine financing was also wiped out. But because more than 40 percent of the units sold at full price, Mr. Barnett was able to repay his $153 million first mortgage from TD Bank and iStar, a troubled finance company that bet heavily on the South Florida condo market.
Since 2003, nearly 23,000 new condo units have been added to the downtown skyline, from Brickell Avenue up through the more modest Biscayne Corridor — far more than this city of 400,000 people could absorb. About 9,400 remained unsold at the end of June, according to Peter Zalewski, the owner of Condo Vultures Realty, a local brokerage. But Miami real estate brokers, lawyers and developers say the overbuilt condo market has entered a new phase. "Things are starting to move through the system," said Adam Cappel, the president of CondoReports.com, a Miami research service.
Until recently, many real estate professionals expected investment funds seeking opportunities in distressed real estate to swoop down on Miami and buy condo units by the hundreds at wholesale prices and then rent them out until the market recovered.
A few bulk purchases have occurred — in the dozens rather than the hundreds — but most buyers have paid the current market price, not a wholesale price. For example, an investor from Colombia recently bought 31 units at 1060 Brickell for an average of $203 a square foot, according to Mr. Zalewski. Last week, however, a private equity group paid only $63 a square foot for 51 oceanfront condo-hotel units at the Regent Hotel in Miami Beach, he said. Previous units there had sold for $1,100 a square foot. But condo-hotel units are considered riskier and harder to finance than traditional condos.
For the most part, bulk condo sales have yet to catch on. With the steep decline in values, developers of newer buildings are no longer in control of their projects and must defer to their lenders. "The lenders did not want to take the hit that the bulk purchasers were offering," said Martin A. Schwartz, a partner at Bilzin Sumberg, a Miami law firm that represents developers.
Another obstacle is that under Florida law, anyone who buys seven condos in a building with 70 or more units may be assuming all the liabilities of a developer, Mr. Schwartz said. "There is an element of risk," he said. Mr. Barnett, for example, was unable to arrange a bulk sale for 346 units at 1060 Brickell last year at $200 a square foot. Robert Kaplan, a principal of Olympian Capital Group, a Miami mortgage brokerage, said the focus had shifted away from bulk sales to retail sales because lenders were not willing to take $100 to $125 a square foot when they could get $175 or more. "Every condo lender is considering market-rate sales," he said. "They have no choice."
Bargains are being offered for under $200 a square foot at Brickell on the River South, near Southeast Fifth Street. At 500 Brickell, developed by the Related Group of Florida, the industry leader, prices for one-bedroom apartments have dropped to $180,000, from $260,000, said Lucas Lechuga, an agent for Keller Williams Realty in Miami. "The buildings that have slashed their prices are doing pretty well now," he said.
If demand does not keep up, prices will have to adjust, Mr. Kaplan said. "But we’re not seeing that yet," he added. "We’re seeing velocity at the new lower prices," According to Ronald A. Shuffield, the president of Esslinger-Wooten-Maxwell, a local brokerage, condo sales in new buildings increased to 82 a month, from an average of 50 a month, since April.
Jack McCabe, the chief executive of McCabe Research and Consulting in Deerfield Beach, Fla., said, however, that he thought prices were likely to drop a lot further because of the high volume of foreclosures. "There are a lot of buildings where 30 to 35 percent of the units are in foreclosure," he said. He predicted that bulk sales at prices as low as $100 a square foot would eventually occur, especially for inland properties. "It’s still early," he said.
In newer buildings with many unsold condos, developers are negotiating uncontested, or "friendly," foreclosures with their lenders, sparing them the expense of a protracted battle. Last month, the Related Group surrendered its 420-unit CityPlace South development in West Palm Beach, Fla., where only 39 sales had been completed, to a group of lenders led by the Bank of Nova Scotia. Related paid an undisclosed sum to cancel its $119 million construction loan and other liabilities and won the right to continue to manage and maintain the project and run the sales operation — all for lucrative fees.
According to recent news reports, Related hopes to work out a similar arrangement within the next couple of months to retire about $1.5 billion in outstanding debt on other South Florida condo projects, including the company’s showpiece, Icon Brickell, where only 31 of 1,646 units have sold. Related executives did not return telephone calls.
Thomas R. Lehman, a Miami lawyer who has been negotiating several friendly foreclosures, said many developers had already quietly turned over the keys to their projects. "The wave has started," said Mr. Lehman, the managing partner at Tew Cardenas. "Public records are catching up to what’s already been negotiated. Lenders are realizing that no one is going to buy their loans and they might as well get their projects back and put them on the market." He said developers often were trying to preserve other assets they might have put up as collateral for their construction loan.
But what has been a catastrophe for developers has been a bonanza for renters. According to a report commissioned by the Miami Downtown Development Authority, a quasi-independent city agency, 62 percent of the already completed new downtown condo units are occupied, split evenly between renters and owners. Monthly rents have declined 15 to 20 percent in Miami, with the median rate at $1.64 a square foot, Mr. Zalewski said.
The Related Group has instituted an unusual rent-to-own program, in which no price is set in advance and all of the rental payments count toward a down payment, if the unit is purchased within a year. Joe Higgins, the owner of Grove Town Properties, a local brokerage, said about one-quarter of his rental clients were University of Miami law students doubling up with roommates, but the rest were professionals working downtown.
With so many new buildings on the market, tenants have become choosy and now demand features like an updated kitchen, Mr. Higgins said. "Renters don’t want the older buildings," he said. "They want the granite; they want the stainless steel."
It's Not a Recession ... Or a Depression
There have been some very interesting diary entries by our beloved Bonddad and Bobswern in the last week, accompanied by some extremely feverish commentary. Is the Great Recession just beginning? Ending? At the beginning of the end? I'm going to say, neither.
The problem is, in my view, that we're really not facing either of these scenarios -- neither recession nor depression. Why would I say that? Because the use of either term is an implicit agreement that what we're experiencing now is can be measured in the same way we've measured all economic activity since 1929. That this is part of normal, cyclical economic activity that includes periods of expansion and contraction and we just happen to be contracting.
Seems pretty clear to me: This is not something we can "recover" from ... We are not simply experiencing a dip in jobs and GDP, but we're experiencing a fundamental reorganization, domestically and globally, of the economic order. This change is coming fast and hard. There is no gently going into that good night here.
Or, rather ... The fundamental change that I am talking about really started decades ago, under Reagan and proceeded at great pace all through the next three presidencies. Deregulation. Union-busting. NAFTA. The great tax shift from the wealthy to the working. The deleterious effects of the economic policies of every government since Reagan have been, as we all well know, disguised by easy lending and the subsequent expansion of consumer debt: Why should the economy pay workers when it can lend it to them instead?
That change started in 1981. The consequences are coming down fast and hard now because we're only now being asked to suffer for it. (Well, working people are being asked to suffer, while the affluent are being paid to party.) Former Labor Secretary Robert Reich wrote about this fundamental change a couple of weeks ago. I wrote a bit about it here at that time. But I think it's worthwhile to quote from him again:Problem is, consumers won't start spending until they have money in their pockets and feel reasonably secure. But they don't have the money, and it's hard to see where it will come from. They can't borrow. Their homes are worth a fraction of what they were before, so say goodbye to home equity loans and refinancings. One out of ten home owners is under water -- owing more on their homes than their homes are worth. Unemployment continues to rise, and number of hours at work continues to drop. Those who can are saving. Those who can't are hunkering down, as they must.
My prediction, then? Not a V, not a U. But an X. This economy can't get back on track because the track we were on for years -- featuring flat or declining median wages, mounting consumer debt, and widening insecurity, not to mention increasing carbon in the atmosphere -- simply cannot be sustained.
The X marks a brand new track -- a new economy. What will it look like? Nobody knows. All we know is the current economy can't "recover" because it can't go back to where it was before the crash. So instead of asking when the recovery will start, we should be asking when and how the new economy will begin. More on this to come.
The Germans use a term, Die Wende, to describe the fundamental change to East German society after the collapse of Socialism and the adoption of Capitalism and German unification.
Wende is the German word for change and the term came to describe not just the change in political and economic order, but also the massive social changes that occurred as a consequence. As Robert Reich points out, there is no going back for us.
We cannot re-inflate the credit bubble.
We cannot re-inflate the housing bubble.
We cannot resurrect the prosperity of this country with more credit card debt or bigger, easier and looser mortgage terms.
We have a number of huge challenges ahead of us. The first challenge is to figure out how to replace some of the vanished consumer demand of the past years -- fueled by credit cards, easy borrowing terms, mortgage equity withdrawal and the like -- with demand that is fueled by wages. The second challenge is to realize that consumer demand might be permanently -- or long-term -- impaired. This means that, for a number of factors of which Globalization is primary, wages will not or cannot rise to fuel the same level of spending that occurred during the boom years. The consequences of such long-term impairment would be an economy that stagnates or even shrinks for years to come.
The third challenge is the creation of a new political order that is capable of securing the general welfare of Americans in an atmosphere of economic stagnation or decline. Are we up to the challenge? The fundamental change to our society that is occurring right now -- like the German Wende -- has the potential of producing both positive and negative results. At its most positive, we could have a period of national reflection, a great re-assessment of values that results in widespread reform of domestic policies, including the taxation and the social safety net, and policies related to the environment.
At its most negative, we could have Führers Mitt Romney or Glenn Beck elected president in 2012 or 2016, using the growing fury and desperation of the populace -- believe me, it is there -- to take this country to the next level of the Republican plan. Which way will things go? I would like to believe that we, as a society, can harness the forces of this great change and use it as a catalyst for improving the quality of life for the average American.
Right now, our ability to do so is restrained by a couple of factors: Foremost is an astonishingly irresponsible and debased media institution. If our nation's TV channels and newspapers have any other purpose besides dividing working Americans along regional, racial and class lines -- and then assisting in stripping them of income, wealth and security -- someone please let me know.
Second is the impotence and corruption that have been allowed to penetrate too far into the Democratic Party, the party that claims to represent the interest of working folks, but finds itself now unable to follow up on that claim. If a Democratic president with Democratic majorities in the House and Senate can't reform health care and other critical institutions that are under duress, who can?
'Help Wanted' counting stimulus jobs
How much are politicians straining to convince people that the government is stimulating the economy? In Oregon, where lawmakers are spending $176 million to supplement the federal stimulus, Democrats are taking credit for a remarkable feat: creating 3,236 new jobs in the program's first three months. But those jobs lasted on average only 35 hours, or about one work week. After that, those workers were effectively back unemployed, according to an Associated Press analysis of state spending and hiring data. By the state's accounting, a job is a job, whether it lasts three hours, three days, three months, or a lifetime.
"Sometimes some work for an individual is better than no work," said Oregon's Senate president, Peter Courtney. With the economy in tatters and unemployment rising, Oregon's inventive math underscores the urgency for politicians across the country to show that spending programs designed to stimulate the economy are working—even if that means stretching the facts.
At the federal level, President Barack Obama has said the federal stimulus has created 150,000 jobs, a number based on a misused formula and which is so murky it can't be verified. At least 10 other states have launched their own miniature stimulus plans and nine others have proposed one, according to the National Conference of State Legislatures. Many of them, like Oregon, have promised job creation as a result of the public spending.
Ohio, for instance, passed a nearly $1.6 billion stimulus package even before Congress was looking at a federal program. When Gov. Ted Strickland first pitched the idea last year, he estimated the program could create some 80,000 jobs. In North Carolina, a panel authorized hundreds of millions of dollars in new debt to speed up $740 million in government building projects. According to one estimate, the move could hurry the creation of 25,000 jobs.
As the bills for these programs mount, so will the pressure to show results. But, as Oregon illustrates, job estimates can very wildly. "At best you can say it's ambiguous, at worst you can say it's intentional deception," said economist Bruce Blonigen of the University of Oregon. "You have to normalize it into a benchmark that everybody can understand."
Oregon's accounting practices would not be allowed as part of the $787 billion federal stimulus. While the White House has made the unverifiable promise that 3.5 million jobs will be saved or created by the end of next year, when accountants actually begin taking head counts this fall, there are rules intended to guard against exactly what Oregon is doing.
The White House requires states to report numbers in terms of full-time, yearlong jobs. That means a part-time mechanic counts as half a job. A full-time construction worker who has a three-month paving contract counts as one-fourth of a job. Using that method, the AP's analysis of figures in Oregon shows the program so far has created the equivalent of 215 full-time jobs that will last three months. Oregon's House speaker, Dave Hunt, called that measurement unfair, though nearly every other state that has passed a stimulus package already uses or plans to use it.
"This stimulus plan was intentionally designed for short-term projects to pump needed jobs and income into families, businesses and communities struggling to get by," Hunt said in a statement. "No one ever said these would be full-time jobs for months at a time." Still, critics say counting jobs, without any consideration of their duration, isn't good enough. "You can't let them say, 'Well, we never said it was going to be full-time,'" said Steve Buckstein, a policy analyst for the Cascade Policy Institute, a free-market think tank. For the price of Oregon's $176 million, lawmakers could have provided all 3 million state residents with a one-hour job paying about $60, he said.
"By their definition, that's 3 million jobs," Buckstein said. "Is anybody gonna buy that?" Oregon's 12.4 percent unemployment rate surpasses the national average of 9.4 percent. To supplement the federal stimulus, the state sold bonds to pay for everything from replacing light bulbs to installing carpet and finishing construction of a school in the farming community of Tillamook.
The "Go Oregon" program is still new. According to its latest progress report, 8 percent of the money has been spent and hundreds of projects have yet to be completed. More paychecks are bound to be written as construction continues. If Oregon's dollars-to-jobs ratio remains steady, the program will create about 688 full-time, yearlong jobs. So far, it's generated only enough hours to employ 54 people full-time for a year.
Still, contractor Deborah Matthews of Pacificmark Construction, based in Milwaukie, Ore., is happy for any work. Her company picked up three contracts for painting, installing a water filter system and refurbishing a maintenance building. Prior to those contracts, which lasted about six weeks, she had laid off nearly all her construction workers. She brought back three full-time and hired a part-time worker. "It was a little bit," she said, "to just keep us going."
Almost $165 Billion in Commercial Loans Due in '09
Almost $165 billion in U.S. commercial real estate loans will mature this year and need to be sold or refinanced as rents and occupancies fall, according to First American CoreLogic. The U.S. South has the most maturing loans with 60,893 mortgages valued at $96 billion coming due on shops, offices, hotels, apartment buildings and land, Santa Ana, California- based First American said in a report. The West is second with 20,549 mortgages maturing for a value of $35 billion.
Commercial property owners are struggling to pay debt as the recession reduces demand and forces landlords to cut rent. U.S. apartment vacancies reached a 22-year high in the second quarter and office vacancies rose to the highest in four years, real estate data company Reis Inc. said earlier this month. Properties worth more than $108 billion were in default, foreclosure or bankruptcy as of July 8, according to data firm Real Capital Analytics Inc. "As long as prices contract, we expect loan performance will worsen and that will make financing difficult," Sam Khater, senior economist for First American, said in an interview. "Delinquencies and notices of default are rising, and we expect that to continue."
Among real estate investment trusts trying to refinance and pay down debt maturing over the next couple years are shopping- mall owner General Growth Properties Inc., which filed for bankruptcy protection this year; Maguire Properties Inc., the largest office landlord in downtown Los Angeles; and ProLogis, the world’s biggest warehouse owner. Denver-based ProLogis said last week that it’s cut its debt by $2.9 billion since November. REITs will have less trouble with maturing loans held by banks than with debt sold as commercial mortgage-backed securities, said Rich Moore, managing director at RBC Capital Markets in Solon, Ohio.
"If you go to the CMBS market, that’s where the danger comes in, because the CMBS market is a bunch of assets pooled together," Moore said. "It’s much more difficult to extend those loans -- not impossible, but much more difficult." Banks likely will offer extensions to avoid having to manage or sell properties, especially with little buyer demand for commercial real estate during the recession, Moore said. U.S. commercial property prices fell 7.6 percent in May from a month earlier, bringing the total decline to 35 percent since the market’s peak, Moody’s Investors Service said last week. Prices dropped 28.5 percent in May from the year earlier period.
The Orlando, Florida, area led the nation in June with the greatest dollar value due on retail property: $96.9 million. Memphis, Tennessee, followed with $96.2 million and Chicago with $71.3 million, according to First American. The Houston area led in office loans maturing with $463.9 million, followed by Atlanta at $456 million and Phoenix at $172.3 million. Los Angeles topped the list in apartment loans with $194.3 million due in June, followed by Dallas with $121.4 million and Chicago with $118.3 million.
Portland, Oregon and the surrounding area had $986.9 million in mortgages due on industrial properties in June, the most in the U.S. St. Louis followed with almost $765.3 million and San Francisco came in third with $473 million, First American said. Stockton, California led in hotel loans due with $14.9 million, followed by Denver with $13.3 million. The value of hotel properties in default or foreclosure almost doubled to $17.3 billion in the second quarter through June 24 from $9 billion at the end of the first quarter, data compiled by New York-based Real Capital show.
More than 5,000 commercial properties in the 10 biggest U.S. metropolitan areas got at least one default notice in March, marking the first time that’s happened in First American records going back to January 2003. The company compiles data from sources including county record tax rolls and covers 98 percent of U.S. ZIP codes.
How Firms Wooed a U.S. Pension Agency With Billions to Invest
As a New York money manager and investment banker at four Wall Street firms, Charles E. F. Millard never reached superstar status. But he was treated like one when he arrived in Washington in May 2007, to run the Pension Benefit Guaranty Corporation, the federal agency that oversees $50 billion in retirement funds.
BlackRock, one of the world’s largest money-management firms, assigned a high school classmate of Mr. Millard’s to stay in close contact with him, and it made sure to place him next to its legendary founder, Laurence D. Fink, at a charity dinner at Chelsea Piers. A top executive at Goldman Sachs frequently called and sent e-mail messages, inviting Mr. Millard out to the Mandarin Oriental and the Ritz-Carlton in Washington, even helping him hunt for his next Wall Street job.
Both firms were hoping to win contracts to manage a chunk of that $50 billion. The extensive wooing paid off when a selection committee of three, including Mr. Millard, picked BlackRock and Goldman from among 16 bidders to manage nearly $1.6 billion and to advise the agency, which Mr. Millard ran until January. But on July 20, the agency permanently revoked the contracts with BlackRock, Goldman and JPMorgan Chase, the third winner, nullifying the process. The decision was based on questions surrounding Mr. Millard’s actions during the formal bidding process. His actions have also drawn the scrutiny of Congressional investigators and the agency’s inspector general.
An examination of thousands of pages of e-mail messages and other internal documents obtained by The New York Times shows the other side of the story: the two firms aggressively courted Mr. Millard, so extensively that they may have compromised federal contracting rules or at least violated the spirit of the law, contracting experts said. The records also illustrate the clash between Washington’s by-the-letter rules on contracting and the culture of Wall Street, where deals are often struck over expensive meals.
"Both sides should have known better," said Steven L. Schooner, co-director of the Government Procurement Law Program at the George Washington University, who reviewed some of the material for The Times. "What happened here is wrong, stupid and probably illegal." BlackRock and Goldman, as well as Mr. Millard, all said that nothing improper happened either before the formal competition for the contract started last July, or while the competition, which concluded in October, was under way.
"Among the reasons that Mr. Millard was selected to head the P.B.G.C. is his understanding of the industry, his extensive background and the quality of his professional relationships," said Stanley M. Brand, a lawyer for Mr. Millard. "He correctly separated his personal relationships from his official actions." A review of the documents shows that the third winner, JPMorgan Chase, had contacts with Mr. Millard before and during the competition, but did not display the same intensity as the other two.
Goldman and BlackRock saw Mr. Millard’s selection as a major business opportunity, the records show.
"This is a very big fish on the line," one BlackRock executive wrote to another, discussing the government official. Mr. Millard had at least seven meetings with Goldman executives in the year before the bidding started, and 163 phone contacts, the documents show. BlackRock had less frequent contact — 39 phone calls in that 12-month period. But one BlackRock executive told another that Mr. Millard had assured him in April, four months before the bidding, that he wanted to hire the company to help manage some of the money, company documents show.
"It sounds like we may have a tiger by the tail here," one BlackRock executive wrote in an e-mail message. The agency takes over pension programs when private companies go bankrupt. For years there was talk it might have to be bailed out by the government, and Mr. Millard, like many others, saw shifting from low-yield conservative investments like Treasury bonds to those with higher risks and higher potential returns as a way to solve the problem.
Before coming to Washington Mr. Millard had been a money manager for Prudential Securities and Lehman Brothers, a senior economic development official in New York City while Rudolph W. Giuliani was mayor, a member of the New York City Council and a Republican nominee for Congress. Within weeks of his arrival at the agency, he told Goldman Sachs about his plans to shake up the agency’s portfolio.
"I just became head of the pension benefit guaranty corp in dc appointed by pres bush," he wrote in a June 2007 e-mail message to John S. Weinberg, a vice chairman and a member of the family that has helped run Goldman since the 1930s. Mr. Millard told Mr. Weinberg, a longtime acquaintance, that he wanted to revamp the agency’s investment strategy. "Is there a team at goldman that does this and that would be interested in pursuing this business?" "Yes, absolutely!" Mr. Weinberg wrote back.
Almost immediately, Goldman started to work informally for Mr. Millard by providing one of its top pension analysts at no charge to prepare at least six reports over the coming year, based on internal agency data, detailing possible investment strategies. Goldman also coached Mr. Millard as he sought to sway skeptics in the Bush administration. "Here is the sound bite we discussed in this morning’s meeting," wrote Mark Evans, a Goldman managing director, in a January 2008 e-mail message to Mr. Millard, seven months before the formal competition would begin.
Mr. Millard consulted with other industry experts during this period, but none so much as Goldman. George Koklanaris, Mr. Millard’s chief of staff, said in retrospect that the detailed analytical work Goldman did for Mr. Millard, and the repeated contacts, might have created an appearance that Goldman had a competitive advantage. Even so, he says he believes Mr. Millard did nothing improper.
Mr. Millard’s lawyer and a Goldman spokeswoman disputed that the firm gained any advantage from this work. The spokeswoman, Andrea Raphael, said the firm had no way of knowing that Mr. Millard was giving them more attention than other prospective bidders and that it was the agency’s job to identify potential conflicts. The most important player in BlackRock’s attempt to win the business was David Mullane, who had known Mr. Millard since the two attended the same high school. The friendship continues; they both live in Rye, N.Y., and attend the same church.
In his conversations and e-mail messages with the agency head, Mr. Mullane often mixed family and business, talking about his golf game, his vacations, their children, their church ("Great job at Mass again this week," he wrote in one), invariably shifting into a discussion of his interest in the government work. "Hope to see you at the Beefsteak Dinner tomorrow," he wrote to Mr. Millard, referring to a Friday night gathering at Church of the Resurrection in Rye. "If you’re going perhaps we can catch up business for a few minutes before I thrash you in ping pong again."
After a February meeting, months before the contract competition began, Mr. Mullane wrote his bosses: "Money in motion by February." There were more meetings through the winter and spring of 2008, as Mr. Millard prepared his plans. That April, there was a charity dinner at Chelsea Piers, along the Hudson River. One BlackRock executive wrote to another, "Try to get Larry seated next to Charles Millard," referring to Mr. Fink, the company’s chairman and chief.
After the dinner, Mr. Millard wrote to Mr. Fink, "A pleasure meeting you. No need to respond. I will follow up with you briefly in future re our investment policy and with your team re other specifics." The e-mail messages show that Mr. Mullane, a managing director at BlackRock, understood that the firm needed to move quickly, before the presidential election. "He is a lame duck political appointee as soon as the November election occurs," he wrote to one BlackRock colleague last June, as the bidding was about to start. "When the new man comes in at P.B.G.C., all bets are off for us."
As he prepared to open the competition, Mr. Millard, working with Mr. Mullane, sought to restrict the bidders to the biggest players by stipulating that the winner must have thousands of employees and a global operation, e-mail messages show. That decision cut out many boutique firms hoping to compete and gave BlackRock, Goldman and other large firms an advantage. "Neither the company nor any of its employees did anything improper or illegal," Bobbie Collins, a BlackRock spokeswoman, said.
Mr. Millard, through his lawyer, denied telling BlackRock that he wanted to select the company even before the competition started. Mr. Millard’s lawyer also said he told the agency about his friendship with Mr. Mullane. But Jeffrey Speicher, an agency spokesman, said in a written statement that Mr. Millard "did not disclose his relationship with the BlackRock executive." While the competition was getting started, Mr. Millard began his job hunt.
He started by contacting Mr. Weinberg of Goldman Sachs, sending him his résumé after meeting with him in New York last June. Mr. Millard’s e-mail messages show that, while the bidding was under way last fall, he also spoke with Rick Lazio, a former House Republican who is now a senior executive at JPMorgan Chase, to discuss career options. In both cases, spokesmen for the executives said that while Mr. Millard was at the agency, they did not take actions to help him find a new job.
The e-mail messages show that within two weeks of the selection of the winners, Mr. Millard sought help from Karen Seitz, a Goldman executive involved throughout the process, in getting interviews with prominent industry players. "I spoke with Dennis Kass after our meeting," Ms. Seitz wrote last November, referring to the chief executive of a $60 billion asset management firm, one of half a dozen interviews she arranged. "He would love to meet with you in N.Y."
To date, Mr. Millard remains unemployed. His lawyer noted that Mr. Millard had honored the one-year prohibition in federal law against negotiating a job with a firm that he helped select as a contractor. While still at the agency, his lawyer said, Mr. Millard also paid his own bill whenever he dined out with industry officials, including Ms. Seitz. But Mr. Schooner, the government contracting expert from George Washington University, said even asking for career help from a company he had just picked as a contractor raised serious questions.
"As a federal official you are not supposed to be discussing, bartering or leveraging a new job while you are involved with parties in a procurement," he said. "It is a clear black-and-white rule." Senator Herb Kohl, Democrat of Wisconsin, plans to seek legislation to require more intense oversight of the agency by an expanded board. "The whole process was flawed," said Mr. Kohl, the chairman of the Senate Special Committee on Aging, which oversees the agency.
Japan Retail Sales Fall for 10th Month on Job Losses
Japan’s retail sales fell for a 10th month in June, extending the longest losing streak since 2003 as job losses and wage cuts forced households to trim spending. Sales slid 3 percent from a year earlier, the Trade Ministry said today in Tokyo. Economists surveyed by Bloomberg News predicted a 2.5 percent drop. The retail slump indicates consumers, whose spending accounts for more than half of the economy, are unlikely to contribute to a recovery as employment prospects worsen. Economists expect a report tomorrow will show that while industrial production climbed for a fourth month in June, output will still be more than 20 percent lower than last year.
"The worst is over but that doesn’t completely wipe out households’ concerns," said Takeshi Minami, chief economist at Norinchukin Research Institute in Tokyo. "Japan’s recovery will be weak until a pickup in jobs and wages boosts consumer spending." The Topix Retail Trade Index fell 0.3 percent at the lunch break in Tokyo. The broader Topix index was little changed. The yen traded at 94.49 per dollar as of 11:20 a.m. in Tokyo from 94.38 before the report was published.
Sales at large retailers tumbled 6.7 percent from a year earlier, the report showed. Department-store sales fell 8.8 percent in June, capping the worst half-year performance on record, the Japan Department Stores Association said last week. Sales at convenience stores declined for the first time in 14 months in June, according to the Japan Franchise Association. Millennium Retailing Inc. said last week that its Seibu and Sogo department stores will launch a cheaper lineup of house-brand products in September to attract a wider range of customers. "Consumers are becoming very sensitive about prices," Nagatoshi Nii, spokesman at Millennium, said in a telephone interview this week. "We want to satisfy them."
Sales of general goods led last month’s declines, falling 6.6 percent from a year earlier, the ministry said. Car sales slipped 0.5 percent, clothing and fabrics dropped 5.7 percent and fuel declined 5.5 percent. From a month earlier, retail sales unexpectedly fell 0.3 percent, the first decline since March. Economists had expected stimulus measures to help sales climb 0.4 percent on a month- on-month basis.
The government has given at least 12,000 yen ($130) to each resident, subsidies for the purchase of fuel-efficient cars, and incentives for buying environment-friendly air conditioners, washing machines and televisions. The worsening job market is likely to prompt people to cut back even more once the lift from the stimulus measures fades, Norinchukin’s Minami said. The unemployment rate rose to a six- year high of 5.3 percent in June and job openings slumped to the scarcest on record, economists predict reports will show on July 31.
New York City Aids Homeless With One-Way Tickets Home
They are flown to Paris ($6,332), Orlando ($858.40), Johannesburg ($2,550.70), or most frequently, San Juan ($484.20). They are not executives on business trips or couples on honeymoons. Rather, all are families who have ended up homeless, and all the plane tickets are courtesy of the city of New York (one-way).
The Bloomberg administration, which has struggled with a seemingly intractable problem of homelessness for years, has paid for more than 550 families to leave the city since 2007, as a way of keeping them out of the expensive shelter system, which costs $36,000 a year per family. All it takes is for a relative elsewhere to agree to take the family in.
Many of them are longtime New Yorkers who have come upon hard times, arrive at the shelter’s doorstep and jump at the offer to move at no cost. Others are recent arrivals who are happy to return home after becoming discouraged by the city’s noise, the mazelike subway, the difficult job market or the high cost of housing. "I didn’t expect the city to be the way it is," said Hector Correa, who was in a homeless shelter last week and flew home to Puerto Rico on Tuesday. "I was expecting something different, something better."
Mr. Correa and his companion, Elisabeth Mojica, and their two young sons, both also named Hector, arrived in New York in May to live with his mother. But after they failed to find jobs and the bills began to mount, his mother threatened to kick them out. Out of cash, they checked into the city intake center for homeless families in the Bronx.
"The person I spoke to in the shelter informed me that if I have a person I could stay with in Puerto Rico, that I could get help to go," said Mr. Correa, who worked as a mechanic in Carolina, on the north shore of the island. They will stay with Ms. Mojica’s father. "I feel very happy because I’m going to be able to get back to do the things that I know how to do," he said.
At the intake center, social workers ask families about their housing options in other places. If a family says that they have relatives who might be willing to take them in, and social workers confirm their report, the family could be on a plane, bus or train within hours, although the city will sometimes wait a few days to avoid the expense of last-minute fares. The Correas flew to San Juan for less than $1,000.
The city, which spends $500,000 a year on the program, employs a local travel agency, Austin Travel, to book one-way tickets for domestic trips. Department of Homeless Services employees do all the planning for international travel. City officials said there were no limits on where a family can be sent, and families can reject the offer and stay in city shelters. So far, families have been sent to 24 states and 5 continents, most often to Puerto Rico, Florida, Georgia and the Carolinas.
"We want to divert as many families as we can that need assistance," said Vida Chavez-Downes, the director of the Resource Room, a city office with 11 social workers, two managers and an administrative assistant who help relocate families. "We have paid for visas, we’ve gone down to the consulate, we’ve provided letters, we’ve paid for passports for people to go. Anyone who comes through our door." One family with 10 children accepted an offer to go to Puerto Rico on a nonstop JetBlue flight. An adventurous but ultimately unlucky Michigan couple drove to the city in search of jobs and a new life. They got $400 in gas cards to drive back.
One set of parents agreed to move to France with their three children to be with the mother’s family. The $6,332 travel cost included five plane tickets to Paris and five train tickets to the town of Granville, in the northwest.
In the past, the city contracted with the Salvation Army for a now-defunct program called Homeward Bound, but only for single adults and couples, not families with children. Both versions followed the example of Travelers Aid, a 150-year-old nonprofit organization that provides stranded and homeless people emergency aid so they could return to their homes, and which still exists today. Other cities have experimented with similar programs, but they are largely focused on adults without children. The Hawaii Legislature recently rejected a plan to send homeless people on one-way flights to live with relatives on the mainland, because of the cost.
Once a family leaves New York, homeless services officials say they follow up with a phone call to make sure they arrive safely, then make a few more calls over the next two to three weeks. In rare cases, they will advance the family up to four months’ rent, a one-month security deposit, a furniture allowance and a broker’s fee. City officials said that none of the families that have been relocated have returned to city shelters.
The program fails to address the underlying problems that brought the families here in the first place, said Arnold S. Cohen, the president and chief executive of the Partnership for the Homeless, an advocacy group in New York. "The city is engaged in cosmetics," Mr. Cohen said. "What we’re doing is passing the problem of homelessness to another city. We’re taking people from a shelter bed here to the living room couch of another family. Essentially, this family is still homeless."
Sometimes the journey to and from New York is quick. Justin Little and Eugenia Martin, both 20, owed back rent on their apartment in Fayetteville, N.C., so they came to New York on Saturday with their 5-month-old, Inez. They planned to stay in shelters while they looked for jobs, and went straight to the intake center. Then relatives of Mr. Little, who worked at a telephone center serving insurance customers, scraped up enough money to pay their back rent, and homeless services workers confirmed that his mother would be around to help.
By Monday night, they were waiting outside Gate 73 at the Port Authority Bus Terminal to board their 7:15 p.m. Greyhound to Greensboro. "We were going to come here and then find work, you know, because there’s always work in New York," Ms. Martin said, as Inez bounced on her knee. Mr. Little said, "Once we found out we could keep our apartment, there was no point in staying here, because I can go back to my job in North Carolina."
Wars, plagues and Europe’s rise to riches
In modern economic thinking, peace and prosperity go hand in hand. However, there are good reasons why in pre-modern societies, the opposite relationship held true – war, disease, and urban death spelled high incomes. This column explains why Europe’s rise to riches in the early modern period owed much to exceptionally bellicose international politics, urban overcrowding, and frequent epidemics.
In a pre-modern economy, incomes typically stagnate in the long run. Malthusian regimes are characterised by strongly declining marginal returns to labour. One-off improvements in technology can temporarily raise output per head. The additional income is spent on more (surviving) children, and population grows. As a result, output per head declines, and eventually labour productivity returns to its previous level. That is why, in HG Wells' phrase, earlier generations "spent the great gifts of science as rapidly as it got them in a mere insensate multiplication of the common life" (Wells, 1905).
How could an economy ever escape from this trap? To learn more about this question, we should look more closely at the continent that managed to overcome stagnation first. Long before growth accelerated for good in most countries, a first divergence occurred. European incomes by 1700 exceeded those in the rest of the world by a large margin. We explain the emergence of this income gap by a number of uniquely European features – an unusually high frequency of war, particularly unhealthy cities, and numerous deadly disease outbreaks.
The puzzle: The first divergence in worldwide incomes
European incomes by 1700 were markedly higher than they had been in 1500. According to the figures compiled by Angus Maddison (2001), all European countries including Mediterranean ones saw income growth of 35% to 180%. Within Europe, the northwest did markedly better than the rest. English and Dutch real wages surged during the early modern period.
How exceptional was this performance? Pomeranz (2000) claimed that the Yangtze Delta in China was just as productive as England. Detailed work on output statistics suggests that his claims must be rejected. While real wages in terms of grain were some 15-170% higher in England, English silver wages exceeded those of China by 120% to 550%. Since grain was effectively an untraded good internationally before 1800, the proper standard of comparison is the silver wage. Estimates for India suggest a similar gap vis-à-vis Europe (Broadberry and Dasgupta, 2006).
Urbanisation figures support this conclusion. They serve as a good proxy since people in towns need to be fed by farmers in the countryside. This requires a surplus of food production, which implies high labour productivity. Since agriculture is the largest single sector in all pre-modern economies, a productive agricultural sector is equivalent to high per capita output overall. Figure 1 compares European and Chinese urbanisation rates after the year 1000 AD. Independent of the series used, European rates increase rapidly during the early modern period. Our preferred measure – the DeVries series – increases from 5% to nearly 10% between 1500 and 1800. The contrast with China is striking. There, urbanisation stagnated near the 3% mark.
Figure 1. Europe versus China urbanisation rates, 1000-1800
In a Malthusian world, a divergence in living standards should be puzzling. Income gains from one-off inventions should have been temporary. Even ongoing productivity gains cannot account for the “first divergence” – TFP growth probably did not exceed 0.2%, and cannot explain the marked rise in output per capita.
The answer: Rising death rates and lower fertility
In a Malthusian world, incomes can increase if birth rates fall or death rates increase (Clark, 2007). Figure 2 illustrates the basic logic. Incomes are pinned down by the intersection of birth and death schedules (denoted b and d). The initial equilibrium is E0. If death rates shift out, to d’, incomes rise to the new equilibrium Ed1. Similarly, lower birth rates at any given level of income will lead to higher per capita incomes. In combination, shifts of the birth and death schedules to b’ and d’ will move the economy to equilibrium point E2.
Figure 2. Birth and death rates, and equilibrium per capita income
We argue that there were three factors – which we call the “Three Horsemen of Riches” – that shifted Europe’s death schedule outwards: wars, epidemics, and urban disease. Wars were unusually frequent. Epidemics were common, with devastating consequences. Finally, cities were particularly unhealthy, with death rates there exceeding birth rates by a large margin – without in-migration, European cities before 1850 would have disappeared.
Figure 3 shows the percentage of the European population affected by wars (defined as those living in areas where wars were fought). It rises from a little over 10% to 60% by the late seventeenth century. Tilly (1992) estimated that, on average, there was a war being fought somewhere in nine out of every ten years in Europe in the early modern period.
Political fragmentation combined with religious strife after 1500 to form a potent mix that produced almost constant military conflict. While the fighting itself only killed few people, armies marching across Europe spread diseases. It has been estimated that a single army of 6,000 men, dispatched from La Rochelle to fight in the Mantuan war, killed up to a million people by spreading the plague (Landers, 2003).
Figure 3. Share of European population in war zones
European cities were much unhealthier than their Far Eastern counterparts. They probably had death rates that exceeded rural ones by 50%. In China, the rates were broadly the same in urban and rural areas. The reason has to do with differences in diets, urban densities, and sanitation:
- Europeans ate more meat, and hence kept more animals in close proximity,
- European cities were protected by walls due to frequent wars, which could not be moved without major expense, and
- Europeans dumped their chamber pots out of their windows, while human refuse was collected in Chinese cities and used as fertiliser in the countryside.
Epidemics were also frequent. The plague did not disappear from Europe after 1348. Indeed, plague outbreaks continued until the 1720s, peaking at over 700 per decade in the early 17th century. In addition to wars, epidemics were spread by trade. The last outbreak of the plague in Western Europe occurred in Marseille in 1720; a merchant vessel from the Levant spread the disease, causing 100,000 men and women to perish. Since Europe has much greater variety in terms of geography and climate than China, disease pools remained largely separate. When they became increasingly connected as a result of more trade and wars, mortality spiked.
Triggering European “exceptionalism”
In combination, the “Three Horsemen” – war, urbanisation, and trade-driven disease – probably raised death rates by one percentage point by 1700. Once death rates were higher, incomes could remain at an elevated level even in a Malthusian world. The crucial question then becomes why Europe developed such a particular set of factors driving up mortality.
We argue that the Great Plague of 1348-50 was the key. Between one third and one half of Europeans died. With land-labour ratios now higher, per capita output and wages surged. Since population losses were massive, they could not be compensated quickly. For a few generations, the old continent experienced a “golden age of labour”. British real wages only recovered their 1450s peak in the age of Queen Victoria (Phelps-Brown and Hopkins, 1981).
Temporarily higher wages changed the nature of demand. Despite having more children, people had more income than necessary for mere subsistence – population losses were too large to be absorbed entirely by the demographic response. Some of the surplus income was spent on manufactured goods. These goods were mainly produced in cities. Thus, urban centres grew in size. Higher incomes also generated more trade. Finally, the increasing number and wealth of cities expanded the size of the monetised sector of the economy. The wealth of cities could be taxed or seized by rulers. Resources available for fighting wars increased – war was effectively a superior good for early modern princes. Therefore, as per capita incomes increased, death rates rose in parallel. This generates a potential for multiple equilibria. Figure 4 illustrates the mechanism. The death rate increases over some part of the income range, which maps into urbanisation rates. Starting at E0, a sufficiently large shock will move the economy to point EH, where population is again stable.
Figure 4. Equilibria with “Horsemen effect”
In the discussion paper, we calibrate our model. The effect of higher mortality on living standards is large. We find that we can account for more than half of Europe’s precocious rise in per capita incomes until 1700.
To raise incomes in a Malthusian setting, death rates have to rise or fertility rates have to decline. We argue that a number of uniquely European characteristics – the fragmented nature of politics, unhealthy cities, and a geographically heterogeneous terrain – interacted with the shock of the 1348 plague to create exceptionally high mortality rates. These underpinned a high level of per capita income, but the riches were bought at a high cost in terms of human lives.
At the same time, there are good reasons to think that it is not entirely accidental that the countries (and regions) that were ahead in per capita income terms in 1700 were also the first to industrialise. How the world could escape the Malthusian trap at all has become a matter of intense interest to economists in recent years (Galor and Weil, 2000, Jones, 2001, Hansen and Prescott, 2002). In a related paper, we calibrate a simple growth model to show why high per capita income at an early stage may have been key for Europe’s rise after 1800 (Voigtländer and Voth, 2006).
In the “Three Horsemen of Riches”, we ask how Europe got to be rich in the first place. Our answer is best summarised by the smuggler Harry Lime, played by Orson Welles in the 1948 classic “The Third Man“:
"In Italy, for thirty years under the Borgias, they had warfare, terror, murder, bloodshed, but they produced Michelangelo, Leonardo da Vinci and the Renaissance. In Switzerland, they had brotherly love; they had 500 years of democracy and peace – and what did that produce? The cuckoo clock."
We argue that a similar logic held in economic terms before the Industrial Revolution. Europe’s exceptional rise to early riches owed much to forces of destruction – war, aided by frequent disease outbreaks and deadly cities.
Scientists sound Oceania extinction warning
Many scientists believe we are now living in the midst of another big extinction event although this time the cause of the mass die-off is easier to identify - humans. A survey of conservation research in the Oceania region says the area is losing species at least as fast as the rest of the planet - and maybe even faster. Dr Richard Kingsford is lead author on the collaborative review of thousands of research papers on conservation in the Oceania region.
The review has found that from Polynesia and the Pacific Islands to New Zealand and Australia, humans are having a dramatic impact on biodiversity and continue to present large-scale threats to plant and animal species. "The rates are increasing," Dr Kingsford said. "They are certainly a lot higher than the background rates of extinction that you would see in the evolutionary record. "Maybe 1,000 to perhaps 10,000 times that rate and that is occurring right across all organisms.
"From our studies, it is clear that we are actually affecting all of biodiversity. "Whether you look at the land biodiversity, the freshwater biodiversity, or the marine ecosystems, we are in some way having a major impact on all of those." The paper identifies six areas where humans are having the greatest impact: habitat destruction; invasive species; overfishing and hunting; pollution; disease; and climate change.
And despite the region having some of the most diverse and ecologically unique environments, they are proving to be vulnerable to human interaction. "On small islands you get much higher extinction processes because the biodiversity that is there is much more vulnerable to introduced species," Dr Kingsford said. "The Polynesian colonists that went into a lot of the Pacific islands essentially brought with them a lot of introduced mammals, pacific rats, and cats, as well as hunting quite a lot of the indigenous fauna that was there. "So that combination is having a big impact."
The research paper is directed at governments who are dealing with many of the threats across the region but the authors warn efforts need to be better coordinated and human behaviour has to change. "Land clearing, logging, building dams, diverting water out of rivers, bottom trawling in marine areas, over-exploitation of our fisheries are having huge impacts," Dr Kingsford said. "These are the major impacts. So basically we need some policies that encourage sustainable industries."