Topic: Finance, Banking & Monetary Policy

The ‘Lehman Trigger’ Myth Continues…

By
Mark A. Calabria

In yesterday’s defense of President Obama’s economic record, Alan Blinder starts, ”[A]fter the frightening financial panic and deep recession triggered by the collapse of Lehman Brothers in September 2008,” thereby repeating the myth that Lehman’s failure caused the recession.

Below is a chart of real (inflation-adjusted) personal consumption and civilian employment from January 2007 to December 2010.  Let’s recall that Lehman’s failure was in September 2008.  What should be immediately clear, even to such an accomplished economist as Blinder, is that both consumption and employment began their decline almost a full year before Lehman’s collapse.  So unless Lehman’s collapse caused some backward ripple in time, it’s hard to see how it triggered the recession.  In fact, about 75% of the decline in personal consumption preceded the Lehman collapse.  Also of interest is that the rate of decline in consumption actually slowed after the Lehman collapse.

Why is this important, other than my obsession with facts?  As long as we allow the narrative to run that Lehman’s collapse caused the crisis, then “solutions” like Dodd-Frank will continue to dominate the debate, rather than recognizing a housing bubble drove the crisis and that we should instead be focused on preventing the creation of housing bubbles.  And don’t get me wrong; Lehman got what they had coming. If anything, their well-deserved fate should have been shared by others.

Topics: 
Finance, Banking & Monetary Policy

Over Half of Foreclosures Now ‘Repeats’

By
Mark A. Calabria

A fundamental question with both the Bush and Obama approaches to the mortgage foreclosure crisis is to what extent are policies simply putting off the inevitable?  Are “permanent” solutions being offered, or are we just recycling the same borrowers through one foreclosure after another?  Recent data from Lender Processing Services (LPS) sheds some light on the question.

The most recent LPS data, covering to the end of August 2012, shows that for the first time, over half of foreclosures are for borrowers that were previously in foreclosure.  Now there are several ways to read the chart below.  On one hand, first-time-ever foreclosures are at their lowest levels since 2008, and in fact have been on a steady decline since the middle of 2009.  That is good news.  The pipeline of new foreclosures is decreasing, a reflection of both improving labor and housing markets (or at least not getting a lot worse).  The bad news is that foreclosures are increasing because of the same borrowers who have been delinquent for years.  I was recently told that the average time to foreclosure for Chicago, for instance, is over 1,000 days.  The LPS data also highlight that the largest increase in repeat foreclosures has been in states that use a judicial foreclosure process, providing further evidence that such a process generally does not change the final outcome, but simply delays it.

If there is one policy lesson we should take away from the foreclosure crisis, it is that delaying the inevitable makes the problem worse.  Had these borrowers finished the foreclosure process the first time around, housing prices would have adjusted quicker and the housing market would have been on the road to recovery quicker.  These families also would not have been stuck in “limbo” and would have been able to move on with their lives.  While some have argued that delaying these adjustments was appropriate, it is far from clear to me that longer periods operating under “false” prices will lead to better market outcomes.

Topics: 
Finance, Banking & Monetary Policy

Romney’s Misplaced Obsession with Chinese Currency Manipulation

By
Daniel J. Ikenson

More than anything else, Mitt Romney’s zealous determination to pin a scarlett “CM” on the Chinese government’s lapel has defined his trade platform.  And that draws an unfavorable contrast for Romney, since President Obama’s repeated decisions not to label China a currency manipulator make him look the more cautious, circumspect, risk-averse business executive that Romney portrays himself to be.

In any event, the currency issue is very much last decade’s battle.  By continuously harping about it, Governor Romney evokes tales of old Japanese soldiers, left behind on South Pacific islands, still fighting WWII well into the 1960s.

As I noted in this piece on Forbes yesterday, if Romney is elected he will  have to renege on this silly commitment (substantively, at least), and change focus:

If Mitt Romney believes in “free trade,” his focus with respect to China should be on correcting that government’s failures to honor all of its commitments to liberalize and on the misguided efforts by U.S. policymakers to thwart legitimate commerce between Chinese exporters and American consumers.

Topics: 
Finance, Banking & Monetary Policy, International Economics and Development, Trade and Immigration

The Duration of Iran’s Hyperinflation?

By
Steve H. Hanke

Since I first estimated Iran’s hyperinflation at 69.6% per month, many people have asked, how long will it last? To answer that question, I have posted my “Hanke Chart of the Day” and will let the data speak for themselves.

 

On second thought, perhaps I should offer some “tweet-able”  hyperinflation-duration takeaways:

  • The average duration of hyperinflation is roughly 12 months.
  • The longest duration of hyperinflation is 58 months (4 years and 10 months), which occurred in Nicaragua from June 1986 until March 1991.
  • The shortest duration of hyperinflation is one month (see numbers 46-57).

When it comes to Iran and the probable duration of its hyperinflation, the specter of  “a horrible end” or “a horror without end” comes to mind.

For the latest news on Iran’s hyperinflation, follow my Twitter: @Steve_Hanke

Topics: 
Finance, Banking & Monetary Policy, International Economics and Development

Iran’s Lying Exchange Rates

By
Steve H. Hanke

On September 24th, the Iranian government announced that it would adopt a three-tiered, multiple-exchange-rate regime. This wrong-headed attempt to exert more control over the price of domestic goods and combat inflation has failed (and will continue to fail). Since the rial began its free-fall in early September, international observers and the Iranian people have struggled to understand the implications of this exchange-rate regime.

Iran has a history of implementing a variety of multiple-exchange-rate regimes – with mixed results, to say the least. Indeed, at its peak of currency confusion, the Iranian government set seven different official exchange rates. As the accompanying chart illustrates, the story of Iran’s hyperinflation has been one of divergence between the official and black-market (read: free-market) exchange rates.

//www [dot] cato-at-liberty [dot] org/wp-content/uploads/Iran-IRRUSD- [at] Liberty-10-09-2012 [dot] png" target="_blank">//www [dot] cato-at-liberty [dot] org/wp-content/uploads/Iran-IRRUSD- [at] Liberty-10-09-2012 [dot] png" alt="" width="570" height="416" />

This divergence is a product of the declining value of the rial – freely traded on the black market. In consequence, prices are rising dramatically in Iran – by almost 70% per month, according to my estimates. That said, in order to make sense of this phenomenon, it is necessary to understand the system whose failure we are witnessing.

Currently, Iran has three exchange rates:

  • The Official Exchange Rate: 12,260 IRR/USD
  • The “Non-Reference” Rate: 25,480 IRR/USD
    • Purportedly 2% lower than the black-market rate
    • Available to importers of important, but non-essential goods, such as livestock, metals and minerals
  • The Black-Market Exchange Rate: Approximately 35,000  IRR/USD
    •  The last freely-reported black-market rate was 35,000 IRR/USD (2 October 2012). The most recent anecdotal reports confirm this number as the current exchange rate.
    • The Iranian government (read: police) has recently cracked down on currency traders and has also censored websites that report black-market IRR/USD exchange rates.

This complex currency system results in lying prices that distort economic activity. By offering different exchange rates for different types of imports, the Iranian government is, in effect, subsidizing certain goods – distorting their true price. In consequence, any fluctuations in the black-market exchange rate – and, accordingly, in the price level – will be amplified to different degrees for different goods. The end result for Iranian consumers is confusion and mistrust, which, as we have seen, are feeding the panic that has been driving the collapse of the rial and Iran’s hyperinflation.

For the latest news on Iran’s hyperinflation, follow my Twitter: @Steve_Hanke

Topics: 
Finance, Banking & Monetary Policy, International Economics and Development

Major New Study about the Top 1 Percent… And Much More

By
Cato Editors

This new Cato Institute Working Paper by Senior Fellow Alan Reynolds confirms recent studies which find little or no sustained increase in the inequality of disposable income for the U.S. population as a whole over the past 20 years, even though estimates of the top 1 percent’s share of pretax, pretransfer (market) income spiked upward in 1986-88, 1997-2000 and 2003-2007.

It has become commonplace  to use top 1 percent shares of market income as a shorthand measure of inequality, and as an argument for greater taxes on higher incomes and/or larger transfer payments to the bottom 90 percent.  This paper finds the data inappropriate for such purposes for several reasons:

  • Excluding rapidly increased transfer payments and employer-financed benefits from total income results in exaggerating the rise in the top 1 percent’s share between 1979 and 2010 by 23 percent because a growing share of other income is missing.
  • Using estimates of the top 1 percent’s share of pretax, pretransfer income (Piketty and Saez 2003) as an argument for higher tax rates on top incomes or larger transfer payments to others is illogical and contradictory because the data exclude taxes and transfers.
  • Using highly cyclical top 1 percent shares as a measure of overall inequality leads, paradoxically, to describing most recessions as a welcome reduction in inequality, because poverty and unemployment rates typically rise when the top 1 percent’s share falls, and fall when the top 1 percent’s share rises.
  • Top 1 percent incomes are shown to be extremely sensitive (“elastic”) to changes in the highest tax rates on ordinary income, capital gains and dividends.  Although estimates of the elasticity of ordinary income for the top 1 percent range from 0.62 (Saez 2004) to 1.99 (Moffitt and Wilhelm), those estimates fail to account for demonstrably dramatic responses to changes in the highest tax rate on capital gains and dividends.

Reynolds estimates that more than half of the increase in the top 1 percent’s share of pretax, pretransfer income since 1983, and all of the increase since 2000,  is attributable to behavioral reactions to lower marginal tax rates on salaries, unincorporated businesses, dividends and capital gains. After reviewing numerous data sources, he finds no compelling evidence of any large and sustained increase in the inequality of disposable income over the past two decades.

Topics: 
Cato Publications, Finance, Banking & Monetary Policy, General, Government and Politics, International Economics and Development, Political Philosophy, Social Security, Tax and Budget Policy

The Iran Hyperinflation Fact Sheet

By
Steve H. Hanke

For months, I have been following the collapse of the Iranian rial, tracking black-market (free-market) exchange-rate data from foreign-exchange bazaars in Tehran. Using the most recent data, I now estimate that Iran is experiencing hyperinflation – a price-level increase of over 50%, per month.

In recent days, Iranians have taken to the streets in protest over the collapse of the rial. In response, the Iranian government has cracked down on the protestors and shuttered Tehran’s foreign-exchange black market.  Moreover, it has effectively cut off the supply of reliable economic information. Indeed, the signal-to-noise ratio in the Iranian economic sphere, which is normally quite low, is now even lower than usual.

To address this, I have prepared a fact sheet of the top 10 things you should know about Iran’s hyperinflation.

  1. Iran is experiencing an implied monthly inflation rate of 69.6%.
    • For comparison, in the month before the sanctions took effect (June 2010), the monthly inflation rate was 0.698%.
  2. Iran is experiencing an implied annual inflation rate of 196%.
    • For comparison, in June 2010, the annual (year-over-year) inflation rate was 8.25%.
  3. The current monthly inflation rate implies a price-doubling time of 39.8 days.
  4. The current inflation rate implies an equivalent daily inflation rate of 1.78%.
    • Compare that to the United States, whose annual inflation rate is 1.69%.
  5. Since hyperinflation broke out, Iran’s estimated Hanke Misery Index score has skyrocketed from 106 (September 10th) to 231 (October 2nd).
    • See the accompanying chart.

    //www [dot] cato-at-liberty [dot] org/wp-content/uploads/Iran-Misery- [at] liberty-10-05-2012 [dot] png" target="_blank">//www [dot] cato-at-liberty [dot] org/wp-content/uploads/Iran-Misery- [at] liberty-10-05-2012 [dot] png" alt="" width="512" height="348" />

  6. Iran is the first country in the Middle East to experience hyperinflation.
  7. Iran’s Hyperinflation is the third hyperinflation episode of the 21st century.
  8. Since the sanctions first took effect, in July 2010, the rial has depreciated by 71.4%.
  9. At the current monthly inflation rate, Iran’s hyperinflation ranks as the 48th worst case of hyperinflation in history.
  10. The Iranian Rial is now the least-valued currency in the world (in nominal terms).
    • In September 2012, the rial passed the Vietnamese dong, which currently has an exchange rate of 20,845 VND/USD.
Topics: 
Finance, Banking & Monetary Policy, International Economics and Development

Pages