Hoosier Macro

Single Family Months for Sale

2010-07-22T07:32:00.000-07:00

Before 2000, the NAR only has inventory data on Single Family Homes. Here is the data since in started in June 1982. Clearly, they must have started to collect the data due to the large amount of inventory. Note that most of the inventory was of occupied homes for sale.

New Mortgage Backed Security

2010-04-26T13:40:00.000-07:00

From Calculated Risk blog:

New Offering: Bullet Proof Mortgage Backed Securities

This is the first mortgage backed security in the last two years without government support.

There is very interesting documentation of the mortgages behind the securities:

SEC Filing

Check the properties of the mortgages beginning on page 15!

Sunday Irish Lion

2010-04-25T11:41:00.001-07:00

Reminder:

Today we have presentations at the Irish Lion starting at 8:00.

Try to get there before 8:00 so that we can order food and drink and get the presentations started earlier rather than later.

We will be upstairs in the small room looking over the street.

See you there!

Sample Presentation

2010-04-14T11:26:00.000-07:00

The Panic of 1907

Project Schedule and Topics Chosen

2010-04-07T13:55:00.000-07:00

The current schedule and projects chosen so far can be seen here.

update (Friday Afternoon): I am continually update the list as topics are chosen.

(updated 7:00 pm Sun. April 11)

Final Project Guidelines

2010-03-28T17:35:00.000-07:00

For the final project I expect you to write an 8-10 page paper and give an 18 minute in class presentation about a topic relevant to the class. The project should include some empirical results, namely some numbers and hopefully a graph or two about relevant data for your topic.

The timeline for the project is as follows:

Monday April 5: in class lottery to determine the date for each presentations, see the schedule below. We will also determine whether the first evening gathering will be Monday April 19, Monday April 26 or Tuesday April 27. For details see below.
Monday April 19: rough draft due
Monday April 19-April 28: presentations
Wednesday May 5: final draft due

Presentation schedule:

There will be four presentations per class. We are having two evening classes to cover all of the presentations. The second class will be on Wednesday at 7:30 pm, location tba (maybe Irish Lion). The first class will either be Monday April 19, Monday April 26 or Tuesday April 27. We will determine the time based upon an inclass vote on Monday April 5th.

Lottery:

We will have a lottery on Monday April 5th to determine who presents when. We will do this by everyone drawing a card form a standard 52 card deck. The priority of who chooses first will by number, Ace high, and then by suit: Diamond>Heart>Spade>Club. If you do not make class on Monday April 5, you will be forced to choose from what was left over.

Class Attendance:

Attending class is mandatory during the presentations. I will be taking attendance and this will be 5% of the 20% class attendance grade. In order to avoid a penalty for not attending you will have to clear it with me before Monday April 19th.

Tentative Schedule for Rest of the Semester

2010-03-28T14:51:00.000-07:00

Reminder: No Class this week!

Week of April 5:

Monday April 5: discussing "This Time is Different", lottery to determine presentation dates
Wednesday April 7: discussing "This Time is Different"
Friday April 9: please have topic picked out by 5pm, for more details see the post on the final project

Week of April 12:

Monday April 12: discussing "Animal Spirits"
Wednesday April 14: discussing "Animal Spirits

Week of April 19: Presentation Starts

Monday April 19: rough draft due, presentations #1 to #4.
Monday April 19, 7:30pm, tentative date for first evening session, presentations #5 to #8.
Wednesday April 21: presentations #9 to #12.

Week of April 26: Presentations

Monday April 26: presentations #13 to #16.
Either Monday April 26, 7:30pm or Tuesday April 27, 7:30pm alternative date for presentations #5 to #8.
Wednesday April 28: presentations #16 to #20.
Wednesday April 28, 7:30 pm. presentations #21 to 24.

Finals Week

Final Project due via pdf email by 5pm on Wednesday May 5.

note: the location for the evening presentation is still to be determined.

Excellent Discussion on Macro

2010-03-11T07:38:00.000-08:00

Here is an excellent post by James Hamilton, an economist at California-San Diego.

"Modeling problems in credit markets"

Book Readings

2010-03-10T18:20:00.000-08:00

Here is a preliminary breakdown of the required readings for the three books:

(note that it is unrealistic for us to cover all of the topics in all three books, so we will be focusing on sections of each book. That said the material we skip is still worth reading)

Irrational Exuberance: start covering on Monday March 23rd.

Please read:

Both Prefaces: read all
Chapter One: read all
Chapter Two: read all
Chapter Three: only read pp. 31-36 (up to Cultural...), pp. 50-52 (The Decline of ...) and p. 55 (Summing Up)
Chapter Four: read all
Chapter Five: skip (although it is an interesting read)
Chapter Six: read all
Chapter Seven: skip
Chapter Eight: only read pp. 147-149 (up to Moral Anchors..) and pp. 152-155 (Overconfidence...)
Chapter Nine: only read pp. 172-173 (The Story so Far)
Chapter Ten: read all
Chapter Eleven: skip
Chapter Twelve: only read pp. 207-210 (up to Ethics..), pp. 224-225 (Monetary Policy...) and pp. 229-230 (Conclusion..)

This Time is Different: start covering March 30

(we will basically be skipping most of the material due to Sovereign Default, and instead focus on Financial Crises)

Please Read:

Preface, Preamble, Part I (only page 1) and Chapter One: read all
Chapter 2: skip
Chapter 3: skip (note this chapter defines most of the data used, you can read this if you do not understand the data cited in later chapters)
Part II and Part III: chapters 4 through 9: skip all
Part IV: chapters 10 through 12: read all
Part V: read chapters 13 through 15, skip chapter 16
Part VI: read chapter 17.

Animal Spirits start covering on April 5.

We will try to read it all, we may skip chapters 8, 9 and 13.

Study Guide

2010-03-03T11:25:00.000-08:00

Study Guide can be found here.

update: study guide updated on Sunday March 7 at 11:45 am. It now reflects all of the material we covered.

State of Macroeconomics

2010-03-01T09:49:00.000-08:00

For a brief history of Macroeconomics, read Mankiw:

"The Macroeconomist as a Scientist and Engineer"

For criticism of the `DSGE' model see Willem Buiter:

"The unfortunate uselessness of most `state of the art' academic monetary economics"

Crisis Slides

2010-02-24T11:24:00.000-08:00

Slides on The Crisis

Frontline: Inside the Meltdown

2010-02-22T09:45:00.000-08:00

http://www.pbs.org/wgbh/pages/frontline/meltdown/

Bank Runs

2010-02-15T09:56:00.000-08:00

Model of Bank Runs, current as of feb 15 1pm.

Brunnermeier

Fed Open Market Operations Annual Reports

Gorton and Bank Runs

Gorton and Haircuts

OTC and Repo Market

2010-02-06T13:01:00.000-08:00

For Monday, in addition to the previous material on credit default swaps, also watch the following Marketplace Whiteboards:

We will also be covering the tools of Monetary Policy before the crisis hit, so please look over the chapter on banking and Monetary Policy from your intermediate macro textbook (if you still have one). I will also be posting some material about Monetary Policy.

Strategic Default

2010-02-02T13:24:00.000-08:00

Here are the links for the two stories on strategic default:

Planet Money: "To Stay or Walk Away"
Marketplace: "Strategically defaulting on a home loan"

Remember to watch the Marketplace Whiteboards segments for tomorrow where we will be covering securitization.

Financial Innovation

2010-01-31T16:30:00.000-08:00

Tomorrow we will be covering the expansion in subprime lending.

On Wednesday we will be covering financial innovation and the creation of such financial products as credit default swaps. To learn about these watch the following three videos from Marketplace's Whiteboard (another great resource connected to public radio).

"How credit cards became asset-backed bonds," about credit cards, but covers the basic idea of securitization. Also check out the wikipedia entry on Mortgage backed securities (MBS), these pictures are useful. pic #1 pic #2
"Crisis explainer: Uncorking CDOs," covers the general idea about creating new securities from bonds
"Untangling credit default swaps" our first exposure to the notorious `credit default swap'

Also, please listen to another episode from "This American Life," here they cover the credit default swap, talking to people involved in the market.

"Another Frightening Show About the Economy" for class listen to acts two and three that start at 20:00. However, the first twenty minutes are interesting since they capture the mood of the economy in October 2008 when the markets really started to collapse.

Mortgages, Government Regulation, and Subprime Lending

2010-01-25T13:47:00.000-08:00

Today we talked about mortgages. A good reference that covers the various types of mortgages is found in "Mortgage Innovation, Mortgage Choice, and Housing Decisions" by Chamber, Garriga and Schlagenhauf from the St. Louis Fed. Read the first half of the paper, the second part contains a model that is beyond the scope of this course.

For the next class meetings please read over two more articles from the St. Louis Fed:

An article about Federal Government involvement in the mortgage market: "Federal Credit and Insurance Programs: Housing" by John M. Quigley, (this was published in July 2006).
An article about growth in the subprime lending market: "The Evolution of the Subprime Mortgage Market" by Chomsisengphet and Pennington-Cross, (published January 2006).

After you have read about the growth in subprime lending, please listen to this classic piece from "This American Life" entitled "The Giant Pool of Money." That episode launched the Planet Money blog and thrice weekly podcast--a really great source for explaining economics. Today they (along with Russel Roberts from Cafe Hayek) debut an entertaining `rap' video between Keynes and F.A. Hayek about their disagreements in Macro.

Book to Order

2010-01-21T13:26:00.001-08:00

Please order the following three books. I have linked them to Amazon, but feel free to get them from any source. We will be starting on Irrational Exuberance in a couple of weeks, so do not delay in ordering. (Note that Amazon is currently offering a discount on the joint order of `Animal Spirits' and `This Time is Different'--however I believe that is only for the hardcover for `Animal Sprits,' which is now out on the cheaper paperback. )

`Irrational Exuberance' by Robert Shiller.
`Animal Spirits' by George Akerlof and Robert Shiller.
`This Time is Different' by Carmen Rheinhart and Kenneth Rogoff.

Housing Bubble? Housing Market Readings

2010-01-15T11:42:00.000-08:00

Here are the readings covering the housing market leading up to the bursting of the bubble. Please have these read for class on Wednesday January 20th. I have provided direct links to the readings on the sidebar. For details on the readings, read on.

Some readings from the popular press:

Business Week, July 19, 2004: "Is a Bubble About to Burst?"
Jim Jubak, Columnist at MSN Money, June 10, 2005; "Why there is no housing bubble"
Article about Ben Bernanke in Washington Post, Oct. 27, 2005; "Bernanke: There's no Housing Bubble to go Bust"

In reading these, ask yourself what were the main issues the popular press was pointing to to determine whether there was a bubble in the housing market.

Next some readings from economic researchers. Note that a lot of researchers discounted the likelihood that there was a housing bubble. Therefore, the papers and researchers listed here should not be singled out as having made a terrible prediction. Rather their work here represents what a lot of very smart people were thinking and saying at the time. The papers should be read as a way to understand the relevant issues and to better understand how people were thinking. Further, note how most researchers made conditional predictions for the economy in the case where there was a bubble--most of these conditional predictions came to fruition!

First, two short articles from John Krainer, an economist at the Federal Reserve bank of San Francisco. Note that both of these articles were written early in the housing bubble, before 2004.

Economic Letter, May 3, 2002: "House Price Dynamics and the Business Cycle"
Economic Letter, March 7, 2003: "House Price Bubbles"

What does Krainer argue about the likelihood of a fall in Nominal house prices?

Next two papers with differing views about whether there was a housing bubble. First a paper by Jonathan McCarthy and Richard W. Peach, two economists at the Federal Reserve Bank of New York. They found that house prices were justified by the fundamentals.

FRBNY Economic Policy Review, December 2004 "Are Home Prices the Next `Bubble'?"

The NY Fed economists were just part of a large crowd who justified high house prices with fundamentals, for instance see "Assesing High House Prices: Bubbles, Fundamentals and Misperceptions" by Himmelberg, Mayer and Sinai.

The next paper is by Karl Case and Robert Shiller. In this paper they examine whether there is a bubble. The innovation in their work is a survey about buyer's expectations--concentrate your reading on this part of the paper.

Brookings; "Is There a Bubble in the Housing Market" (this version of the paper comes from JSTOR, requiring you to be over an IU connection. An earlier unrestricted version can be found at Karl Case's webpage here)

Slides for Today: Could We See a Bubble at the end of 2004?

2010-01-13T08:54:00.000-08:00

Here are slides for today's lecture.

Savings Behavior: Update

2009-06-26T07:46:00.000-07:00

A quick update on the main topic from class last semester:

The personal savings rate has continued to increase, it's now up to 6.9%, above the average of 6.3% from 1959 to present. For more information check out the CalcRisk posting.

Some Solutions (updated)

2009-05-06T08:09:00.001-07:00

Here are some more samples questions and solutions. These are from previous years, so not all of the material is relevant (figuring out what is relevant is a good test!);

I also have an accumulation of past final exams with some comments about the solutions. The comments refer to other solutions that may or may not agree with the above solutions. Again, not all of the material is relevant.

Previous Final Exams

The solutions to the review questions previously posted are somewhere within the material here, with the exception of Keynes. I thought I had some Keynes solutions from last Fall. I'm still looking. If I don't find them and I get some time I will try to post this afternoon.

update: The Keynes Notes have been updated to include the solution to the sample question.

Review Session and Office Hours

2009-05-04T11:14:00.001-07:00

Details on Review Session:

Tuesday, May 5
8pm
Wylie 005

We actually have the room reserved from 7:15-9:15, so you are all welcome to get there early and work together on the board.

Office Hours:

T: 11:00-12:00; 3:30-4:30
W: 11:00-12:00; 3:30-4:30

Study hard.

Review Questions for the Final

2009-05-03T13:30:00.000-07:00

I have posted some review questions for the final here. Remember that the final is cumulative, including the material covered by Professor Huynh. The review session will be on Tuesday evening at 8pm. I will post the room location sometime later. Study well.

Homework #2

2009-04-27T08:06:00.001-07:00

Here is the second homework, due at the start of class on Thursday. It uses the Keynes assumptions from the previous post.

Simple Keynes Model Assumptions

2009-04-27T07:49:00.000-07:00

Here are some notes for a simple model of Keynes. Note that is NOT the standard Keynesian model that is in all the textbooks (chapter 12 in Williamson's Third Edition). This model allows aggregate demand to affect the economy. When aggregate demand affects the economy then financial frictions can have real effects on the economy. This is at the heart of Keynes' Theory in The General Theory, not sticky nominal wages. The sticky nominal wages are just an assumption so that the financial frictions and investor psychology can affect the economy. For this last point see the new and very intersting book by Akerlof and Shiller: Animal Spirits. We will be talking about this in class on Tuesday.

Exam One Solutions

2009-04-21T06:16:00.000-07:00

Suggested solutions and a general grading algorithm for exam one can be found here.

Homework #1

2009-04-20T12:30:00.000-07:00

The first homework, due Thursday is here.

Since we will be going over the homework in class, you have to turn the homework in at the start of class.

Homework and Extra Credit

2009-04-20T12:13:00.000-07:00

In order to improve your performance for the rest of the class I am providing you an incentive to work hard the last two weeks of class. There will be two homeworks, one each due on the last two Thursdays of the semester. Each homework will be graded for completion, based upon effort not on whether the answer is correct. For each homework that you successfully complete your exam grade for my portion of the class will be augmented. Your exam grade consists of the weighted average of the two exams. The first exam is worth 40% and the last exam is worth 60%. Therefore your exam grade for my portion of the class is given by

exam grade=0.4*exam 1 % correct+0.6*exam 2 % correct

The exam grade will lie between 0 and 1.

Your exam grade will be augmented by the following algorithm:

exam grade>0.9: each homework raises exam grade by 0.005
0.9> exam grade >0.8: each homework raises exam grade by 0.01
0.8> exam grade >0.7: each homework raises exam grade by 0.015
0.7> exam grade >0.6: each homework raises exam grade by 0.02
0.6> exam grade: each homework raises exam grade by 0.025

If you do two homeworks and the first homework raises your exam to a higher class (such as from 0.79 to 0.810) then the second homework raises your exam grade based upon the new category.

Note that this algorithm provides you some insurance in the case of poor exam performance.

Sample Questions

2009-04-05T12:10:00.000-07:00

Here are some sample questions to work on for class on Tuesday and for the exam/quiz on Thursday. The exam will only be two questions and will not take the whole class time, thus I am referring to it as an exam/quiz. Another excellent source are the sample questions in the back of Chapter 8.

Update:

Here are some solutions for the questions.

IU Economics Forum

2009-04-03T13:54:00.001-07:00

We had a very educational and quite often entertaining forum on Friday afternoon concerning the current economic crisis. Thanks goes out to Eric Leeper for organizing the forum.

All of the presenters at the forum have graciously allowed me to post their slides:

Eating Out and the Fall in Consumption

2009-03-31T15:53:00.000-07:00

Calculated Risk is a great blog to check each day to see the latest economics news. Today there was an update about restaurant spending. Check out the figure from the past seven years. Notice how sharp the index in restaurant spending fell around September 2008. Clear evidence of a fall in consumption right when the credit markets started freezing up. In class we argued that this could be explained by consumers thinking that their expected future income would fall.

Later in the class we will also argue that the fall in consumption could be due to an income effect from the fall in the stock market.

Foolish Homework Suggestions for Tuesday

2009-03-29T11:57:00.000-07:00

Last class we showed that, using the two-period model of savings with perfect capital markets (also known as efficient markets) that a fall in current income (Y) leads to a fall in savings. However, we know that currently we are seeing a fall in income and a rise in savings. Instead, examine the effects of a fall in future income (Y') on savings.

Also, examine the effect of a permanent fall in income--both Y and Y' falling--on savings. How do your results compare to only Y or Y' falling? For now, keep to analyzing the case of perfect capital markets.

Household Debt leading up the the Credit Crisis

2009-03-29T09:46:00.001-07:00

In the first class, we saw how the household savings rate fell from over 10% around 1980 to roughly 0% in 2007, and has risen to roughly 5% in the past seven months. Here we examine what has happened to household debt. The Federal Reserve maintains a balance sheet for the household sector. The balance sheet consists of all of the debts and assets of all of the households of the United States. These contain both financial assets, such as stocks and deposit at banks, as well as real assets such as houses and cars. The data reported here are part of the Flow of Funds put out by the Federal Reserve. For more information check out the Flow of Funds page at the Fed.
Figure One plots (all of the figures are also availble in a pdf) the amount of debt held by households relative to income. People generally feel that the more debt a person has, the worse is their financial position. We can see from figure one that from 1980 to 2006, household debt relative to income rose tremendously. Of particular note is the acceleration in the amount of debt relative to income starting around 2000.
Having debt is not necessarily a bad thing. Debt is important to be able to buy assets that we cannot buy with our current income, but that we can buy using our lifetime income. This is the idea of student loans and using a mortgage to buy a house. Along these lines, a lot of people were arguing that the rise in debt after 1980 would not be a problem because it was accompanied by rising wealth. Figure Two plots the net worth of households relative to income. Net Worth is the value of all assets less the value of debt owed. We can see that after 1980 household net worth was indeed rising, suggesting that the rising debt levels were justified by increases in wealth. A striking feature in figure two are the twin bubbles of the tech stock (around 2000) and the housing market (2006). These large swings in net worth happened at the same time as the explosion of debt around 2000.

FigureThree plots the ratio of debt to assets. This helps us see if the rising debt was backed up by purchases of assets. This picture suggests that not all of the rise in debt was offset by rising assets. Figure four compares debt/income to debt/assets. For both series I have divided them by their level in 1952. Thus, we get a sense for how much each series has moved the last 57 years. From figure 4 we see that debt/income and debt/assets generally move together. However, beginning around 1995, debt/income rose while debt/assets fell. During this time period many experts were arguing that the rising debt/income was not a problem since debt/assets was actually falling. However, we now know that the low level for debt/assets was due to assets being overvalued due to the tech bubble. Once the tech bubble burst in 2001, debt/assets caught up to the debt/income level. Around 2003 debt/income againg took off while debt/assets went flat. Once again many experts, argued that this was not a problem because the rising debt was being offset by a rise in assets values--this time housing assets. We now now what happened: the housing bubble burst in 2007 and debt/assets rose, trying to catch up with debt/income.

Figure 5 plots the value of houses and the stock market relative to income. For the value of houses, we use home equity. Home equity is the amount of money a household would get if the household sold their house. It represent the value of the house less the value of the mortgage on the house. We can see from figure five that home equity has roughly the same value to households as the value of their stocks. However, we should be careful when we say this, since most the stock held by households is held by the top 5% of the wealthiest households. The bottom 95% hold most of their wealth in the from of bank deposits (not in figure 5) and home equity. Therefore, the large swing in the value of home equity from 1998 to now was most likely felt more by the average American household. Also, note that if a household ignored the housing bubble, that, relative to income, home equity is the same as it was in 1999. A lot of the problems we are facing are that a lot of people thought the increase in home equity was permanent.
Focusing more squarely on the housing market, figure 6 plots the value of mortgage debt relative to income. Here we see a huge surge starting around 2000. Figure 7 plots the value of mortgage debt relative to the value of housing. The higher is the amount of mortgage debt relative to the value of the house, we say that households are more levered in housing. We refer to the amount of debt used to purchase an asset as the amount someone is levered in that asset. For instance, when a house is purchased, a homeowner typically only pays for a part of the house, called the down payment, and borrows the rest. Essentially, the amount borrowed acts as a lever, raising the amount of housing that can be purchased with the cash used for the down payment. The lower the down payment, the higher is the leverage. We can see that from 1995 to 2005 that housing leverage was not increasing even though the amount of mortgage debt was exploding. Of course we all know the result.

Last, figure 8 compares mortage debt/income to housing leverage. Once again, I divide each series by their value in 1952. Here we see mortgage debt rising. However, when mortgage debt rises it takes a while for leverage to also increase. However, in every instance we see that leverage does eventually rise. From 2001 to roughly 2005, we saw mortgage debt take off, while leverage remained constant. Many people were arguing that the rise in debt was not a problem since it was backed up by the rise in home values. These people were ignoring the data before 2000. We can see from figure 8 that a rise in debt eventually leads to an increase in housing leverage--it is just delayed. If we think of the average household as only owning housing, then we can see that the average American household is now more levered than ever. Therefore, as we saw in figure 5 home equity may be back where it was in 1999, but the amount of debt owed for the that home equity, given by the amount of leverage, is at an all time high. The high rates of foreclosure are quite understandable: the real value of houses are not worth more than in 1999 (relative to income) but households have to pay more for them.

The Trainwreck

2009-03-26T05:16:00.000-07:00

The picture above is an image an impending trainwreck. The picture plots the savings rate in the United States (produced by the Bureau of Economic Analysis). We can see that between 1959 and 1980 the savings rate was slowly rising from 7% to around 10%. However, beginning in 1980, the savings rate started on a new trajectory, falling from 10% to essentially zero. The last observation in the above picture is for the first quarter of 2008. In hindsight, this clearly looks like a bad situation. Nothing good can probably come out of negative savings. However, arguments were made, such as "Americans invest well," "Americans are actually getting wealthier from the return to their assets." As we will see next class, Americans were getting wealthier from the high return to their savings. However, a large part of the return to their assets was an illusion, the result of a bubble in asset prices. The trajectory of the fall in the savings rate was unsustainable. Negative savings for a country as a whole is most likely not good.

What happened? The next picture adds the last three quarters for 2008 and one observation for January 2009 (the latest release of the data from the BEA can be seen here).

We can clearly see that the trajectory for the savings rate was indeeed an impending trainwreck. We clearly see the collision. In the last seven months, the savings rate has gone from essentially zero to 5%. Whatever was the cause behind the falling savings rate, starting in 1980, is most likely the ultimate cause behind the current crisis.