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What We Read Today 28 June 2014

Econintersect: Every day our editors collect the most interesting things they find from around the internet and present a summary "reading list" which will include very brief summaries of why each item has gotten our attention. Suggestions from readers for "reading list" items are gratefully reviewed, although sometimes space limits the number included.

  • That Big Study About How the Student Debt Nightmare Is in Your Head? It's Garbage (Choire Sicha, The Awl) This is a much more complete critique of a report that we criticized 'behind the wall' two days ago (26 July). Our previous discussion is repeated below. This critique looked at the data selection criteria of the study and found that it was constructed so that only student debt of the wealthy was included, a sample of 1,711 households and then only included approximately 1,200 that were current on their student loan payments. This appears to be an even more egregious abuse of cherry picking that our previous discussion addressed. This atrocious piece of "research" should be withdrawn. It is an embarrassment to the reputation of the Brookings Institute.

  • Is a Student Loan Crisis on the Horizon? (Beth Akers and Matthew M. Chingos, Brookings Institute) The where 14% of households in which the average age of adults is between 20 and 40 which had college debt for one or more members in 1989. In 2010 that had risen to to 36%. The size of the debt burdens also rose (see graph below). The study concludes there is no growing student debt problem:
Despite the widely held belief that circumstances for borrowers with student loan debt are growing worse over time, our findings reveal no evidence in support of this narrative. In fact, the average growth in lifetime income among households with student loan debt easily exceeds the average growth in debt, suggesting that, all else equal, households with debt today are in a better financial position than households with debt were two decades ago. Furthermore, the incidence of burdensome monthly payments does not appear to have become more widespread over the last two decades.

This report does not include data after 2010. As of Q1 2012 the average student loan debt outstanding per capita was up 40% from the number in this report to $24,301. Just 21 months later in December 2013 the average was up 70% from the 2010 number to $29,400. It has been estimated that the impact of the high level of student debt on the demand for first-time home purchases could reduce demand by 2 million units. A study by Liberty Street Economics (New York Fed) found that the percentage of 27-30 year olds with college debt also having mortgages fell from nearly 34% in 2008 to 22% in 2013. Another recent report from the New York Fed found a significant drag from student loan debt on the use of other forms of credit. Econintersect suggests that releasing a report now that has data stale by 3 1/2 years in such a rapidly changing environment is less than useful and possibly duplicitous. If the 2011-2013 data were added to the graph below the slope would be rising parabolically over those three years.

student-debt-growth-brookings-2014-jun-24

  • Starting Strong: Modiís First Month (Teresita and Howard Schaffer, South Asia Hand) Modi has been remarkably successful in creating excitement about his initiatives, and an air of inevitability about his determination to follow through. His challenge will be to maintain focus and discipline in his exuberant party, and to deal with soaring expectations. It is clear the new government will be highly centralized, more so than any other government since Indira Ghandi. Modi has met with the Secretaries from all over the India government and told them "they would be "empowered" to act decisively and do what was right." Modi is operating with a ten point list for the first hundred days, which is centered on economics with emphasis on "e-governance, efficiency, and infrastructure".
  • What the crap? Neanderthals had a taste for vegetables (Renaud Joannes-Boyeau, The Conversation) Fossilized feces (caprolites) from Neanderthals 50,000 years ago clearly established a significant amount of vegetable matter. Theses results do not repudiate the theory that Neanderthals' diets were rich in animal sourced protein, just that the diet may have been more complex than heretofore thought.

Today there are 11 articles discussed 'behind the wall'.

Included is a video presentation that analyzes the economic woes of Venezuela.

Please support all that we do at Global Economic Intersection with a subscription to our premium content 'behind the wall'.

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  • Japan's households stung by consumption tax (Walter Kurtz, Sober Look) The depth of the impact of the consumption tax increase has surprised many. Kurtz says it "puts the BOJ's optimistic economic forecast in doubt".

japan-consumer-spending-2014-may

  • Housing, the ultimate momentum trade (Edward Hadas, Reuters) Hadas opines that "house prices jump around too fast for the good of the economy". He suggests two solutions to the volatility problem: (1) Make financing of home purchases much more difficult; and (2) raise taxes on capital gains from property. He concludes:
Technically, the required changes would be relatively straightforward. Politically, though, they need to overcome a serious obstacle: too many people care too much about where house prices are heading.
  • Stress Testing after Five Years (Daniel K. Tarullo, Press Release, Federal Reserve Board of Governors) Tarullo attempts to defend the stress testing process. His conclusions:

Although strong capital regulation is critical to ensuring the safety and soundness of our largest financial institutions, it is not a panacea, as indeed no single regulatory device can ever be. Similarly, supervisory stress testing and CCAR, while central to ensuring strong capital positions for large firms, are not the only important elements of our supervisory program. Having said that, however, I hope you will take at least these three points away from my remarks today.

First, supervisory stress testing has fundamentally changed the way we think about capital adequacy. The need to specify scenarios, loss estimates, and revenue assumptions--and to apply these specifications on a dynamic basis--has immeasurably advanced the regulation of capital adequacy and, thus, the safety and soundness of our financial system. The opportunities it provides to incorporate macroprudential elements make it, in my judgment, the single most important advance in prudential regulation since the crisis.

Second, supervisory stress testing and CCAR have provided the first significant form of supervision conducted in a horizontal, coordinated fashion, affording a single view of an entire portfolio of institutions, as well as more data-rich insight into each institution individually. As such, these programs have opened the way for similar supervisory activities and continue to teach us how to organize our supervisory efforts in order most effectively to safeguard firm soundness and financial stability.

Finally, supervisory stress testing and CCAR are the exemplary cases of how supervision that aspires to keep up with the dynamism of financial firms and financial markets must itself be composed of adaptive tools. If regulators are to make the necessary adaptations, they must be open to the comments, critiques, and suggestions of those outside the regulatory community. For this reason, transparency around the aims, assumptions, and methodologies of stress testing and our review of capital plans must be preserved and extended.

  • The Daily Shot email (no url available) U.S. oil imports have been declining (increase domestic oil and gas production) but non-petroleum imports are increasing strongly. The Daily Shot says this correlates with China manufacturing activity and U.S. credit card debt.

us-imports-daily-slot-2014-jun-27

Two Senate subcommittees held critically important hearings last week so Senators could gauge first hand the level of corruption and self-dealing on Wall Street and 72 percent of the members of those committees failed to show up. Missing in action were Senators Chuck Schumer, Bob Corker, Dick Shelby, David Vitter, Tom Coburn, Tammy Baldwin, and Rand Paul, among many others.

and she ends with:

The aw-shucks questioning of Senators Johanns and Johnson in dead serious hearings last week is an embarrassment to the Senate and this nation. "Sinister" is exactly what we're talking about. The very same mega Wall Street banks that crashed the U.S. economy in 2008, were charged with colluding and rigging the Libor interest rate market, and any day now will be charged with rigging the foreign exchange currency markets in chat rooms dubbed "The Mafia" and "The Bandits' Club," are not unjustly maligned actors.

Everything in between is well worth reading.

  • Study Finds Chinese Economy a Third Smaller Than Claimed (Gordon G. Chang, World Affairs) Several factors result in the official rate of real GDP growth being inflated by about 50% above the true value. By these arguments the real GDP growth rate is less than 5% rather than the 7.4% reported. Among the factors detailed in the studies reported here are understated inflation and the practice of continually rolling over bad debt without recognizing the needed write-downs.
  • When Correlations Lie (Barry Ritholtz, Bloomberg) We are all aware (at least Econintersect hopes so) that correlation does not prove causation. But sometimes correlation does not even prove, well, correlation. For example, the following graph shows a 92% data correlation between sales of sour cream and motorcycle deaths. In this case we doubt anyone would suggest an event correlation. Yet, everyday you can find analysis of the stock market based on correlations between data sets without proof that there are actually event correlations. Of course there may be logical reasons for assuming a correlation. But don't forget the construction of the word: ass-u-me.

correl-meaningless-600x300

  • The Incompetence Dogma (Paul Krugman, The New York Times) A prince of dogmatism has another premature "Mission Accomplished" moment.
  • Stop Taxing the Sick (Rod Hunter, Project Syndicate) Taxes and tariffs on drugs and medicines raise a little money for governments and cause a great deal of financial distress for the ill.
  • Venezuela's economic crisis explained (Caspian Report) The origin of the economic difficulties for Venezuela go back 30 years to factors over which Venezuela had no control. The reactions to the external factors is discussed in the following eleven minute video:


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