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What We Read Today 03 February 2015

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 (and sometimes longer ones) 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.


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Reserve Bank of Australia cuts cash rate 25 bps to record low 2.25% ( staff)  See also next article.

For the past year and a half, the cash rate has been stable, as the Board has taken time to assess the effects of the substantial easing in policy that had already been put in place and monitored developments in Australia and abroad. At today's meeting, taking into account the flow of recent information and updated forecasts, the Board judged that, on balance, a further reduction in the cash rate was appropriate. This action is expected to add some further support to demand, so as to foster sustainable growth and inflation outcomes consistent with the target.

Aussie dollar gets destroyed after RBA cuts rates (Myles Udland, Business Insider)  The Aussie dollar dropped 1.7%, a very large move, in just a few minutes following the rate cut (previous article).  This article points out that the Aussie dollar is still probably significantly overvalued because of declining commodity prices.  AUD has continued to drop to $0,7634 as this is written.  For the latest exchange rate go to


Articles about events, conflicts and disease around the world













Oh, those largely repaired Irish banks... (Constantin Gurdgiev, true economics) Constantin Gurdgiev contributes to GEI

Both, in level terms and in growth terms, Irish banks remain zombified. 'Repaired' into continuously shrinking credit supply and stagnant household deposits base, the banks have been flatlining ever since the beginning of the crisis. In the last 6 consecutive quarters, household deposits posted negative rates of growth - a run of 'improvement' that is twice longer than the 'recovery period' of Q3 2012 - Q1 2013 when the deposits rose (albeit barely perceptibly).  Meanwhile, credit continues to shrink in the system with not a single quarter of positive growth (y/y) since Q4 2009. In four quarters through Q3 2014, credit for house purchases shrunk at just around 3.05% on average - the steepest rate of decline since the start of the crisis.

Click for large image.

Oil Prices' Impact On Canada's Oil Transportation Industry (Kario-Paul A. Brown, Investopedia)

Industry data show that short-term declines in oil prices do not have a material negative impact on the profits of the Canadian oil transportation industry. Oil is transported primarily by rail and pipeline, and a decline in oil prices tends to have a mixed, and often muted, effect on these two enterprises. In the case of railway companies, for instance, a decline in oil prices actually has a positive effect on their profits, even if such a decline is followed by a decline in the volume of oil transported. The profits of the pipeline industry, on the other hand, are reduced by a fall in oil prices, but the size of the decline in profits is marginal in the short-term. Similarly, a reduction in the volume of oil that is transported by pipeline companies also has just a minimal impact on their profits in the short term. However, sustained low oil prices and low volume of oil transported can significantly reduce the revenues that pipeline companies receive through oil transportation over time.

Investment Riches Built on Subprime Auto Loans to Poor (Michael Corkery and Jessica Silver-Greenberg, The New York Times)  Predatory lending to desperate car buyers at interest rates over 20%.  How are lenders doing it?  Have you heard of securitized debt?  That's right, the old sucker play for investors held over from the housing bubble that keyed the Great Financial Crisis of 2008.  In this case the amounts of money involved are not systemically dangerous, but there are still big investor losses to come and pain and suffering for the borrowers.


Scapegoating poor people for the housing crash is dumb. This study shows just how dumb. (Dylan Matthews, Vox)  What happened as the housing bubble reached a peak?  Foreclosures in the first three years after origination more than doubled for the top two income quintiles and was cut almost by half for the fourth quintile and by almost 2/3 for the poorest quintile.  These numbers are expressed as a percentage of all foreclosures within the first three years.  Having an explosion of delinquencies for the top 40% compared to the lowest 40% is inconsistent with having the lower income group drive the housing bubble and being responsible for the collapse.

The full paper:  Changes in Buyer Composition and the Expansion of Credit During the Boom (Manuel Adelino, Antoinette Schoar and Felipe Severino, Social Science Research Network).  The abstract:

Earlier research has suggested that distortions in the supply of mortgage credit during the run up to the 2008 financial crisis, in particular a decoupling of credit flow from income growth, may have been responsible for the rise in house prices and the subsequent collapse of the housing market. Focusing on individual mortgage transactions rather than whole zip codes, we show that the apparent decoupling of credit from income shown in previous research was driven by changes in buyer composition. In fact, the relationship between individual mortgage size and income growth during the housing boom was very similar to previous periods, independent of how we measure income. Zip codes that had large house price increases experienced significant changes in the composition of buyers, i.e. home buyers (mortgage applicants) had increasingly higher income than the average residents in an area. Poorer areas saw an expansion of credit mostly through the extensive margin, i.e. a larger numbers of mortgages originated, but at DTI levels in line with borrower income. When we break out the volume of mortgage origination from 2002 to 2006 by income deciles across the US population, we see that the distribution of mortgage debt is concentrated in middle and high income borrowers, not the poor. Middle and high income borrowers also contributed most significantly to the increase in defaults after 2007. These results are consistent with an interpretation where house price expectations led lenders and buyers to buy into an unfolding bubble based on inflated asset values, rather than a change in the lending technology.


One top Wall Street economist thinks the markets have never been this easy (Myles Udland, Business Insider)  One graph from Torsten Slok of Deutsche Bank needs no further explanation.


Gauging Housing Demand for the Spring of 2015 – Caution in the Wind (Logan Mohtashami)  A senior mortgage lending officer offers an optimistic view for housing markets in 2015.  And then he includes the graph below, which is missing the real median household income for 2014.  His hope for the new year is based on ... well, hope.  There is nothing in the data shown to indicate any improving trend has started.  But new data from Sentier Research does change the picture presented in the article:  real median household income increased 3.3% from December 2013 to December 2014, to $53,653 using the normalization factor of the data here.  That would extend the green line to the upper left corner of the death valley box and may replace "pure hope" with "hope plus supporting data".  The second graphic below has an "X" added representing the new Sentier data.


Econintersect:  The graph below has the 2014 income data from Sentier Research added (by us).  See Median Household Income Improves Significantly in December 2014 (GEI Economic Releases, 26 January 2015).


Other Economics and Business Items of Note and Miscellanea

Despite history, GOP still wed to trickle-down economics (The Atlanta Constitution)

Paul Ryan:  Obama Exploiting 'Envy Economics' with Tax Plan (Breitbart News)

Economics on electric cars face reset (The Detroit News)  Do electric cars make sense with $2 gasoline?

Now’s the Time for Infrastructure Spending, White House Says (The Wall Street Journal)

Grover Norquist Turns on His Anti-Tax Bae Sam Brownback (Mother Jones)  Kansas governor proposed increasing alcohol and tobacco taxes.

Study Shows 74% Growth In Cannabis Industry In 2014 (Benzinga)

15 Marijuana Stocks To Watch In 2015 (Benzinga)

Battle of the Economics Bloggers (Bloomberg View)

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