Prescience of Senator Elizabeth Warren

The graph below says it all. It is a record over time of Google searches for the word "subprime" from 2004-2013. The y-axis is in % with 100 % representing largest number of searches. When the word "subprime" was hardly in anyone's lexicon, Sen. Elizabeth Warren (not a Senator then) was shouting about it from the rooftops. I have not read her famous book "The Two Income Trap" (co-authored with Amelia Warren Tyagi, her daughter) but I have listened to interviews of her from 2004 when she was talking passionately about middle-class debt and subprime debt.

In this interview byDean Lawrence Velvel at the Massachusetts School of Law, Prof. Elizabeth Warren describes the debt- related problems of working class and middle class Americans. She was way ahead of the curve. In fact, much of what she said then should have been celebrated by Democrats and Republicans alike.

She has at least one quality I want every one of the politicians to have. She understands the issues. Much was made of the fact that she is a Harvard Professor - as if somehow that precluded her from understanding the issues that affects working class Americans. If you are not able to look past the crime of being a Professor in an Ivy League school, just read about her background. From the dust-bowl of Oklahoma to marriage and children at a fairly early age to putting herself through law school in New Jersey, she has seen more hardships, I'd say, than many of us. Even if all that I say (admittedly from her wikipedia page) is not true, her understanding of middle class woes stands out. Here are a few more links to videos/audios of her: (1) At UC Berkeley, (2) At JFK Presidential Library, (3) OnPoint with Tom Ashbrook, and (4) With Harry Kreisler at UC Berkeley (this interview is awesome - a lot of her childhood/family/educational background). Many, many more are available. I wish I had good enough time-management skills to make time to read her books but that will not happen any time soon.

I hope she goes on to have a stellar career as Senator fighting for the issues she has become famous for.

The idea of home ownership as investment

I never understood this. Even when house prices were going gang-busters. But that may just be because of my personality. Ownership, in some cases and maybe most, leads to misery. I am sure this is one of the teachings of either the Gita or the Mahabaratha or the Bhagavatham (maybe none of these but some philosophical Hindu text). I do not own a car or a house. Fortunately for me, I live in NYC (does not seem so fortunate when I tally up my necessary expenditures). I cannot dream of owning a house here because I cannot afford it. It would be a nightmare to own a car here.

So, how did whoever-did-it succeed in selling this wonderful myth that home ownership is good for you? Having to deal with maintenance issues itself is dreary enough to put off any fleeting thoughts of buying one. I am sure it will a prudent choice depending on the location and prospects of having a stable job at that location for a sufficiently long time. In NYC, it seems like a no-brainer. Just rent. In Columbus, OH, it may be better to purchase (I do not have numbers to support anything here - just gut feeling) but will it ever be an investment?)

NT times has a nice interactive feature that takes a few inputs and calculates whether it will be better to rent or purchase. The required inputs are: (1) Monthly rent, (2) Home price, (3) Down payment, (4) Mortgage rate, and (5) Property tax rate. A lot depends on what you enter for these inputs. Property tax rates usually vary between 1 % and 2.5 % (surprisingly Texas is at the higher end - effect of no state income tax?) I think one should add the average cost of maintenance of the house to this number. Check this website - bankingmyway.com - not sure how reliable it but it gives a suggestion that maintenance costs are 1 % of home value on an average. That is effectively increasing the property tax rate by 1 %. In NY and NY, the property tax rate is around 1.8 %. So, effective property tax rate would be 2.8 %. 30 year fixed rate mortgage is approximately 3.6 %. Cost of house and rent are ($800000, $2000) in NY, (300000, 1000) in Texas, and so on. Also, it is assumed that house value increases at 2% and rent at 3%.

*I made a mistake regarding the effective property tax rate. Actually, there are other numbers that can be entered through the "Advanced Settings", which includes stuff like maintenance costs. That actually adds the 1 % I added to the property tax rate.

Clearly renting turns out to be better in NYC. Surprising thing is that it turns out that the numbers I used as representative of Texas also implies that renting is better. That makes me feel good about my bias towards renting - rather not having to own. But it is kind of surprising. I have not looked into the details of the NYT interactive tool. I am not sure how it takes tax benefits of mortgage interest rates into account. In any case, before you make any big decision like buying a house, play around with tools like these.

Obviously, some owners will have other reasons than just owning the home as an investment. But those of you thinking of home as an investment, listen to Robert Shiller (he of the Case-Shiller home price index) talk on this topic.

Sweeping complexity under a software blanket

Software usually simplify life for the user. Most often. Using Mathematica or MATLAB for computational purposes lets most users be unaware of the subtleties of backward or central difference schemes or the Newton-Raphson method. Most often, this is not good for the user but in some cases tolerable.

One case where a software is a clear boon is the filing of income tax. That time of the year is coming soon and we (my family) are in a financial situation where the federal income tax is quite easy to file. However, with incomes from two states, payment of state income taxes is a colossal nightmare. I have not yet found a software that can deal with this problem easily (easily to me). Come to think of it, there must be countries with bloated tax codes where no software solution is available. Think of that special hell! Anyway, I digress.

The tax preparation software has the perfidious effect of apparently simplifying a nightmare of IRS rules. That is exactly what Nina Olson, the IRS National Taxpayer Advocate, said at a discussion on the Federal Income Tax sponsored by the Urban Institute on Feb. 6, 2013. Nina Olson says that her Quixotic mission is to make tax payers understand how the tax code affects them! Counting stars in the sky might be easier. From what I gather, the National Taxpayer Advocate Office reports to the Congress every year what they identify to be the important challenges faced by taxpayers. The latest report can be found here.

Given her self-admitted Quixotic goals, she must be a far more interesting person than what I can gather from public forum events or interviews that are more skewed towards her work at the IRS. What motivated her to take on this challenge? What about her work in Richmond?A few brief articles/interviews about/with her are given below:

Profile of Nina Olson
An interview at dailyfinance.com

Learning from David Wessel, Adam Davidson, and a few others

I try to read as many articles as possible from NTY and WSJ. I subscribe to WSJ (ah! the joys of using airline points) and Sunday NYT. There are a few columns that I try to read as carefully as I can, and usually I learn a lot by the end of the column. For instance, David Wessel from WSJ (Capital),  Adam Davidson (he of the Planet Money fame) from the Sunday Magazine of NYT, Gretchen Morgensen from NYT, and Robert Shiller whenever he writes for NYT, Jason Zweig from WSJ, and a few others. Of the lot, I think I learn most from David Wessel (@davidmwessel, artcles can be found here) and Adam Davidson (@pm_adamdavidson, articles can be found here). I find Gretchen Morgensen's articles too really good but most times the details regarding banks and mortgages are a little too much for this economics simpleton. Not that I understand all things written by David Wessel and Adam Davidson - its just that with them I know what I do not understand and can actually articulate them reasonably. My goal from now on is to post every week a write up on David Wessel's Capital column - essentially asking questions that I would ideally like to ask David Wessel but do not have the access to. Maybe some benevolent soul with better understanding of his articles can enlighten me (and others like me).

David Wessel's article on Feb. 7, 2013 is titled "Borrowing: Key to Recession and Recovery". To an extent I can understand the hypothesis. The recession was brought on by excessive debt - debt that US households and financial institutions could not afford. What tripped me in the column is this passage: "And if consumers are borrowing less (because they want to or because no one will lend to them) they will spend less--good for the long-run health of the economy but not so good in the short run." Consumers borrowing less seems good for the long-run health - that seems intuitive. However, why should it be bad in the short run? Is it absolutely imperative that it be debt-fueled spending (borrowed money)? Does it mean that if all US consumers spend only what they consider to be an appropriate fraction of their income, that spending would not be enough to fuel sufficient growth? Is the borrowing really necessary?

From what I understand from the article, a collective impetus to save in these slow-growth times may not be what is required for increasing the growth rate. However, if the savings are all invested in the stock market, which is what people seem to be doing, is that such a bad thing? Why does that not lead to growth? Will growth manifest itself only if we spent on manufactured products or services?

Finally, if you see the chart accompanying David Wessel's article, you will notice that debt-to-GDP ratios for almost all classes of debt are increasing with time. Why is that the case? What are the optimum values for each class of debt?

Now, really finally: US household debt is quoted as one number. However, that must be misleading as different holders of the debt have different probabilities of paying back the debt. So, instead of just the total, there must be a slightly different weighted average that might be a better number, is it not? Is there any such number?

As it is most of the time, any Tom, Dick, or Arvind can ask the questions. It is the really good ones who can give the right answers!