Friday, December 12, 2014

Pledgeable Vanguard accounts

When I see houses, I see collateral.

It's good for regular people to have access to some good collateral. Without good collateral, it's very costly to respond to income shocks, emergency spending needs, or an awesome business idea. You may have to resort to credit card borrowing or even payday lenders. So this is one point in favor of owning a house: it gives you a way to accumulate collateral--so emergency borrowing isn't insanely expensive--while also providing you with housing services and a way to accumulate wealth with a little leverage.

But a house is a really weird asset! Is it really optimal to have housing be the only source of collateral for regular people? I have wondered this for a long time. If housing is the only source of good collateral, I'm going to devote a lot of saving to the accumulation of housing when it might be better if I could devote that saving to more diversified assets with higher returns. But I don't have an easy way to use my Vanguard account as collateral. I don't mean for margin trading, which is way beyond my risk tolerance. I mean I want to be able to use my portfolio to take on some uncallable debt. Unlike a house, my Vanguard account is intentionally structured in a way that minimizes exposure to idiosyncratic risk. It seems like it would make pretty good collateral, particularly over a multi-year period. We could even stick to real estate and focus only on the REIT fund if you think stocks are too risky or whatever. But, to my knowledge, there's no way for me to pledge my Vanguard portfolio. The closest thing I can think of is the rule about taking out loans against a 401k, which is very costly.

So, for regular people, financial assets are not pledgeable. Why?

Joshua Brown reports on an "exploding" trend among wealth management providers:

Wealth management clients of the wirehouse firms keep millions of dollars in their taxable brokerage accounts, predominantly invested in stocks, bonds, and mutual funds. Advisors at the firm are encouraged to convince their clients to borrow against these holdings. Clients are offered an ultra-low interest rate, typically between 2% and 5%. And they can borrow between 50% and 95% of their portfolio’s equity (cash) value, with the bond-equity mix of the account being the primary determinant of the loan’s size.

The only rule is that clients cannot use the loaned funds to purchase additional securities, like a margin loan. Instead, these borrowings are meant to allow clients to smooth out cash flow at a small business, fund the purchase of artwork and real estate, or refinance higher-rate loans like mortgages. The beauty of securities-based lending is that these are not underwritten loans nor do they require extensive due diligence because the assets are already sitting there at the firm and public securities are thought to be extremely liquid.

This is what I'm talking about! So it's a thing, but apparently it's only available to really wealthy people. Moreover, Brown describes a bunch of other problems with it. Apparently the loans are typically callable, so the lender can liquidate the collateral at will. And there are likely some systemic risks associated with the way this is being done (sort of like, you know, home equity borrowing).

So this isn't quite what I'm looking for. Housing will still carry a large liquidity service yield. If I want to accumulate a lot of collateral, it means accumulating a lot of housing inventory--maybe even more housing inventory than I need. Practically every homeowner I know holds more housing inventory than they need. That's like owning a stock but throwing away half of the dividends. But it's a pretty natural outcome when housing is seen as the best mechanism for accumulating wealth and collateral (obviously that's not the only reason people accumulate extra housing). I would rather live in a house that provides exactly the amount of housing service I need--and put my excess savings in other assets whose production I can capture in its entirety. That strategy would be less costly if my Vanguard account were pledgeable.

The aggregate consequences are less clear. Brown argues that the current trend toward collateralizing financial assets for rich people causes systemic risk. But if financial assets became pledgeable, maybe people would live in houses that are less leveraged. The net effect on systemic risk isn't clear. It might also free up resources that are currently tied up in unproductive spare bedrooms, providing more savings for productive assets. Maybe the quantitative magnitudes on that notion are pretty small. But the point is: It's not obvious to me why we have a system that so dramatically favors housing as collateral.

UPDATE: My friend Jared Larsen points me to some details about a similar service provided by Charles Schwab. The minimum credit line is $100,000, so it will still be mostly available to the well-to-do. You can borrow up to 70% of the value of the collateral. The line is subject to collateral calls, and CS can sell your collateral without your consent (or even awareness). This is available in taxable accounts. So I find this pretty interesting--the thing I'm asking for is available, more or less, but I wish it were available at smaller dollar amounts.

Wednesday, December 10, 2014

Tabarrok on business dynamism

Last week's Cato growth forum included a session on declining business dynamism, which included presentations by John Haltiwanger, Amar Bhide, and Alex Tabarrok. Alex focused on the question of whether we should care about this. See his MR post here; some key points he makes:

1. More regulated industries are not less dynamic (he shows this by plotting a measure of industry-level dynamism against a measure of regulatory burden).

2. Entrepreneurship is not necessarily good. Poor countries are full of entrepreneurs of necessity. They have no better options.

3. Old firms are very entrepreneurial. The good ones are constantly reinventing themselves. Think of Ford, Zara, or Apple.

4. Increasingly, what matters is global dynamism. Looking at national statistics is not enough.

Point 1 has made everyone's job very difficult. It is very hard to find a smoking gun in terms of policy. That said, we should not overinterpret Alex's result. In most of the work on this topic, people look within industries because regulatory burden is not the only way industries differ. My prior is that, in many industries, other differences swamp regulatory differences. I would be more persuaded by time series evidence--for example, have the industries that have seen large changes in regulatory burden also seen large changes in dynamism (of the appropriate sign)? Davis and Haltiwanger describe evidence on the effect of certain labor market regulations, like occupational licensing and various worker protections, but as they say more work is needed.

Point 2 is a good one, and in my work with John Haltiwanger, Javier Miranda, and Ron Jarmin, we mention this frequently. This was also Noah Smith's first reaction--declining mom-n-pops doesn't hurt productivity. But as we show in more recent work, it's not just low-productivity entrepreneurs that are going away. We are seeing fewer high-growth firms.

I like Point 3. I know there is work being done on this avenue, including by us. What if creative destruction is being brought inside the boundaries of older firms? In terms of Alex's exposition, what we would want is some reason to think that the reinvention he mentions is going on more now than it was 30 years ago. A related hypothesis is the notion that startups get acquired soon, so their high growth happens inside other firms. I should also note that almost all of the good data on firm growth are based on employment, because that is easy to measure (at least for privately held firms). So that matters too--what if firms are more dynamic now but it shows up somewhere other than employment? At least among public firms, though, we do see these trends (speaking of gross job flows) in sales data as well as employment.

Point 4 is good too. I know people are researching this point as well. There are a few ways to think about it, so I think it's a question with an answer.

Sunday, December 7, 2014

Feynman on living standards

I started to say that the idea of distributing everything evenly is based on a theory that there's only X amount of stuff in the world. . . . But this theory doesn't take into account the real reason for the differences between countries--that is, the development of new techniques for growing food, the development of machinery to grow food and to do other things, and the fact that all this machinery requires the concentration of capital. It isn't the stuff, but the power to make the stuff, that is important. But I realize now that these people were not in science; they didn't understand it. They didn't understand technology; they didn't understand their time.

From Surely You're Joking, Mr. Feynman, page 283 in my paperback copy. What would Feynman think of this physicist? (I don't know).

Monday, December 1, 2014

My five favorite books of 2014

image source

Here are 2013 and 2012. As usual I will limit myself to books that were published somewhat recently. My favorites, in no order:

1. Dam Nation, Stephen Grace (2012). This book is truly superb. I mentioned it here. This is a history of water in the western US, a topic I find endlessly fascinating (see posts). It is short and readable.

2. Junkyard Planet, Adam Minter (2013). I mentioned this here. This is a very readable, very interesting description of the global scrap industry. The story is told as a series of anecdotes, primarily in the US and China. This book is very engaging--it will not bore you.

3. Ninety Percent of Everything, Rose George (2013). This is an extended anecdote about the shipping industry. Basically the author rides on a container ship. I found it immensely entertaining and informative.

4. Capital, Thomas Piketty (2014). My review is here (yes, I did read the whole thing). This book's fans were often confused about which claims were empirical and which were speculative. FT/McKinsey awarded Capital for being an "epic analysis of the roots and consequences of inequality," which makes me wonder if anyone at FT or McKinsey actually read the book (very little "roots" analysis and zero "consequences" analysis). The book focused entirely on the world's richest 20 percent, and it largely ignored both the literature on the consequences of inequality and the literature on optimal taxation. But I liked the book--data firehoses provide huge benefits to economics. Between the data and the instructive nature of its omissions, Capital is a very valuable contribution to the economics and policy debate--and I found it to be quite readable.

5. Big Ideas in Macroeconomics, Kartik Athreya (2014). My review is here. Unlike Noah Smith, I found this book extremely useful and believe it should be required reading for any person who wants to engage in debates about methodological issues in macroeconomics but does not want to learn the math. It is not a casual read, but those who aren't willing to give it a shot should rethink their confidence level on macro methods topics. I also highly recommend the book to grad students who want more intuition for the models. It is also a great literature review. This book deserves far more attention than it has received.

I did not read House of Debt; I am already pretty familiar with the authors' excellent research, and I find it reasonably persuasive. Due to their blogging efforts, though, I have assumed that Mian and Sufi include a lot of the wrong complaints about the macro field that always drive me nuts, so I decided to pass on it (you spend three years writing a het agent job market paper then see how you feel when someone says macroeconomists ignore distributions). I hate that selling a book in econ apparently depends on telling readers that everyone else in the field is an idiot.

I am in the middle of Geithner's book; it is mostly fine, but I think we all have financial crisis play-by-play fatigue (though I will definitely read Bernanke). I also have a hard time with memoirs--they feel so folksy, yet I can't help but imagine the ghost writer behind the scenes. I do plan to read Fragile by Design but may not get to it for a few more months (I have been working through Caro's LBJ series and want to make some more progress soon). I am also tentatively planning to get to Martin Wolf's book. I find plenty of older books that I want to read, so I don't always keep up with new releases very well.