Blog

Earlier, Megan revisited the topic of her column in January’s edition of The Atlantic and pondered why everyone apparently “got stupid at once” during the real estate boom. I’d like to suggest an answer: commercial real estate might not have had any choice. I’d suggest that the boom began in residential real estate, and economics dictates that commercial real estate was doomed to follow its path.

Let’s start with the chart Megan mentions from Krugman:

I interpret this graph as showing that the party got started in the residential sector. It wasn’t until the end of 2002 that commercial real estate started showing significant appreciation, exceeding its pre 2001-2 recession level. The way I see it, the commercial real estate boom lagged the residential boom. If you move the red graph back about 8-12 months, it would practically sit on top of the blue one.

Let’s think about the two kinds of commercial real estate, that leased to residents and that utilized by businesses. I think both roads lead to the same result: unavoidable irrational appreciation thanks to the residential market.

Scenario 1: Commercial Real Estate Based On Rental Units

Home prices begin to increase. Since homes and residential rentals are substitute economic goods, when the price for one increases, the demand of the other increases, leading to its price rising as well. Thus, rental prices began to rise with housing prices. That would have led to (fully rational) appraisals of these commercial real estate properties rising, since the associated rental cash flows would be higher.

What if landlords had balked at the appreciation of their rentals? First, they wouldn’t. If you can get a higher rent price as a landlord, then that’s what you do. It would be stupid not to. And as rental prices rose, demand for housing probably began to increase further. A delightful little vicious cycle ensues, as demand for homes and demand for rentals seesaw, leading to higher and higher prices for each.

Scenario 2: Commercial Real Estate Based On Business Inhabitants

So you’ve got home prices increasing. You’ve also got residential rents increasing. On some level, real estate is real estate. What’s to stop commercial developers from abandoning office buildings and constructing more apartment buildings if that space becomes more valuable? Very little.

Indeed, the building where I rent my apartment is managed by a commercial real estate developer that had traditionally specialized in creating office space for companies, but got into the residential game when it thought it could be more lucrative a few years ago. My building remains its only residential property, as the party was over by the time its foray into the space was completed. Of course, in cities you also saw old factories and office space commonly converted into residences.

So commercial builders had two options: charge office tenants more or focus on residences instead. Again, these turn out to be substitute goods from the developer standpoint. The increase in the price of office space per square foot should follow any increase in the price of residential space per square foot. As the profit potential in the residential space increases, the supply begins to fall behind demand in the office/factory space sector, eventually leading to its price appreciating as well and more construction.

Moreover, the economy was roaring on all cylinders during this time period, so businesses could stomach increased commercial real estate prices. As banks got used to relaxing standards for residential real estate, they did the same for commercial real estate. And unlike in the residential space, banks and investors wouldn’t needed to be worried about businesses speculating on commercial real estate or trying to flip their factories or office headquarters like with residential real estate.

Like Megan, I think a whole lot of irrational expectations were a big part of the equation. But I can still kind of see an argument for commercial real estate having been a sort of casualty of the residential real estate boom. I don’t think you can make economic sense of a world where there’s an incredible boom in residential real estate but not in commercial real estate. And the graph above indicates that housing is, indeed, where the growth began. Commercial real estate was forced to follow, and I can’t see how it could have escaped that fate — no matter how rational commercial mortgage originators or borrowers might have been. This, by the way, makes it a little harder to dismiss the theory that that Fannie/Freddie/CRA started the runaway real estate train.

Just in time for National Influenza Week (January 10-16), the Louisiana Department of Health and Hospitals has expanded H1N1 vaccine availability to the general public. Until recently, the vaccine has been available only to high risk populations. Now, anyone interested in receiving the H1N1 vaccine may contact his or her healthcare provider, or any provider listed on the H1N1 flu shot locator at www.fighttheflula.com.

Friday’s jobs report damped expectations in financial markets that the Federal Reserve will raise its benchmark federal funds rate by midyear. By the close of trading Friday, futures contracts implied there was just a 22% chance of a rate hike by June.

Fed officials are expecting a recovery that produces spotty job growth in its early stages. The latest report is in keeping with that view and is likely to leave Fed officials committed to their pledge that interest rates will stay low for “an extended period” as they prepare for a policy meeting later this month.

“The employment picture overall has improved, and the outlook is certainly much brighter than one year ago,” Eric Rosengren, president of the Federal Reserve Bank of Boston said in a speech Friday. But he warned that while layoffs are abating, “many firms are not yet ready to do new permanent hiring.” Spotty job growth means downward pressure on wages and inflation and gives the Fed room to keep monetary policy very easy.

It’s not going to stump an expert, but there will probably be a couple questions in Mental Floss’ Cable Connector Quiz that could trip you up. Try it yourself and let us know what you scored.

[Mental Floss via Neatorama]

Leo Igwe is a skeptic in Africa who has tirelessly and heroically fought the forces of unreason. He is director of the Centre for Inquiry in Nigeria and executive director of the Nigerian Humanist Movement, and has battled against female genital mutilation, the oppression of women in Africa, witch hunters, and all manners of religious-based (generally Sharia law) woe in that continent.

But he’s in trouble. Igwe accused a man of raping a ten-year-old girl in Nigeria. This man has turned around and accused Igwe and his father of murdering another person — an apparently false charge, since the man was examined and found to have died due to an HIV/AIDS related illness. Igwe was arrested, temporarily imprisoned, and then let out on bail. But the pressure is on, and the Nigerian government is not doing a whole lot to help.

Please note all this is alleged, but is coming from multiple sources. You can find more information on on the Think Humanism forum. Also, Kylie Sturgess has been on this since it started, and has more information on this case with updates and what can be done to help.

Sprint (NYSE: S) hosted a surprisingly splashy event tonight at CES complete with comedian Frank Caliendo, food prepared by Chef Mario Batali and guest appearances by Microsoft’s CEO Steve Ballmer and Best Buy’s CEO Brian Dunn. With all of the hoopla, everyone expected a big announcement like a new Microsoft (NSDQ: MSFT) tablet, or a WiMax phone. The crowd seemed a bit disappointed when Sprint instead unveiled the Overdrive, a Wi-Fi router that connects to the Sprint 3G and 4G network. Still, the device represents the next evolution of WiMax high-speed broadband.

The Overdrive will become available on Jan. 10 and costs $99 with a two-year contract. The monthly contract will run you about $60 for service, and users will be able to connect five Wi-Fi enabled devices at a time. Sprint’s CEO Dan Hesse: “2010 is the year of Sprint 4G…If your device has Wi-Fi, Sprint wants you to be free to connect that device anywhere.”

Best Buy’s Dunn said the device will be available in 182 stores and Ballmer was pretty much there to show his enthusiasm for the service, adding that even his son asked for one for Christmas.

Filed under: Truck, Plants/Manufacturing, India, Diesel

The Chicken Tax strikes again? When Indian automaker Mahindra first decided to sell its oft-delayed compact diesel pickups here in the United States, the company said it planned to assemble the trucks from knock-down kits imported from India as a way to avoid paying the 25 percent tariff on imported trucks. Later, that decision was repealed and the first Mahindra trucks that make it across the ocean will in fact be completely assembled in India.

At the time, Mahindra alluded to quality concerns as the reason the change was made, but that apparently doesn’t mean the decision is set in stone. According to a report from The Wall Street Journal, Mahindra has been in talks with Navistar – makers of heavy-duty trucks and diesel engines – to have the American company assemble its TR series of trucks here in America at Navistar-owned facilities.

Now that Ford is building its own diesel V8 engines for its line of Super Duty pickups, we’d imagine that Navistar will have a bit of latent manufacturing capability, which could equal a win/win scenario for both it and Mahindra. Further, the two companies have been involved in joint ventures in India since 2005. We’ll see how it all plays out soon enough, but in the meantime, the first Indian-built Mahindra pickups are scheduled to arrive within the next few months.

[Source: The Wall Street Journal via PickupTrucks.com]

Report: Mahindra pondering shacking up with Navistar to build pickups in U.S. originally appeared on Autoblog on Fri, 08 Jan 2010 14:28:00 EST. Please see our terms for use of feeds.

Read | Permalink | Email this | Comments

Palm (NSDQ: PALM) unveiled two new devices today at CES for Verizon Wireless—the Palm Pre Plus and the Palm Pixi Plus. But the more important announcements of the day revolved around new software and developer programs, which badly needed attention if the handset maker was going to stay competitive against Apple’s and Google’s growing app stores.

The press conference had the feeling of an Apple (NSDQ: AAPL) event, where the audience hung on CEO Jon Rubinstein’s every word, and clapped easily for even such incremental announcements as video-capturing on the phone. Still, Palm did have a lot to talk about. In February, it will release a new version of the operating system that will enable video-capturing and editing and full Flash support (one of the first in the mobile industry).

Palm also announced the ability for the phones to play 3D games, and new developer-focused projects, such as opening its developer kit to the public, providing $1 million in cash incentives for the hottest apps; and a PDK that will allow plug-ins for common developer languages, such as C++.

Game Development: Up until now the Palm webOS was not known for hardcore gaming, and was restricted to casual games. Starting today, seven new 3D games were released into the App Catalog, including titles from EA, Gameloft (EPA: GFT), Laminar Research and Glu (NSDQ: GLUU). Release.

Palm Pre Plus and Palm Pixi Plus: The most exciting part of these phone launches on the Verizon Wireless network is an application Palm is calling the “mobile hotspot,” which gives customers the option of creating a personal Wi-Fi cloud surrounding their device. The cloud is capable of sharing internet connectivity with up to five Wi-Fi-enabled devices such as notebooks, netbooks, cameras, gaming devices or portable media/MP3 players. No prices were given for the devices or the service. They will be available Jan. 25. Release.

Developer Program: As of today, the Palm webOS developer program is now open to any developer, after previously being in a private beta. The SDK is available at http://developer.palm.com. To encourage developers to jump on board, Palm announced a $1 million developer “Hot Apps” bonus program. Release.

If I were a gamer, I’d probably be a lot more excited by being one of the very first to play the highly anticipated BioShock 2, set for sale next month, and I was most honored to be shown my way around the game by developer Jesse Attard. (Not so honored to be killed in seconds, but, hey.) I’m a tech geek, though, and what really grabbed me was how the high-bandwidth game is being delivered at CES: on Sprint’s just-announced 4G Overdrive and without any latency issues. The tiny drive is serving up the game on eight large screens in a parking lot at CES, courtesy of a partnership between Fox Digital’s IGN and Sprint (NYSE: S).

IGN, which usually creates Launch Pad experiences on IGN.com, has a Launch Pad tent as part of the Sprint compound in front of the Las Vegas Convention Center. This was a bit of a risk for Sprint. CES is notoriously tough on connections; my efforts to upload a simple five-minute video were torpedoed repeatedly. But the WiMax appeared to work flawlessly, delivering the game in all its glory (sorry, no game photos allowed) while streaming music, too. Anyone see otherwise?

Nokia (NYSE: NOK) CEO Olli-Pekka Kallasvuo used his speech at the Consumer Electronics Show to say that the company was positioned to take advantage of “staggering” growth in developing markets. “In China, in India, in Vietnam there are huge opportunities to accelerate development” especially as smartphone features come to standard handsets, he said. While users in Western markets, for instance, are already tied to their e-mail accounts, most of the world is not, something he said Nokia was trying to change with its mobile services. In its first year on the market, the company’s Ovi e-mail service—which is designed for first time e-mail users—has already signed up five million accounts.

Throughout, Kallasvuo framed the company’s efforts as being about “doing good”—saying that the there was an opportunity to “do good business and do good at the same time.” (There was even a groanworthy introduction by Lonely Planet reporter Frances Linzee Gordon who talked about the innumerable benefits of cell phones including that they can “save lives” and “overcome environmental difficulties.” A bit much, perhaps? Her project on the “benefits of mobility” had been sponsored by the company).

It was mostly talk but Nokia did announce one bit of news: The company is setting up a competition to “encourage innovators to create a mobile product or service that raises the standard of living or enhances the lives of those in growth economies.” The winning entrant will get a $1 million prize.

(This guest post originally appeared at the author’s blog)

Speaking of President Obama, Karl Rove writes, “After a year of living in his fiscal fantasy world, Americans realize they have a record deficit-setting, budget-busting spender on their hands.”  Well, given his history with former President Bush, it certainly takes one to know one.

But it is hard to understand how the concept of “budget busting” applies to a government which, as a sovereign issuer of its own currency, can always create dollars to spend.

There is, in other words, no budget to “bust”. A national “budget” is merely an account of national spending priorities, and does not represent an external constraint in the manner of a household budget.

A Deficit Spending Limit Disaster

What do commentators such as Mr. Rove really think would have happened if there had been tight fiscal rules in place preventing any (or only some) discretionary response in net spending? Consider a real world example. In December, Spanish unemployment rose to 19.3% (the highest in more than a decade), capping a year that saw the nation’s jobless rate soar to double the Euro- zone average. According to the Merco Press, the number of people registering for unemployment benefits increased by 54,657, or 1.41 percentage points from November to 3.92 million. From a year earlier, unemployment climbed by 25%; youth unemployment is now 40 per cent. The only good piece of news this year was that the number of jobs destroyed in 2009 was 200,000 less than in 2008. That’s the sort of statistic which, in the US would likely prompt grave warnings about the need to pursue “exit strategies”.

Spain, like the other countries within the European Union (EU), has other problems, because the nation has voluntarily decided to accede the so-called “Stability and Growth Pact” (SGP), which arbitrarily limits national government deficit spending to 3% of GDP, whilst limiting overall public debt as a percentage to GDP of 60% (even though there is no economic theory in evidence to justify these arbitrary figures). Since the inception of European Monetary Union (EMU), the conflict within the EU on how to co-ordinate economic policy on the supranational level has been recurrent. It fully illustrates the core problem at the heart of the EMU and its related Stability and Growth Pact. Politically, the interpretation of the euro zone’s stability pact is largely left in the hands of unelected bureaucrats, operating out of institutions which are devoid of any kind of democratic legitimacy.

More fundamental are the institutional flaws. The relation of member countries to the European Monetary Union (EMU) is more similar to the relation of the treasuries of member states of the United States to the Fed than it is of the US Treasury to the Fed. In the US, states have no power to create currency; neither do the countries within the EU. By the same token, purchasers of US state bonds do worry about the creditworthiness of states, and the ability of American states to run deficits depends at least in part on the perception of creditworthiness. While it is certainly true that an individual state can always fall back on US government help when required (although the recent experience of California makes that assumption less secure), it is not so clear that the individual countries in the euro zone are as fortunate.

The euro dilemma that Spain faces, then, is somewhat akin to the problems of a country like Iceland or Latvia. They operate under a system which prevents their government from spending money freely – precisely the sort of thing that the deficit terrorists in the US advocate on a regular basis (particularly those who call for constitutionally mandated balanced budgets, as exists in many state budgets).

Facing a worsening economic situation, the Spanish government has done what any reasonable fiscal authority would do and that is to expand its budget deficit. A significant proportion of the rising deficit is being driven by its automatic stabilizers, which is normal and sensible. But their impact to stabilize incomes is negated to a large degree by the SGP.

Why it’s Folly to Balance Budgets During a Recession

Spain illustrates the futility of seeking to impose balance budgets during a recession. It makes things worse. Budgets inexorably tend to deficit when economic activity slows and tax revenues collapse. If not addressed soon, this structural flaw at the heart of the European Union suggests problems ahead for the long-run viability of the euro, and certainly points to growing intra-European political tensions. (In that regard, it is interesting to note the recent comments by the Mayor of Athens in regard to Greece’s comparably adverse unemployment situation: “Germany owes us €10.5bn from the 2nd World War, they should give us that back and we can equate it all up, automatically our deficit falls to 5%…”).

The debate about public debt limits is arcane in the extreme and harks back to gold standard logic which is no longer applicable. It was always clear – by the nature of the structure of their monetary system (divorce between the fiscal and monetary sovereignty) that the system would not cope in a major economic crisis such as now, where unemployment is skyrocketing. As much as one can complain about the size and direction of the US government spending, the country at least is in a position (should it choose to do so) to exercise fiscal leadership, and the institutional capacity to implement it. But if the US imposes anything like the constraints on government spending demanded by the deficit warriors, we’ll have Spanish style levels of unemployment.

The Spanish government does not have the ability to provide fiscal leadership in their winter of recession because of the voluntary constraints they have imposed on their fiscal capacity courtesy of EMU membership. That is why almost one in five Spaniards is now unemployed, with no prospect of respite. With the degree of fiscal maneuver limited in all EU nations, growth in the euro zone depends on 1) a low enough interest rate to fuel private domestic spending (probably requiring asset bubbles, as in Spain, Irish housing markets), 2) entrepreneurial innovation, and 3) cost cutting, the last of which tends to suppress domestic demand. The net result has been a region has been left largely on a stagnant growth path since unification because it cannot run large enough current account surpluses given Asian cost structures and Asian exchange rate linkage to the US dollar (although it has tried to use relocation of production to Eastern Europe to gain an edge). The euro region basically rides on the back of global growth, which previously depended on the Anglo private sector deficit spending, which was largely sponsored by asset bubbles.

Having shut down their policy options in order to discipline themselves, they are stuck in a hard grind, which now will get even harder as fiscal retrenchment is attempted. Perhaps enough people will conclude after a decade of trying to work within a number of self-imposed policy constraints, it is time to try something else. I wonder how long the euro in its current incarnation can last? Is this really what the US wants? Because that is the ultimate implication of a policy which arbitrarily seeks to constrain government spending in the manner in which the Karl Roves, Robert Rubins and Pete Petersons of this world are currently advocating.

Getting Government Spending Right

So what is the “right” level of government spending? Obviously, we want the government spending to be done efficiently. We don’t want government spending to become inflationary. Keep in mind — the public purpose behind government doing all this is to raise an army, operate a legal system, support a legislature and executive branch of government, promote public infrastructure, promote basic research, etc. So there are quite a number of tasks that even the most conservative voters would have the government perform.

Ultimately, the ‘right amount of government spending’ is an economic and political decision that has nothing to do with government finances. The real ‘costs’ of running the government are the real goods and services it consumes; the real cost of the government using all these real goods and services is that those resources would other wise be available for the private sector. So when the government takes those real resources for its own purposes, fewer real resources are left for private sector activity. What matters is that taxes are set to balance the economy and make sure it’s not too hot or not too cold. And government spending is set at the ‘right amount’ to provide the requisite services and full employment. Getting caught up in the mythology of “financing” considerations or arbitrary self-imposed constraints with no bearing in any economic theory at all is the wrong path. That way lies Spain. Is this the future we want for the US?

Roosevelt Institute Braintruster Marshall Auerback is a market analyst and commentator.

Join the conversation about this story »

See Also:

• Robert Rubin Is Back: Noooooo!!!
• New Year, Same Old Deficit Hawk Rubbish
• Obama’s Newfound Populism: All Hat No Cattle

Angelina Jolie will be having a little less face time on magazines and billboards — the stunning actress has been dropped as the face of the St. John fashion house, Women’s Wear Daily said on Friday.

“[Jolie] overshadowed the brand,” according St. John’s chief executive officer Glenn McMahon, who says Angie’s celebrity status was too much for the label. “We wanted to make a clean break from actresses and steer away from blondes and cleanse the palette.”

“We needed to show a modern point of view of St. John,” McMahon added. “We have evolved.”

Redhead Karen Elson has replaced Jolie as St. John’s Spring/Summer 2010 spokesmodel.

We were digging through the user guide for the Nexus One and came across something that we hadn’t seen reported elsewhere.  You know that nifty little feature that comes with Android 2.1 where you can speak instead of typing?  Pretty cool, right?  Did you know that in order to use it, you need a data connection available?  Neither did we. Now to be fair, this probably doesn’t affect too many people as 3G and EDGE networks practically blanket the country.  There are however going to be holes and instances where this feature won’t work.  Google does bill the feature as “experimental” so we can’t really complain.  We’re surprised it doesn’t say “beta” anywhere near the  feature.  All kidding aside, maybe a little more upfronted-ness would have been nice.

You might ask yourself what is the benefit of having it work this way?  Well, since it’s being given back to the cloud, the algorithms and special formulas being used can get constant updates without pushing out incremental releases of Android.  It’s probably tied to the same system that that helps transcribe your voice mails in Google Voice and help you with GOOG-411 calls.  Kinda smart if you ask us.

Anyone else have a chance to look through the guide?  Find anything else cool?  Hit us up in the comments.

Do you hate plugging things into the wall? How about typing your name into some fields? Hoo boy, have I got a deal for you! Target is willing to do these arduous tasks for you for a mere $99.

Yes, ninety nine fucking dollars. To hook up an Xbox or a PS3 that cost you a bit more than twice that. It’s though a third party called Zip Installation, who somehow stays in business despite offering such idiotic and overpriced services. Seriously, who is paying for these things? And do they realize that they’re being ripped off once the tech is in their house and they watch them spend 5 minutes doing the most basic of tasks before asking for a check? [Kotaku]