Housing after the recovery - REALTORS® Association of Maui, Inc.

Housing after the recovery 

Prepared for the 

Realtors Association of Maui 

July 16, 2010 

by Paul H. Brewbaker, Ph.D. 

Principal, TZ Economics 

Special mahalo to 

Terry Tolman!

The business cycle 

Slide copyright TZ Economics 

1

Real activity (U.S. GDP) in levels 

“Average” recession 

Previous 7 U.S. recessions 

Index of real GDP: peak quarter = 1.0 

1.050 

1.025 

1.000 

0.975 

2007Q4 

(December)— 

official NBER 

“peak” 

2001 dot.com recession 

Real GDP and FRB forecasts 

Peak quarter 

2008 

Q2 

2009 

Q2 

The Great Recession 

F (2010q3) 

F (2010q2) 

2010q1 released 6/25 

Recession 

Recovery 

Expansion 

0.950 

-6 -3 0 3 6 9 


Source: Professor Robert Hall, Stanford University and Chair, NBER Dating Committee; Bureau of Economic 

Analysis, U.S. Department of Commerce; chart by TZE includes June 25, 2010 release for 2010q1 (revised) 

2

Real GDP growth rate (U.S., decomposed) 

6 

P 

T 

Quarterly percent changes at annual rates 

3 

0 

-3 

-6 

-9 

-12 

Real GDP growth rate 

Inventory change 

Consumption 

Capital formation 

Government 

Net exports 

NBER recession 

dates shaded 

(presumed) 

Brewbaker 

recession 

call (box) 

2005 2006 2007 2008 2009 2010 

A consumption 

break “activated” 

the recession, and 

consumption has 

led the recovery 


Source: BEA, U.S. Department of Commerce (June 25, 2010); graphic and calculations by TZE 

3

Recent U.S. real GDP forecasts 

8 

P 

T 

Quarterly annualized growth in percent 

4 

0 

-4 

-8 

Crisis 

Lehman 

Top 5 

Bottom 5 

NABE forcast May 24 

Actual posted Jun 25 

U.S. real economic 

growth forecasts 

are around the 

long-term potential 

trend growth rate, 

following the deep 

2008-09 recession 

NBER recession shaded 

06 07 08 09 10 11 


Source: 

Bureau of Economic Analysis, National Association for Business Economics; revised 2010Q1 data released 

June 25, 2010 

4

Federal Reserve real GDP growth forecasts 


Source: 

Minutes of the June 22-23, 2010 meeting of the Federal Open Market Committee 

(http://www.federalreserve.gov/newsevents/press/monetary/fomcminutes20100623.pdf) 

5

Federal Reserve economic forecasts 

As close to longrun 

policy targets 

as you will get 


Source: 

Minutes of the June 22-23, 2010 meeting of the Federal Open Market Committee 

(http://www.federalreserve.gov/newsevents/press/monetary/fomcminutes20100623.pdf) 

6

Obama Administration end-2009 economic forecast 

Note: based on data 

avilable as of November 

18, 2009. Interest rate on 

91-day Treasury bills is 

measured on a secondary 

market discount basis. 

The figures do not reflect 

the upcoming BLS 

benchmark revision, 

which was expected to 

reduce 2008 and 2009 job 

growth by a cumulative 

824,000 jobs. 


Source: Council of Economic Advisers, Economic Report of the President (February 2010), Table 2-3 

(http://www.gpoaccess.gov/eop/2010/2010_erp.pdf) 

7

“…at the current pace the economy will have recovered 

by the third quarter of 2010, next quarter!” 

Advertiser, , who wrote the headline? 


Source: Honolulu Advertiser archives, 

http://the.honoluluadvertiser.com/article/2010/May/02/op/hawaii5020305.html 

8

The recovery 

is almost over! 


Source: National Association for Business Economics 

Public version available at http://nabe.com/publib/macsum.html 

9

“…the economic recovery is proceeding…” 

FOMC 6/23/10 


Source: Federal Reserve Board, 

http://www.federalreserve.gov/newsevents/press/monetary/20100623a.htm 

10

U.S. potential real GDP growth rate calculation 


Source: Council of Economic Advisers, Economic Report of the President (February 2010), Box 2-1 

(http://www.gpoaccess.gov/eop/2010/2010_erp.pdf) 

11

Double dip is an ice cream serving 

Short-term performance: 

• Oahu > Hawaii (state) > U.S. recovery > Neighbor Islands 

• “National average” recovery is almost over: real GDP expansion 

• Oahu’s unemployment rate (5.5%) almost “full employment” in the U.S.* 

Long-term performance: 

• State projects 1.6 percent real Hawaii personal income growth 2010-35 

• U.S. productivity growth is ≥ 2 percent annually 

• Labor force growth is ≈ 1 percent annually 

• Potential annual real GDP growth should be ≤ 3 percent (less ≈ 0.5%) 

Expectations and policy may be shooting too low 

*Google “NAIRU” (non-accelerating inflation rate of unemployment) which many conjecture is in the neighborhood of 5.5 percent. The 

Federal Reserve publishes “Longer run” estimates interpreted by many as guiding monetary policy ranging from about 5 to 6 percent. 

Oahu’s May 2010 unemployment rate was, by TZE calculation, a seasonally-adjusted 5.4 percent. 

Source: Hawaii DBEDT, series “are neither targets nor goals”; 

http://hawaii.gov/dbedt/info/economic/data_reports/2035LongRangeSeries/LRFreport_2035series_revised_Aug09.pdf 


12

Some Hawaii macroeconomic metrics 


13

Hawaii payroll employment and change 

640 

620 

Thousands, s.a. (log scale) 

4 

Thousands, s.a. 

600 

580 

0 

560 

-4 

540 

NBER recessions shaded 

-8 

520 

1990 1995 2000 2005 2010 90 95 00 05 10 

Total payroll employment, s.a. . (jobs) Monthly employment change (jobs) 


Source: Hawaii DLIR, DBEDT; seasonal adjustment by TZE 

14

Hawaii payroll employment change 


4 

.4 

Thousands, s.a. 

0 

-4 

.0 

-.4 

Millions, s.a. 

-8 

US (right scale) 

Hawaii (left) 

-.8 

00 02 04 06 08 10 


Source: U.S. BLS (via FRB St. Louis), Hawaii DLIR, DBEDT; seasonal adjustment of Hawaii data by TZE 

15

Unemployment rates show relative performance 

10 

8 

Neighbor Islands 

Statewide 

Oahu 

1. Three recessions, 90’s 

Japan Bubble long, 2001 

dot.com bubble mild, 

2008-09 Great 

Recession severe 

Percent, s.a. 

6 

4 

9/11 

SARS 

2. Neighbor islands led 

recovery in late-1990s, 

lag recovery in 2010 

3. Oahu low structural 

unemployment rate over 

the business cycle 

2 

4. Also notable: Neighbor 

Island match with Oahu 

unemployment rate, 

1999-2006 (a first!) 

Gulf 

0 

90 95 00 05 10 



16

Honolulu inflation vs. unemployment trade-off 

Inflation rate (%) 

8 

6 

4 

2 

1991(H1) 

2006(H2) 

Semiannual 

Honolulu data 

1984-2009 

2009(H2) 

Intensity of the Great Recession is 

reflected in the rapid transition from 

“boom” to “bust”—three years in the 

recent cycle to cover the ground that 

took seven years to traverse during 

the 1990s. Honolulu inflation should 

converge to just above the U.S. core 

inflation expectation of 2 percent, 

0 

-2 

1998(H2) 

1 2 3 4 5 6 7 

Unemployment rate (%) 

Source: Bureau of Labor Statistics, U.S. Department of Labor; seasonal adjustment, regression by TZE 


17

Hawaii forecasts: real personal income growth 

6 

Quarterly percent change, y-o-y 

4 

2 

0 

-2 


Forecast 

02 04 06 08 10 12 

Source: 

Bureau of Economic Analysis; TZ Economics (forecast) 


18

Maui jobs data 


19

Maui payroll employment 


10.5 

10.0 

9.5 

9.0 

8.5 

8.0 

7.5 

Private (right scale) 

Public (left scale) 


9/11 

Aloha/ATA 

shutdown 

68 

64 

60 

56 

52 

48 


7.0 

98 00 02 04 06 08 10 



20

Maui employment: cycles and shocks 

Percent, s.a. (level scale) 

10 

8 

6 

4 

2 

Payroll employment (right) 

Unemployment rate (left) 


Iniki 

9/11 

Aloha/ATA 

shutdown 

76 

72 

68 

64 

60 

56 

52 

48 


0 

90 95 00 05 10 



21

Housing markets 


22

Case-Shiller 

SF same home price indexes: 

the 2000s house price bubble 


Index, January 2000 = 100, s.a. (log scale) 

200 

100 

Denver 

Phoenix 

Las Vegas 

Los Angeles 

San Diego 

San Francisco 

50 

00 02 04 06 08 10 


Source: Standard & Poor’s (http://www.standardandpoors.com/indices/sp-case-shiller-home-priceindices/en/us/?indexId=spusa-cashpidff--p-us----) 

23

Case-Shiller 

SF same home price indexes: 

extreme bubbliciousness 

Index, January 2000 = 100, s.a. (log scale) 

200 

100 

50 

Las Vegas 

Phoenix 


1990 1995 2000 2005 2010 


Source: Standard & Poor’s (http://www.standardandpoors.com/indices/sp-case-shiller-home-priceindices/en/us/?indexId=spusa-cashpidff--p-us----) 

24

Long-run median SF pricing trends look log-linear 

linear 

Thousand dollars, s.a. (log scale) 

800 

400 

200 

ln (P Oahu 

) =4.7456 + 0.0120(T) 

(0.0558) (0.0006) 

(where T = quarters, 1983.1-2010.1) 

Maui 

100 

Kauai 

Orange Co., CA 

Oahu 

50 

75 80 85 90 95 00 05 10 

4.9% (Oahu) 


Source: National Association of Realtors, Honolulu Board of Realtors, Realtors Association of Maui, Hawaii Information 

Service (Kauai); all calculations and seasonal adjustment by TZE 

25

Median single-family home prices: 

bottomed out, except on Maui 

800 


Quarterly, thousand $, s.a. 

400 

Oahu 


Orange Co., CA 

San Diego, CA 

Overshoot? 

200 

98 00 02 04 06 08 10 


Sources: Honolulu Board of Realtors; Realtors Association of Maui, Hawaii Information Service, UHERO, National 

Association of Realtors; seasonal adjustment calculations by TZE 

26

Maui quarterly existing home sales 

1000 


Units, s.a. (log scale) 

100 

Single-family 

Condominium 

10 

80 85 90 95 00 05 10 


Source: Realtors Association of Maui; seasonal adjustment by TZE 

27

Maui quarterly existing home sales 

800 

Units, s.a. (log scale) 

400 

200 

Single-family 

Condominium 

Lehman 

100 


05 06 07 08 09 10 11 



28

Maui existing home sale mean prices 


800 

400 

200 

Single-family 

Condominium 


100 

80 85 90 95 00 05 10 


Source: Realtors Association of Maui; seasonal adjustment, HP filter trend calculation by TZE 

29

Maui existing home sale mean prices 


1200 

1000 

800 

600 

400 


Lehman 

Single-family 

Condominium 

05 06 07 08 09 10 11 



30

Maui existing home sale median prices 

800 

Single-family 

Condominium 


400 

200 


Lehman 

465k 

430k 

98 00 02 04 06 08 10 



31

Maui SF median home price higher-order moments 

Kurtosis (right scale) 

Standard dev./mean (x100) 

Skewness (left scale) 

250 

200 

150 

100 

14 

12 

10 

8 

6 

4 

2 

90 95 00 05 10 

50 

0 


Source: Realtors Association of Maui; moment calculations by TZE 

32

Summarizing housing market outcomes 

• Hawaii proved to be less of “bubblicious” housing markets, although 

Maui experience is more similar to California than Oahu 

• “Overshoot” of house price declines after Lehman resulted in modest 

bounce in winter/spring 2009—stabilization anticipated for some time 

• Sales volumes, on the other hand, have clearly rebounded and probably 

have begun a long period of growth through the mid-teens (2008- 

20teens) similar to to 1998-2005 experience 

• Notable anomaly, near equivalence of single-family and condominium 

prices towards end of 2007, appears to have partly unwound 

• Higher-order moments of underlying home price distribution are not 

definitive, but suggestive regarding whether valuation turning point has 

commenced—best guess is fairly stable valuations through 2012 as 

bottom-fishing absorbs distressed properties 

• Maui does not seem to have an inventory overhang like most distressed 

mainland markets, and home production is way too low for glut 


33

Housing construction 


34

Hawaii new housing units / existing inventory: (∆K( 

t / K t ) 

Percent of existing housing stock 

.08 

.07 

.06 

.05 

.04 

.03 

.02 

.01 

2.5% pop. gr. 

Production has fallen because of regulatory 

restriction from two to three times the population 

growth rate to a pace that doesn’t t even endow the 

newborn with the existing per capita housing stock 

1.5% pop. gr. 

1.0% pop. gr. 

.00 

60 65 70 75 80 85 90 95 00 05 10 


Sources: County Building Departments; Bank of Hawaii; U.S. Bureau of the Census; Hawaii DBEDT; TZE 

35

Oahu and Neighbor Island private building permits 

320 

Monthly, million 2009$, s.a., log scale 

160 

80 

40 


20 

90 95 00 05 10 

Oahu 

Neighbor Isle 


Source: Hawaii DBEDT, County Building Departments, Bureau of the Census; seasonal adjustment, deflation, and 

Hodrick-Prescott filter trend-fitting by TZE 

36

Oahu and Neighbor Island new housing units authorized 

Oahu ( >1980) 

Neighbor Isle 

Quarterly, units, s.a., log scale 

1000 


100 

75 80 85 90 95 00 05 10 


Source: Hawaii DBEDT, County Building Departments; seasonal adjustment and H-P filter trend-fitting by TZE 

37

Maui new housing units authorized 

Quarterly, units, s.a., log scale 

1000 

100 


75 80 85 90 95 00 05 10 15 


Source: Hawaii DBEDT, County Building Departments; seasonal adjustment and H-P filter trend-fitting by TZE 

38

Total Hawaii real contracting (through 2009) 

8 

Monthly, billion 2009$, s.a., (log scale) 

4 

2 


80 85 90 95 00 05 10 


Source: Hawaii DoTax, U.S. Bureau of the Census; deflation using Census cost index, seasonal adjustment by TZE 

39

Tourist arrivals 

• Supply reduction from airline shutdowns (Aloha, ATA; March/April 2008) 

preceded consumption and investor pullback before and after the 

collapse of Lehman Brothers (September 2008) 

• Domestic arrivals stayed at bottom of March-September 2008 drop 

through spring 2008; international arrivals bounced back from the H2N1- 

A shock (spring 2009) 

• Maui and the Neighbor islands were exposed to greater losses from the 

airline shutdowns than Oahu 

• Maui less dependent on international arrivals than Oahu, so its exposure 

to domestic arrivals declines cannot be “diversified away” 

• Hotels now starting to stabilize as room rates have dropped enough to 

start rebuilding occupancy, especially on Maui 

• Lift commitments for summer 2010—after seasonal adjustment—point to 

incipient recovery in seasonally-adjusted volumes in second half 2010 


40

Hawaii total visitor arrivals 

650 


Monthly in thousands, s.a., log scale 

600 

550 

500 

450 

400 

Aloha/ATA 

shutdowns 

90 95 00 05 10 


Source: Hawaii DBEDT, Hawaii Tourism Authority; seasonal adjustment by TZE 

41

Hawaii visitor arrivals by origin 

Thousands, s.a., (log scale) 


480 

220 

200 

440 

Lehman 

180 

160 

400 

140 

Aloha/ATA 

shutdowns 

120 

SARS 

360 


04 05 06 07 08 09 10 

100 

9/11 

H1N1 

02 04 06 08 10 

Domestic 

International 



42

Total arrivals on Maui, Kauai: bigger hits than 9/11 

Maui (right scale) 

Kauai (left) 

240 

220 

Monthly in thousands, 

s.a., log scale 

120 

110 

100 

90 

80 

70 

Aloha/ATA 

shutdown 

200 

180 

160 

140 

120 

Monthly in thousands, 

s.a., log scale 

60 


00 01 02 03 04 05 06 07 08 09 10 



43

Maui monthly visitor arrivals through May 2010 

Domestic (right scale) 

International (left) 

200 

180 

Monthly in thousands, s.a., log scale 

80 

40 

20 

Y2K 


Aloha/ATA 

shutdowns 

160 

140 

120 

100 

9/11 

SARS 

H1N1-A 

00 05 10 



44

Hotels 


45

Hawaii hotel performance clawing its way back 

Percent of capacity, s.a. 

85 

80 

75 

70 

Real room rate (right scale) 

Occupancy (left scale) 


220 

200 

180 

160 

140 

120 

2009$ per night, s.a., log scale 

65 

60 

1980 1985 1990 1995 2000 2005 2010 


Source: Hospitality Advisors LLC; seasonal adjustment by TZE 

46

Oahu hotel performance indicators 

Occupancy (%, right scale) 

Room rate (2009$, left) 

90 


180 

170 

160 

150 

140 

130 


80 

70 

60 

50 


95 00 05 10 


Source: Hospitality Advisors LLC, UHERO; seasonal adjustment by TZE 

47

Neighbor Island hotel occupancy 

80 


70 

60 

50 



Kauai 

Hawaii 

95 00 05 10 



48

Neighbor Island real average hotel room rates 

280 


240 

200 

160 


Kauai 

Big Island 


95 00 05 10 



49

Lift 


50

Actual scheduled seats flown to Hawaii 


250 

240 

230 

220 

210 

200 

190 

Domestic (right) 



Crisis 

Lehman 

04 05 06 07 08 09 10 

680 

640 

600 

560 

520 

480 




51

Rolling monthly estimates of quarter-ahead ahead lift 

Millions, s.a., (log scale) 

.76 

.72 

.68 

.64 

.60 



Crisis 

Lehman 

2.0 

1.9 

1.8 

1.7 

1.6 

1.5 

Millions, s.a., (log scale) 

.56 


04 05 06 07 08 09 10 



52

Oahu scheduled air seats 

three-month forward commitments 


.8 

.7 

.6 




Aloha/ATA 

shutdowns 

1.2 

1.1 

1.0 

0.9 


2005 2006 2007 2008 2009 2010 



53

Neighbor Island scheduled air seats 

three-month forward commitments 

Domestic (right scale) 



80 

70 

60 

50 

40 

30 

Aloha/ATA 

shutdowns 


05 06 07 08 09 10 

800 

750 

700 

650 

600 

550 

500 




54

Tourism summary 

It’s s the economy, stupid? 

• Recession “officially” started in December 2007 

• But consumers did not “capitulate” until well after Aloha/ATA shutdown 

• Remember—oil prices rose through summer 2008 (some “recession”) 

• By the time Lehman Brothers collapsed, arrivals were finished falling 

• Tourism for most of the remaining 18 months 

Supply, demand, complements and cross-elasticities 

• Aloha/ATA are a natural experiment: instantaneous travel supply drop 

• Mixed with first rising, then falling oil prices (commodity bubble!) 

• Travel demand fell with consumer demand generally, later in 2008 

• Decrease in hotel room rates (complementary good) cushioned the fall 

• Stabilization—through H1N1 event—established base for recovery 

• Both supply and demand are necessary for recovery ⇒ expansion 


55

Macroeconomic policy issues 

• Mortgage delinquency close to a turning point—falling faster in much of 

the country than in Hawaii, where it is hung up by slower “throughput” of 

foreclosures and REOs involving mainland borrowers and lenders 

• Fed monetary policy has unwound “quantitative easing” but the fate of 

the resulting balance sheet expansion remains undetermined 

• Return to a “normal” Fed Funds target will wait until monetary 

policymakers believe economic conditions warrant it—recovery is 

gaining traction, but Fed is concerned not to undermine it 

• Return to normal from 2004-2006 may have come “too late” and “too 

slowly,” relative to ideal (this is disputed by Bernanke) 

• Return to normal originally expected to begin mid-2010 has been 

deferred partly by global macroeconomic surprises (Greece and the 

Eurozone, spring 2010)—it’s only a matter of time before rates rise 

• Fiscal balance issues will shortly replace monetary policy concerns 


56

≥90-day mortgage delinquency 

Delinquency by state 

U.S. 4.91% 

Hawaii 3.79% 

0 2 4 6 8 10 

Percent 

Dade, FL 23.1 

Riverside, CA 16.4 

Clark, NV 16.6 

Maui, HI 8.9 

Hawaii, HI 7.4 

Kauai, HI 5.6 

Honolulu, HI 3.3 


Source: Data by state 2010Q1 Mortgage Bankers Association; by county 2009Q4, Federal Reserve Bank of New York 

http://data.newyorkfed.org/creditconditions/ based on TransUnion LLC data; note possible inconsistency 

57

Composition of Federal Reserve assets 

2.5 

Securities held outright 

Other assets 

Lehman 

Weekly, trillion dollars 

2.0 

1.5 

1.0 

Specific institutions 

TALF 

Term Auction credit 

Commercial Paper funding 

Central bank swaps 

Securities (T-Bills, 

Notes, Bonds, MBS 

and agency debt) 

0.5 

0.0 

A-07 N-07 F-08 M-08 A-08 N-08 F-09 M-09 A-09 N-09 F-10 M-10 

Other assets 

Specific institutions 

TALF, CB swaps* 

*Was zero, jumped to $9.2 bil in 

May (Greece); now $1.2 billion 


Sources: Federal Reserve Board through week of June 16, 2010; calculations by TZE 

58

Recession ended (2001.11), “transparent” removal of 

accommodation began (2004.06), result: convergence 

Percent 

7 

6 

5 

4 

3 

2 

1 

0 


When the Fed began removing accommodation in 2004, they 

announced the Fed Funds target in “real time” and 

gave forward-looking statements in 

monetary policy decisions. 

Result: smooth 

convergence. 

99 00 01 02 03 04 05 06 

However, many people now 

would say (in hindsight) that the 

Fed raised rates “too late” and 

“too slowly” to pre-empt the subprime 

mortgage (and derivatives) 

financial crisis, or to pre-empt a 

rational speculative bubble in 

house prices 


Sources: Federal Reserve Board, Federal Reserve Bank of St. Louis; TZ Economics 

59

Fed funds and 10-year T-Note T 

yield trajectories 

along with Brewbaker’s end-2009 rate forecast 

6 

5 

Lehman 

(09/08) 

Greece 

(03/10) 

4 

Percent 

3 

2 

1 

0 


06 07 08 09 10 11 12 

From the 2004-2006 

experience,it seemed that the 

target Fed Funds rate increase 

could come as early as the 

June 2010 FOMC meeting, but 

problems in Greece and the 

Eurozone, plus less robust 

economic recovery data, have 

led to a deferral of those rate 

increases, allowing long-term 

rates to once again subside. 


Sources: Federal Reserve Board, Federal Reserve Bank of St. Louis; TZ Economics 

60

Federal fiscal balance issues 


61

Federal budget surplus projections, 

pre-Obama, as a percent of GDP 

Note: CBO baseline surplus projections adjusted for 

CBO’s estimates of costs of continued war 

spending, continuation of the 2001 and 2003 tax 

cuts, preventing scheduled cuts in Medicare’s 

physician payment rates, and holding other 

discretionary outlays constant as a share of GDP 


Source: Council of Economic Advisers, Economic Report of the President (February 2010) estimates developed by CBO 

in 2009 (under Doug Holtz-Eakin); see http://www.gpoaccess.gov/eop/2010/2010_erp.pdf 

62

Percent of GDP 

4 

2 

0 

-2 

-4 

-6 

-8 

Federal budget surplus as percent of GDP 

and the economic cycle 

On budget 

Including S.S. 

Baseline forecast 

Obamanomics 

Baseline 

Post-Obama 

-10 


-12 

70 75 80 85 90 95 00 05 10 15 20 25 


Source: Congressional Budget Office (http://www.cbo.gov/budget/budget.cfm) 

63

Federal budget surplus as percent of GDP 

and the Presidential political cycle 

4 

2 

R D R D R 

D 

(TBD) 

0 

Percent of GDP 

-2 

-4 

-6 

Baseline 

Post-Obama 

-8 On budget 

Including S.S. 

-10 Baseline forecast 

Obamanomics 

-12 

70 75 80 85 90 95 00 05 10 15 20 25 


Source: Congressional Budget Office (http://www.cbo.gov/budget/budget.cfm) 

64

Relevant fiscal policy issues 

• Benchmarking: to become a member of the Eurozone, a country’s 

central government fiscal deficit must be lesss than 2.5 percentage 

points of GDP—U.S. couldn’t make the cut (no one could now) 

• Crude formula: debt shouldn’t grow faster than economies’ ability to 

service principal and interest 

• Counterpart of net U.S. dissaving is net foreign saving; problem arises if 

higher interest is required to leave foreign debt holders indifferent 

• Among the moving parts are foreign exchange rates (e.g. yuan/dollar) 

• Challenges to restoration of fiscal balance include fate of 2001, 2003 tax 

cut expiration, entitlements (medicare and social security), tax subsidies 

(mortgage interest deduction), and federal spending reductions 

• Articulation of credible commitment to plausible deficit reduction strategy 

necessary to prevent emergence of interest rate risk premium (actually, 

higher real rate) to compensate foreign holders of U.S. domestic debt 


65

Signs 


66

Got ARRA? 

Boulder, 

CO

Close-duh

“A A road sign 

must have a 

preposition”

Pau 


70

Appendix 1: financial regulatory reform background 


71

Financial reforms themes 

• Among many origins of financial crisis: 

• Regulatory arbitrage—book assets off balance sheet, via conduits 

• Maturity mismatches—riding the yield curve on overnight repos 

• Violation of Taylor Rule mixed with Asian demand for Treasuries 

• “Affordable housing” pressure on GSEs, rating agencies 

• Bank stock ownership limitations that impede corporate governance 

• Six reform ideas (Calomiris) 

• Smarter “micro prudential” regulation of banks 

• Eliminate distortions in housing finance that encourage leveraging 

• Improve stockholder discipline of banks 

• Counterparty “netting” and OTC transparency 

• Prepackaged “bridge bank” plans for large, complex financials 

• “Macro prudential” regulation of bank capital and liquidity standards 

Charles Calomiris’s views are also developed in an April 2009 working paper, 

http://www0.gsb.columbia.edu/faculty/ccalomiris/papers/PrudentialBankRegulation.pdf; see also Markus Brunnermeier’s 

Journal of Economic Perspectives article http://www.princeton.edu/~markus/research/papers/liquidity_credit_crunch.pdf, 

and materials from panel discussion at the NABE spring policy conference with Calomiris at 

http://www.nabe.com/pc09/documents/Brunnermeier02b_NABE_2009_Brunnermeier.pdf. 


Source: NABE Spring 2009 Policy Conference, http://www.nabe.com/mem/pc09/calomiris-cato.pdf 

72

Someone to think about the big picture 

• Macro prudential regulation 

• Time-varying parameters (capital, liquidity, provisioning policies) 

• Increase capital requirements to tamp down asset price “bubbliciousness” 

• Form new regulator: Federal Reserve has its hands full 

• Problem identifying bubbles: false positives 

• Orderly resolution of systemically-embedded financial institutions 

• More on varying capital requirements 

• Excessive notional amounts of many securitization structures 

• Excessive speed with which financial innovations proliferate 

• Limit systemic exposure with higher capital requirements on CDOs, CDS 

• Lower requirements in interest rate swaps, others with proven track records 

See materials from panel discussion at the NABE October 2009 Annual Meeting with Rene Stultz (Ohio State) on bank 

CEO compensation and Arvind Krishnamurthy (Northwestern) on financial crisis and regulation, who reports that with 

more than $400 trillion in notional amounts outstanding (gross), interest rate swaps have proven to be “a successful 

market with few blowups” http://www.nabe.com/mem/am09/krishnamurthy.pdf (Author’s note: versus $60 trillion in 

notional CDS amounts pre-Lehman, before netting offseting counterparty exposures) 


Source: NABE Spring 2009 Policy Conference, NABE October 2009 Annual Meeting 

73

Appendix 2: Oahu tourism microeconomics 


74

Model says supply shock preceded demand shock 

P 1 

P 2 

P 

P 0 

V 0 

V 1 

V 

S 2 

net reduction 

S 0 

08q1 

09q2 

D 0 

D 2 

net reduction 

V 2 


75

Summarizing the predicted trajectory, 2008-2009 

2009 

P 

Theoretical prediction summarizing the 

(P, V) price-volume trajectory traced 

out in the previous slide sequence 

P 1 

P 0 

V 0 

08q1 

P 2 

09q2 

V 1 

V 2 

V 


76

Actual Oahu visitor arrivals in “price-quantity” space 

Real HNL air 

travel cost 

(2007 = 100) 

120 

110 

P 

08q3 

2010-?f 

08q1 

The actual fare (P), arrivals (V) 

trajectory traced out in (P, V)- 

space, quarterly from mid-2006 

through mid-2009 

Early collapse of travel was 

supply contraction (higher fuel 

costs, airline shutdowns) 

followed by collapse in travel 

demand, later response to falling 

lodging costs. 

100 

09q2 

(probably q3 

and q4) 

07q1 

90 

500 550 600 650 700 750 

V 

Oahu domestic 

arrivals (000, s.a.) 


Source: Bureau of Transportation Statistics, U.S. Department of Labor; Bureau of Economic Analysis, U.S. 

Department of Commerce; Federal Reserve Bank of St. Louis; Hawaii DBEDT; calculations by TZE 

77

Forecast requires both increased supply (lift) and 

demand recovery—macroeconomics in place for latter 

P 

S 2 

= K 1 

+ MC 2 

S 3 

= K 3 

+ MC 2 

P 1 

increased lift 

P 3 

P 2 

08q1 

D 3 

consumption revival 

*During 2010 gradual growth in 

travel demand from rising wealth 

and expected income should bring 

volumes back towards the starting 

point (2007), facilitated by entry (lift 

increases) and no material oil price 

changes (from $70-80/bbl) 

V 1 

V 2 

P 0 

V 0 

D 2 

V 3 

V 


78

Tourism forecast: total visitor arrivals 

2000 

Quarterly in thousands, s.a., log scale 

1900 

1800 

1700 

1600 

1500 

1400 

1300 

9/11 

SARS 

Lehman 

Acceleration over next four 

quarters is expected to 

substantially rebuild arrivals 

volumes as lift is restored 

Actual 

Forecast 

00 02 04 06 08 10 12 14 


Source: Hawaii Tourism Authority, Hawaii DBEDT; seasonal adjustment and forecast by TZE 

79

Housing after the recovery - REALTORS® Association of Maui, Inc.

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