Wednesday, April 29, 2009

Actively Managed Fund Managers: Say Bye-Bye to My Pennies Until You Fix Your Incentive Policies

“A blindfolded chimpanzee throwing darts at The Wall Street Journal could pick a portfolio of stocks that would perform as well as those carefully selected by the highest priced security analysts.” Burton Malkiel
Actively managed funds are supposed to "surf the waves" of the financial markets in your advantage when compared to passively managed index funds that just follow the tide. In exchange for this service, they charge much higher fund expenses (management fees).

Until recently, I had some money invested in actively managed funds. Not anymore. During the recent market downfall, actively managed funds didn't do better than index funds, and when they did better, it was for arbitrary reasons, such as not owning shares of large financial institutions due to fund regulations (see the WSJ on the subject and compare the performance of some of the best funds in the market here). Some researchers have also gathered convincing evidence indicating that actively managed funds indeed fail to outperform cheaper index funds.

As a result, I'm out of actively managed funds until they adopt incentive policies like this one:

Management fees are calculated as a share of the difference between the fund's performance and the performance of a benchmark index fund. If they beat the market, I pay them. If the market beats them, they pay me.

For example, let's say the "Ambassador Aggressively Managed Fund" has a return in 2009 of 20%. The chosen benchmark fund is the S&P 500, which let's assume has a return 0f 18% (dream on). They get 25% of the difference, meaning, I pay them 0.5% as management fees. On the other hand, if the fund's performance is only 16%, they pay me 0.5% as compensation fee for not investing my money wisely.

Until managed funds adopt compensation policies like the one above, they can say bye-bye to my hard-earned pennies (HT to Anil for the post idea).

The Reports of My Ruin Have Been Greatly Exaggerated

No, my life isn't in ruins, don't believe the rumors back in the South...

Picture by Ennyman.

Tuesday, April 28, 2009

Political Irrationality: The Swine Flu Scare

Don't take me wrong: I believe that contagious diseases should be taken seriously and good hygiene should be a habit, not a fashion.

Yet, this swine flu scare is the latest example of how politicians can easily take advantage of people's political irrationality and of the collapse of mainstream media credibility.

Let's put things in perspective: there are many contagious diseases around the world that have a much more sinister track history than this swine flu, and yet nobody gives them even one minute of their daily attention. As an example, consider the case of the dengue fever, transmitted by mosquitoes. In 2008, in Brazil alone, there were almost 800,000 infections and 448 deaths. A WebMD article estimates the annual worldwide death toll to be around 24,000. Yet, governments and press organizations from many countries, including Brazil, are now recommending that people should not travel to the US or Mexico due to the swine flu... C'mon, gimme a break!

BTW, here's Ennyman on the swine flu media scare:
I have not lost any sleep over this except to worry a little whether it's possible get infected thru online social networks. Actually, maybe someone will suggest that MySpace and Facebook are helping ameliorate the spread of the disease since we do all our socializing online now instead of face-to-face.
Oh, and here's Jon Stewart, excellent...
The Daily Show With Jon StewartM - Th 11p / 10c
Snoutbreak '09 - The Last 100 Days
Daily Show
Full Episodes
Economic CrisisFirst 100 Days

Monday, April 27, 2009

Gary Becker: The Problem with Bank Reserves

In his latest post, Gary Becker appears to agree with me that the unparalleled expansion of bank reserves has created substantial risks for the American economy:

The huge increase in bank reserves is a major consequence of the Fed's monetization of the government's large spending programs. Reserves went from about $8 billion in early Fall to around $800 billion, or a hundred fold increase in only 6 months. The recession rather than the wage and price controls imposed during prior periods is keeping inflation suppressed at present. Once the economy begins to recover, the inflationary risks will be enormous. In order to soak up these reserves, the Fed would have to sell large quantities of its government securities back to the private sector. These sales would put downward pressure on security prices- that is, upward pressure on interest rates- that will slow the economy's expansion at that time. For this reason, any government in power then, whether Democratic or Republican, will vigorously resist such Fed actions.

I agree with Becker: the fire sale of government bonds by the Fed will be necessary at some point in the future, and has the potential to generate high interest rates. On the other hand, if the fire sale proves to be politically or technically unfeasible, then inflation will surge and high nominal interest rates will follow anyway. It's a Catch-22 that has only been aggravated by the misguided fiscal and bailout policies of the new administration and its furthering of the missteps of the previous one.

Saturday, April 25, 2009

Government Failure: Willfully Ignorant Economic Policies

This passage on the Lucas critique in the Monetary Economics textbook by Champ and Freeman discusses a very important economic lesson that many policymakers around the world have chosen to ignore during this crisis, especially policymakers in our current administration (italics are mine):
The importance of the Lucas model lies not primarily in its explanation of the money/output correlation, as interesting as it may be. ... Lucas's paper changed macroeconomics by demonstrating that the correlations among macroeconomic aggregates are subject to change when economic policy changes. This showed macroeconomists the pitfalls in evaluating policy by looking simply at correlations in the data, without a working theory of how people may react to policy changes. Those macroeconomists who open their eyes to Lucas's critique are thereafter compelled to fully specify the environment in which the economic agents studied make their decisions.
The disturbing lack of understanding by current policymakers of the lesson above is one of the main reasons why so many economists have been critical of the economic policies adopted by the current administration. The cost of this willful ignorance will surely not be small.

Friday, April 24, 2009

Blodget's Three Thoughts on the Financial Crisis

The Atlantic Monthly has an excellent article by Henry Blodget on the financial crisis. Here are his main conclusions:

So what can we learn from all this? In the words of the great investor Jeremy Grantham, who saw this collapse coming and has seen just about everything else in his four-decade career: “We will learn an enormous amount in a very short time, quite a bit in the medium term, and absolutely nothing in the long term.” Of course, to paraphrase Keynes, in the long term, you and I will be dead. Until that time comes, here are three thoughts I hope we all can keep in mind.

First, bubbles are to free-market capitalism as hurricanes are to weather: regular, natural, and unavoidable. They have happened since the dawn of economic history, and they’ll keep happening for as long as humans walk the Earth, no matter how we try to stop them. We can’t legislate away the business cycle, just as we can’t eliminate the self-interest that makes the whole capitalist system work. We would do ourselves a favor if we stopped pretending we can.

Second, bubbles and their aftermaths aren’t all bad: the tech and Internet bubble, for example, helped fund the development of a global medium that will eventually be as central to society as electricity. Likewise, the latest bust will almost certainly lead to a smaller, poorer financial industry, meaning that many talented workers will go instead into other careers—that’s probably a healthy rebalancing for the economy as a whole. The current bust will also lead to at least some regulatory improvements that endure; the carnage of 1933, for example, gave rise to many of our securities laws and to the SEC, without which this bust would have been worse.

Lastly, we who have had the misfortune of learning firsthand from this experience—and in a bust this big, that group includes just about everyone—can take pains to make sure that we, personally, never make similar mistakes again. Specifically, we can save more, spend less, diversify our investments, and avoid buying things we can’t afford. Most of all, a few decades down the road, we can raise an eyebrow when our children explain that we really should get in on the new new new thing because, yes, it’s different this time.

Wednesday, April 22, 2009

Why Not a Capitalism Day?

Here's a great editorial by the IBD on the need to honor capitalism with its own day (HT Carpe Diem):
There's nothing wrong with setting aside a day to honor the Earth. In fairness, though, it should be complemented by Capitalism Day. It's important that the world be reminded of what has driven the environmental improvements since Earth Day began in 1970.
Let me simplify the environmentalist argument for capitalism this way: capitalism is based on private property and the search for profit. Both are essential to productivity growth. Higher productivity is the same as producing more with less. In other words, if you're really serious about the environment and about the welfare of humanity, then you should be serious about the defense of capitalism and free markets too.

The Daily Show: Man Versus Earth, the Wreckoning

It's Earth Day, so here it is (HT Division of Labour):
"Can we afford not to have a war on lightning?" LOL!
The Daily Show With Jon StewartM - Th 11p / 10c
Man V. Earth: The Wreckoning
Daily Show
Full Episodes
Economic CrisisPolitical Humor

7th Art: Tyler on "The End of Poverty"

Tyler dissects in this article a movie called "The End of Poverty," the latest example of manipulative, self-congratulatory, hypocritical, pseudo-knowledgeable, boring and, above all, condescending misuse of cinema by Hollywood celebrities that apparently have too much money and not enough real work on their hands. Here are some highlights:

In this movie, the causes of poverty are oppression and oppression alone. There is no recognition that poverty is the natural or default state of mankind and that a special set of conditions must come together for wealth to be produced. There is no discussion of what this formula for wealth might be. There is no recognition that the wealth of the West lies upon any foundations other than those of theft, exploitation and the oppression of literal or virtual colonies. ...

Perhaps the real lesson here is that someone is always going to be unhappy about how poverty is handled on the big screen. Once a movie decides it is going to cover “poverty” as a theme, its characters are liable to become clichés even before the script assigns them their lines. The better cinematic treatments of poverty are those that are not too consciously concerned with being didactic about poverty per se. For all its exaggerations and clichés, you’ll actually learn more about poverty by watching Deliverance than you will from The End of Poverty. At least in Deliverance it’s clear that a lack of production is among the main root causes of poverty. ...

Given the obvious intent that The End of Poverty should be a film version of a propaganda poster and a recruiting device for a new era of anti-capitalist protest, it verges on embarrassing that, when all is said and done, this film does exactly what it complains about: It exploits and markets poor individuals from the South for the purposes of wealthier people, in this case Western moviemakers, commentators and intellectuals.

Oh well, as if we needed more waste of cellulose.

Tuesday, April 21, 2009

Cochrane on Ancient Keynesianism

University of Chicago economist Cochrane has produced one of the best statements yet about the use of cartoonish Keynesianism by the current administration and most of the press:
Professional economists, the guys I hang out with, are not reverting to ancient Keynesianism any more than physicists are going back to Aristotle when they can't understand how fast the universe is expanding.
He was probably trying to be gentle here. I'd say that the regression that we've been observing is more akin to a return to pre-Socratic animism.

The Onion: Americans Are Oustourcing Their Own Work

The Onion on the benefits of a globalized economy (HT Mankiw)...

More American Workers Outsourcing Own Jobs Overseas

Monday, April 20, 2009

Economists: Can't Live with Them, Can't Live Without Them

As it happens during every economic crisis, economists have become the target of lots of mostly undeserved criticism. Yes, it's true that there are elements of the crisis that can be traced back to the political actions of some economists. Yes, maybe there are a significant number of academic economists that shouldn't be teaching given their lack of understanding of real world economics. Yet, the same is true for all professions and fields of science, partly because of ordinary human failure and partly as an expected outcome of the scientific method.

An accusatory piece came out recently in the BusinessWeek. The author denounces economists for having "mostly failed to predict the worst economic crisis since the 1930s" (HT Selva Brasilis). The magazine The Economist replies by coming to the defense of economists:
These angry rants about economists are strange. The complainants castigate an entire field and then interview members of the profession who saw it differently. How can an entire profession be guilty of negligence when it is so easy to find dissent? Also, while they are at it, why don't they blame physicists who used economic and financial models, but did not take the time to understand their limitations and how they should be applied. Or how about lawyers, they were supposed to be regulating financial markets, but many never bothered to learn the necessary quantitative skills.
The author of the BusinessWeek article shows the typical symptoms of someone that has suffered in the hands of some of my colleagues during college. I sympathize with his distress. Unfortunately for him, he'll need to cope with it and live with ideas produced by professional economists for the rest of his life. The reason is simple: if he investigates further, he'll find out that every economic or anti-economic idea that he can come up with has most surely been argued in detail by at least a few very qualified professional economists. He'll also find out that getting into the economic debate is not a task that can be easily undertaken by amateurs.

Wednesday, April 15, 2009

Mind the Gap: The Astonishing World-View Gap Between Americans and Brazilians

In this post by Offsetting Behavior you'll find some interesting statistics that reveal the huge world-view gap between Americans and Brazilians. The graphs below represent the increase in interest in Rand's and Marx's ideas after the beginning of the current crisis (darker colors show stronger Google search intensities, Rand is red, Marx is blue, click on the graphs to magnify):

While Brazil is second only to Cuba regarding the revival of interest in Marxist ideas, we see the strongest revival of interest in Rand's ideas here in the US.

Being a native of Brazil, those numbers don't surprise me at all. They mirror differences in perception of reality that help to explain the achievements of the US and the failures of Brazil as nations.

It's ironic however that some here in the US have recently developed a taste for ideologies that have wrecked so many nations. I wonder what will be the effect of this intellectual shift on the future of this country.

Notice that the BRIC are not at all made up of the same bad stuff. While Brazilians prove to be incapable to learn from their own history of statist fiascos, Indians prove to be much smarter by moving away from their disastrous socialist experience, at least in what matters the most: their inner minds.

Monday, April 13, 2009

7th Art: The French Jack Bauer, Circa 1964

French Jack Bauer, circa 1964. He has only 24 hours to save the world... Excellent parody of the aesthetics of French movies of the sixties ("la Nouvelle Vague") and of French existentialism (HT Faria):

Sunday, April 12, 2009

7th Art: Chauncey Gardiner Is Back with a Vengeance

Here's the WSJ on the naiveté and superficiality of our current political discourse and its poor coverage by the press:
The combination of signs that the economy may have begun to recover and the arrival of spring has led to the overuse of a metaphor that could use a little pruning. We’re talking about those “green shoots” (sometimes “shoots of green”) that keep showing up in policymakers’ speeches, economists’ notes and, unfortunately, reporters’ stories. ...
The source, of course, is Being There, the 1979 movie (based on the Jerzy Kosinski book of the same name) where Peter Sellers plays a feeble-minded gardener named Chance. Sometimes life imitates art – and we wish it didn’t.
Yes, "as long as the roots are not severed, all is well, and all will be well… in the garden..." Stop it please!

Saturday, April 11, 2009

The Invisible Hand: The Social Miracle of the Marketplace

Look at the picture above. All these people are helping each other. All of them are cooperating with each other. Nobody had to brainwash them into becoming political activists so they could help people they never met before. No government had to dictate social service. No charity was needed to provide them with needed goods.

This picture represents what economists call the invisible hand. This is the driving force behind the vast majority of cooperative and beneficial transactions among people that are not next of kin. We were wrongly taught that history is mostly made by politics and war. Wrong. History is mostly made by cooperation among strangers through trade.

A post by Art Carden in the Division of Labour elegantly lays down what is surely one of the most important principles of social interaction, a principle that clearly explains why all economic systems that tried to eradicate the marketplace failed, a principle that is so important that it should be part of our elementary education, but instead is one of the most disregarded and sometimes even despised principles of social action:

As economists like Milton Friedman, Deirdre McCloskey, and others have pointed out, the social miracle of the marketplace is that it helps people care for one another even when they don't care about one another. In fact, people with positive antipathy toward one another can still find ways to cooperate to mutual advantage through the market process.

Or as Adam Smith bluntly but eloquently pointed out more than 200 years ago:

It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own self-interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.

[Caveat emptor] This is the "home page" of professor Adam Smith at UT Dallas [grinning]...

Government Failure: Repeating the Errors of the Past

"Those who cannot remember the past are condemned to repeat it," wrote once George Santayana.

The Nazi propaganda poster seen on the right is a good reminder of one of the greatest intellectual and moral failures and political and economic tragedies of human history. The poster says "Germans buy German goods" and "German Week, German Goods, German Labor."

Economists had until recently hoped that economic bigotry and obscurantism, as practiced by Nazis and communists, were things of the past, at least in nations like the US. Unfortunately, our hopes were dashed by our elected officials, as explained by McTeer:

"Buy American" was put into the stimulus package. It sounds innocuous enough, but how would we feel about "buy German" or "buy French" in today's world where there is not enough aggregate demand to keep all workers fully employed? ...

Does Congress not understand that we can't shift our problems onto our trading partners without the same coming back at us? The Great Depression of the 1930s might have been a mere recession without our Smoot-Hawley tariff that triggered a world-wide trade war.

Economists need to hammer this extremely important point until it sinks in among voters and those in power. We must not repeat the costly mistakes of the 20th century.

Friday, April 10, 2009

Split or Steal?

The video below showcases the importance of understanding game theory (HT Mankiw). What was the mistake of one of the players? Is there a winning strategy?

Economics students should be able to fully understand what happened here:

Thursday, April 9, 2009

Government Failure: Caplan on the "Idea Trap"

Demagogues, political naifs and economic illiterates love to parrot about how "markets do not self-correct" every time we go through crises that almost always were created by their own political excesses. A great article by Caplan explains how the only thing that never self-corrects is in reality the government's provision of really bad ideas (HT De Gustibus Non Est Disputandum). Here are some thought-provoking passages:

Your country is falling apart. Unemployment and inflation are sky high. World war is on the horizon, and there are riots in the streets. But never fear: An election is coming up! The incumbent will be thrown out for his failed policies. And the challengers will surely have the bright new ideas the country needs to turn itself around.

Or will they? Perhaps amidst all this the confusion, the people will hand the reins of power over to irresponsible demagogues, and conditions will go from bad to worse. This worry is hardly far-fetched. When do the "crazies" start to get a serious political hearing? Only after a country is already going down the drain.

If we look around the world, there is a lot of circumstantial evidence that bad performance is not self-correcting. One of the most important facts about economic growth is that, on average, poor countries do not catch up to rich countries. The main reason seems to be that poor countries consistently have bad policies. Many of these countries are democracies. But they almost never elect a candidate on the theme "We need to copy the policies of more successful countries like Hong Kong and Singapore, and turn our backs on our failed national political tradition." ...

Depression and disarray benefit the Lenins of the world. That is when the public is most receptive to nonsense, to scapegoating sneaky foreigners and greedy corporations. The voice of reason, in contrast, gets its most sympathetic hearing when things are running smoothly, so the public is calm enough to think rationally about how to improve on the status quo, and maybe even appreciate how much their favorite scapegoats do for them.

7th Art: Quais des Orfèvres (1947)

Eight years before the success of masterpiece film "Diabolique," Clouzot directed "Quais des Orfèvres" ("Quay of the Goldsmiths," 1947), another excellent even if not equally well-known crime thriller. It's a remarkable movie, among other reasons for the presence of two French beauties, Suzy Delair and Simone Renant, and the bold depiction of adult themes for a 1947 movie - a mark of Clouzot's work.

Here's Suzy Delair singing the movie hit titled "Avec son tra-la-la":

Monday, April 6, 2009

Grafite's Goal of the Year

Pure soccer genius (HT Silva).

Students at UMD Get It Right in the Statesman

Two Opinion articles by UMD students make excellent points about current events. Brooke Naland strikes gold again when talking about the constitutionality of spam mail:

However, on the other hand, it gets more complicated when I begin to consider the commercial aspect of this law. ... When a business cannot give its actual information and instead has to resort to false information, one has to beg the question of how sound their business practices can be expected to be otherwise.

All in all, while some good may come of it, I'm somewhat in disagreement with the U.S. Supreme Court's decision in this case. First Amendment rights, while very important to our country, are not all-encompassing, and therefore do not necessarily give businesses the right to be irresponsible or unnecessarily hide information from potential consumers. When the original Framers of the Constitution wrote the Bill of Rights, I am pretty positive that they did not have unsolicited penis enlargement e-mails in mind.

And Jesse Meehl hits the bull's-eye with this comment on another case of EPA economic foolhardiness:
Stopping the global warming "dragon" involves taking steps we know will work. We can't afford to throw regulations at everything we think might be a factor. In order to control methane, are we going to start regulating how many cows someone can own? Like our supposed dragon slayer, we can't just rush into a situation and make a decision without being fully informed. That doesn't mean we can't do anything. We need to stick to things that we know help, or at least things that won't hurt the environment. Take the bus instead of your car. Don't waste food, etc. In addition, we need to get the government out of the energy business. There can't be a fair, free market to bring ideas to if the government is deciding who to fund. A free market would allow alternative energy that works to be continually produced, thanks to standard supply and demand. At the same time, things that fail are eliminated. And this is all decided by "we the people," not "them in Washington," which is exactly what the Founding Fathers intended.

Saturday, April 4, 2009

Government Failure: Dawn of the Zombie Companies

If the current administration had a time machine, it would probably be willing to use it to save the likes of WorldCom and Enron. What is kind of ironic, given that the government that loves to help big corporations is made by the same people that used to bash them while on the campaign trail (and I'm not saying here that the other party has done much better in the recent past)...

Will the current administration be responsible for a new era in American business, the era of the zombie companies? Here is David Brooks on the disastrous administration policies towards failed American companies such as GM (HT Escolhas e Conseqüências):

The most likely outcome, sad to say, is some semiserious restructuring plan, with or without court involvement, to be followed by long-term government intervention and backdoor subsidies forever. That will amount to the world’s most expensive jobs program. It will preserve the overcapacity in the market, create zombie companies and thus hurt Ford. It will raise the protectionist threat as politicians seek to protect the car companies they now run.

It would have been better to keep a distance from G.M. and prepare the region for a structured bankruptcy process. Instead, Obama leapt in. His intentions were good, but getting out with honor will require a ruthless tenacity that is beyond any living politician.

Should the government have helped WorldCom, Enron or Polaroid to avoid bankruptcy? Should the government have transformed IBM or Apple into big zombie companies when they almost went bankrupt years ago? The answer to these questions is obviously a BIG NO! There should be no question that the US would be a much more backward and poor nation if the American government would have adopted in the past the misguided economic policies of the current administration.

Thursday, April 2, 2009

The Phenomenal Increase in Bank Reserves

There's absolutely no question that the extraordinary increase in total and excess reserves held by banks, shown in the graphs below (click on the graphs to zoom in), is a unique event in monetary history. As it happens with all unique historical events, it's hard to fully understand its meaning while it's yet taking place and to predict its consequences. What will happen when the Fed eventually needs to mop up all this liquidity? What will be the effect on interest rates? How bond and stock markets will react?

The extraordinary behavior of excess reserves is a result, among other factors, of the extremely low interest rates currently set by the Fed when lending money to banks:

One thing I can predict for sure: economists will not have a shortage of topics to talk about during lunch for many years to come...

Bernanke on the Need for a Rapid Increase in Fiat Money... In 1987!

In the excellent textbook "Modeling Monetary Economies" (2001), Champ and Freeman said the following regarding Ben Bernanke's 1990 article titled "Clearing and Settlement During the Crash":
Ben Bernanke (1990) suggests that the Federal Reserve’s rapid temporary increase in fiat money was the action needed to handle the enormous volume of transactions without financial disruption during the stock market crash of 1987.

Who could have imagined that Bernanke would one day be able to test his article's theory using a real economy...

Did You Know?

Mind-boggling video (HT Ennyman).

Wednesday, April 1, 2009

Levitt and Mankiw Join Obama's "Dream Team"

Breaking news (HT Marginal Revolution), more here and here:

Colleagues at the University of Chicago economics department are cheering the move. “I could not think of a better choice than Steve Levitt to move to Washington and help the Obama team” says Nobel Laureate James Heckman, adding that he expects the job to occupy Levitt for two full Obama administration terms. “We will miss him, but he has an important job to do.” ...

Now, Obama has shown the same pragmatic streak in inviting Greg Mankiw to join his administration. Mankiw was the head of Bush II’s Council of Economic Advisors. He has so far played a role on the sidelines, an informal referee of the contest between Obama and his right-wing critics. Mankiw is often skeptical of Obama’s plans but at the same time he does not fully endorse their antithesis. This ambiguity has suited Mankiw well, as he has been courted by both sides of the political spectrum. Finally, he has chosen his prom date and decided to join the Obama administration. He will serve alongside his old Harvard colleague Larry Summers as Co-Director of the National Economic Council.

The Invisible Hand: Lowest Mortgage Rates Since Eisenhower

Mortgage rates dropped to their lowest value since the fifties, according to The result is a huge increase in refinancing activity, a great example of the predictive power of economics. Does anybody have any doubt that incentives matter?

Here are some interesting quotes from the article. :

It appears that homeowners, eager to refinance, took advantage of the lowest rates since the Eisenhower administration.

The Mortgage Bankers Association says home loan applications soared by more than 30 percent last week. Four-fifths of those applicants were homeowners who had loans and who wanted to refinance at lower rates. ...

People in the mortgage industry say they hear from a lot of people who say they won't refinance until mortgage rates fall to 4.5 percent or even 4 percent. Few lenders think rates will drop that low.

"It is ridiculous for somebody to hold out for 4 percent because there's no evidence that we're going to see that immediately," says Barry Habib, CEO of Mortgage Market Guide. It would be better, he says, to refinance now to take advantage of lower rates -- and if rates unexpectedly drop even further, refinance again.

Another reason to act now, instead of waiting, is that lenders keep tightening their standards -- and, at the same time, house prices are falling. The combination of more stringent lending and falling prices can push homeowners out of the category of people who are eligible for loans and into the category of people who are ineligible.