What life is like as a Scientist in Congress Bill Foster U.S. Congressman (Ret.) Illinois14th...

What life is like as a Scientist in Congress

Bill Foster

U.S. Congressman (Ret.)

Illinois14th District

Introduction

Bill Foster

U.S. Congressman (Ret.)

Illinois14th District

OUTLINE1. Bill’s Trajectory:

– Businessman– Physicist– ?? Politician ??

2. Financial Services – Plots & Data

3. Applied Physics: A PID feedback controller for stabilizing Real Estate Housing Bubbles

(Talk at AEI)

Bill Foster’s TimelineI. Businessman: ETC Inc (1974…~1980)

II. Physicist: (1979-2005)– IMB Proton Decay Detector (~1980-1984)– Fermilab (1984-2005)

• HEP Experiments: CDF & SDC• Accelerators

III. Politician (2006 - )– Why would you possibly do such a thing?– Learning to Campaign– A day in the life of a U.S. Congressman

Electronic Theatre Controls, Inc.~1974 -1980

Electronic Theatre Controls, Inc.Today

• 500 Employees in Middleton, WI

IMB Detector 1979 – 1984 (…1987A)• Bill’s PhD Thesis (under Prof. Larry Sulak)• No Proton Decay, but saw SN1987A neutrinos

IMB Proton Decay Experiment

"Did anyone read on the front page of the Times that matter is decaying? Am I the only one who saw that? The universe is gradually breaking down. There's not going to be anything left. I'm not talking about my stupid little films here. Eventually there's not going to be any Beethoven or Shakespeare or ..."

Woody AllenStardust Memories (1980)

Fermilab’sAccelerato

rs

Past,Present,

and Future

Dr. G. William Foster

November 8, 2002

Bill at Fermilab 1984 - 2006

Collider Detector at Fermilab

(CDF)

1984 - 2005

CDF Central Tracking ChamberElectronics High Pt Track Processor

“Damn Fast”

Event Display Program

CDF

High Pt Track Processor

• Hand-wired(Wire-wrapped) FastBus Boards

• Finds all of the High-Pt Tracks before the next crossing

• Essential for Top Quark discovery

e-u top Quark Search & Discovery

QIE Integrated Circuit (invented for Superconducting Super Collider)

• Deadtimeless Charge Integrator and Floating-Point Digitizer

• Still in use today for LHC experiments

Particle Accelerators 1994-2006

FermilabMain Injector

Antiproton Recycler Ring

8 GeV Transfer Line (1996)Fermilab Booster Main Injector

Permanent Magnets

Very Large Hadron Collider (VLHC) 100kA Superconducting Transmission Line Magnet

Beam Damper Circuits for Main Injector

8 GeV Linac / Proton Driver / Project X

The Familial Recessive Gene for Adult-Onset Political Activism

• Bill Got Married,

• Raised a Family,

• Had a reasonably interesting career in Physics.

So: why go into politics?

Bill’s Mother and FatherJeanette Raymond and George William Foster

Met on Capitol Hill ~1950

Bill’s Mom worked for Sen. Paul Douglas (D-IL)

2005 – Bill’s Youngest Child (Christine) Heads off to College

Patrick Murphy 2006 Campaign

Bill Started the 110th Congress as an Intern in the Office of Rep. Patrick

Murphy

• He ended it as a sitting Congressman

Gerrymandering and the IL-14th

IL-14th

Illinois 14th Congressional District

The Campaign Staff

Bill’s Favorite Parade Tie

County Fairs

Churches

FARMERS

Photo Shoot

March 8, 2008

Swearing-In Ceremony – March 11, 2008

2008: An Interesting Year to be a Politician From Illinois

Denver Convention 2008

CongressionalBall - 2008

What Life as a Congressman is Really Like

• Scheduled 12 Hours each day

• Read myself to sleep each night with a ¾” stack of papers…

• Live in a Crummy Efficiency Apartment in DC

• After last votes on Friday, come back home each weekend

(where I get scheduled up by the staff in the District Office…)

Life in Washington

Efficiency Apartment

2 blocks from Capitol

“Congress on Your Corner”

So, why does anyone take this job?

Voting Machine in the U.S. House of Representatives

Supporters

Energy Policy in Congress

Questions About Solar Energy…

Armed Forces

H.R. 3962 - Affordable Health Care for America Act

Financial Services Committee

• Our Economy has Many of the Propertiesof an Oscillating Analog Electronic Circuit

$45T

$50T

$55T

$60T

$65T

$70TJu

n-07

Sep-

07

Dec

-07

Mar

-08

Jun-

08

Sep-

08

Dec

-08

Mar

-09

Jun-

09

Sep-

09

Dec

-09

Mar

-10

Net Worth of U.S. Households

$17.5 TWealth DestroyedOct. 2007 - March 2009

Source: Federal Reserve Flow-of-Funds Data Series Z1 : June, 2010 Rep. Bill Foster http://Foster.house.gov

$6.3 T

RecoveredSince Stimulus

Stimulus SignedFebruary 17, 2009

GreatRecession (Started Q2 2007)

BUSH OBAMA

HOOVER

Great Depression (1929-1933)

FDR

Stimulus

70%

75%

80%

85%

90%

95%

100%

0 0.5 1 1.5 2 2.5 3 3.5 4

Hou

seho

ld N

et W

orth

Com

pare

d to

Pea

k

Years from Peak

Drop in Household Net Worth

Sources: Frederic S. Mishkin, "Household Balance Sheet and The Great Depression," J. Econ.Hist.38 (Dec.1978), p. 920. & Federal Reserve Flow-of-Funds.

Worse than the Great Depression

Actual Intervention

No Intervention

Stimulus Only

Financial Only

$45 T

$47 T

$49 T

$51 T

$53 T

$55 T

$57 T

$59 T

$61 T

$63 T

$65 T

U.S

. Hou

seho

ld N

et W

orth

($T)

Rep. Bill Foster - Aug 2010 Sources: Federal Reserve Board & Moody's Analytics

Household Net Worth Actual vs. No Intervention

$7 TIncrease

due toIntervention

WHAT IF WE HAD DONE NOTHING ?American families would be ~$7T Worse Off

Manufacturing Employment

?1/3 OF JOBS

LOST IN 8 YEARS

STEADY FOR 30 YEARS

10 M

11 M

12 M

13 M

14 M

15 M

16 M

17 M

18 M

19 M

20 M

1973 1977 1981 1985 1989 1993 1997 2001 2005 2009 2013

Man

ufac

turin

g Em

ploy

men

t (m

illio

ns)

Rep. Bill Foster Source: U.S. Bureau of Labor Statistics

U.S. Manufacturing Job Loss - 2001-2009

BANK FAILURES AND SUSPENSIONS 1864-2009

Dodd-FrankWall-Street Reform Bill

• Bill ended up being 10-for-10 in getting his amendments into House-Passed reform bill.

• 6 ½ of these survived the compromise with the Senate.

APPLICATION OF ANALOG ELECTRONICS TO POLITICS

Counter-Cyclical Down Payments:

A Simple Method for Mitigating Future Housing Bubbles

Rep. Bill Foster (IL-14)

AEI - June 12, 2010

With suggestions & comments from: Alan Boyce, Polly Cleveland, Mason Gaffney,

Alex J. Pollock , and Jonathan Reiss.

Counter-Cyclical Down Payments

THE CONCEPT:

• Automatically increase down payments when housing prices start to rise rapidly

Dampen or Eliminate Future Housing Bubbles

No attempt to regulate long term asset values,just damp out boom-bust oscillations.

“AC-coupled feedback loop”

This is a Feedback Loop• Well known from engineering controls theory• Some examples:

– Thermostat– “Governor” on a lawn mower engine (Gibbs)– “Cruise Control” on an automobile

• Regulates fixed speed as car goes up & down hills

– Computerized Accelerator Control on modern cars• programmed to limit acceleration & deceleration for

passenger comfort even while imposing no limit on car’s overall speed

Why Dampen Housing Bubbles?

• That is where the money is:– Housing dominates household net worth– We can survive a stock bubble but not a housing

bubble• Time scale of real estate bubbles is tractable

– Develop over months to years• Low volatility of intrinsic worth of housing

– Not like stock valuations based on volatile earnings– Housing demand changes on demographic time

scales• Good statistical measures exist for feedback

– Large numbers of public transactions in regional housing markets

http://HousingBubble.jparsons.net

http://housingbubble.jparsons.net/

A Simple Example Damping Formula

MinimumDown

Payment= +CONSTANT

(e.g.10%)

Percentage Increase inReal Regional Housing

Prices Over Past 3 Years(or a fraction thereof)

NOTES:1. If the housing price increase is negative, it is treated as zero.2. A fixed fraction (e.g.40%) of the price increase could be used.

This controls how strong the damping of bubbles will be.3. There is nothing magical about using the 3 year price rise …

anywhere between 1-5 years works OK.4. LTV on Home Equity Loans, etc. would be similarly limited.5. The CONSTANT term is subject to socio-political debate and

will not be discussed here. Here we assume 10%.

Can be thought of in several ways:

1. As a feedback mechanism.

2. As a prudent countercyclical principle:“All mortgages have to make sense even if housing

prices retreat to where they were a few years ago”

3. As a simple underwriting rule:“I will give you a mortgage against 90% of the long-

term value of the property, but against only a small fraction of the recently-appreciated value.”

Treats skeptically the value of recently-appreciated assets!

How This Would Have Worked

• The following plots show how this formula would have applied to price bubbles in regional markets over the last 20 years.

• In reality, the big increases in counter-cyclical down payments would have absorbed speculative capital and largely squelched the bubbles.

• There are also higher-order psychological effects since even the specter of large counter-cyclical down payments would have discouraged any large inrush of speculative capital.

0

50

100

150

200

250

300

Infla

tion-

Adju

sted

Reg

iona

l Hou

sing

Pric

es (2

000 =

100)

Countercyclical Down Payment Based onRecent Rise in Regional Real Estate Price

Las Vegas, NV (Inflation Adj.)

Down Payment (3 yr. Diff.) (Fract=100%) Peak=55%

Down Payment (3yr. Diff.) (Fract=50%) Peak=32%

10% Fixed Down Payment

0

50

100

150

200

250

300

Infla

tion-

Adju

sted

Reg

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l Hou

sing

Pric

es (2

000 =

100)


Seattle, WA (Inflation Adj.)




0

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100

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200

250

300

Infla

tion-

Adju

sted

Reg

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l Hou

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es (2

000 =

100)


Cleveland, OH (Inflation Adj.)




ORDWAS on Air Force One

BACKUP: DETAILS ON COUNTER-CYCLICAL LOAN-

TO-VALUE LIMITS

• OPTIMIZATION OF FEEDBACK GAIN

• BEHAVIOR IN REGIONAL MARKETS

• LEGISLATIVE IMPLEMENTATION

Input Data

• Housing Price Data (S&P / Case-Shiller)– Seasonally Adjusted to avoid yearly ripples– Regional since markets have individual

bubbles

• Inflation Adjustment using CPI-U– excluding Food and Energy (less noisy)

0

50

100

150

200

250

300

Infla

tion-

Adju

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es (2

000 =

100)


Miami, FL (Inflation Adj.)




0

50

100

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200

250

300

Infla

tion-

Adju

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100)


Minneapolis, MN (Inflation Adj.)




0

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250

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Infla

tion-

Adju

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10-City Average (Inflation Adj.)




Countercyclical Down Payment Absorbs Capital from House

Flipping

Normal Flipping

Flipping with Countercyclical Down Payment

Initial Equity $10,000 $10,000 Down Payment 10% 10% Affordable House Price $100,000 $100,000 Market Appreciation 25% 25% Appreciated House Value $125,000 $125,000 Equity after Sale $35,000 $35,000 Down Payment for New House 10% 35% See Note Affordable New House $350,000 $100,000

Note: Counter-Cyclical Down Payment = 10% + 25% Market Appreciation

More Optimizations of the Feedback Loop

• What variables are best for feedback sensing:– Housing prices: (national, regional, sectoral?)– Housing volume: (sales volume or construction?)– Inflation-adjusted? Subtract long term trends?– Price/Rent ratios?– Incomes & creditworthiness of buyers?– Geographical smoothing?

• What actuators are we using for feed back:– Loan-to-Value (LTV) limits– Other underwriting requirements– Securitization “skin-in-the-game” for MBS

Optimizing the Gain of the Feedback Loop

(Ideas from Jonathan Reiss)Q: What is the optimum fraction of the price rise

to apply to the down payment (i.e. the gain of the feedback loop)?– Too small, and it will be ineffective– Too large, and it may over-correct and oscillate– Jonathan Reiss estimates ~ 40%– Needs modeling… is there calibration data

anywhere? Fortunately, damping feedback loops are

very insensitive to the exact value of the feedback gain (at least in electrical engineering).

Formula vs. Omniscient Regulator

• Similar feedback could be implemented via an omniscient and independent real estate market regulator (presumably the Fed).– The Chinese & Israelis are doing this today.

study this as source of calibration data?

• Our approach of using a formula is:– More Transparent and Predictable

– Simpler

– Less prone to political interference

Life Inside the Feedback Loop

• When real estate markets slow down, The Lending Tree™ will start running advertisements talking about how NOW is the right time to buy a house because housing prices are not rising as fast as normal and down payments are the lowest in years!

These ads will disappear as soon as a bubble starts.

Squelching the Bubble Psychology

• Negative feedback removes the most powerful element in the bubble psychology:

Nobody likes to be the dumb guy in the room who missed out on the big price run-up.

• People will know that even if there is a big price run-up, counter-cyclical LTV’s will remove potential speculative buyers from the market and you won’t be able to flip it.

Legislative Implementation

• As an underwriting standard:– Fed authority to set nationwide mortgage

origination standards (for consumer protection) broadened to include LTV limits for market protection

• As a condition on government-backed MBS– Currently dominate the market

• but Fannie & Freddie will have to be unwound.

– Do not have to control 100% of the mortgages issued to dampen a housing bubble

…but you still have to compete.

Some Down Sides of Regulating Bubbles

1. Will slow down the re-deployment of capital in response to real changes in the economy– The misallocation of capital due to this effect is

tiny compared to the recent housing bubble.

2. Will distort the economy by punishing one sector for a “nearby” bubble– “Gary is not Chicago”– Will be small under the non-bubble conditions

that should be typical with bubble damping

3. Politicization of the housing indexes

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What life is like as a Scientist in Congress Bill Foster U.S. Congressman (Ret.) Illinois14th...

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