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December 2008

Questions to Ponder...

  • Why did I never learn any spherical trigonometry?

  • What was the cuisine of Singapore, Malaysia, and Indinesia like before 1492 and the chili pepper?

  • What is in a Singapore Sling, anyway?


This Week in Journamalism

We have only one nominee this week. The Washington Post's Shailagh Murray.

Outsourced to Swope:

From the Department of Situational Ethics: Matt Yglesias caught this bit of double-talk about the Rod Blagojevich indictments coming from the Washington Post’s Shailagh Murray in an online chat yesterday:

There isn’t a reasonable person around who thinks this scandal will taint Obama in any meaningful way, but at the very least, it reminds people of the political world from whence he came. This story could be a useful preamble to something bigger down the road.

Seeing Murray’s eagerness to tolerate phony claims of corruption in the hopes they will prove “useful” in reporting on a hoped-for presidential scandal later, I immediately flashed back to her comments in the summer of 2007, reacting to the actual corruption of a President commuting the sentence of a criminal in his own administration:

Yaawwn. That’s my view of the Libby flap. What on earth did people expect Bush to do?

Apparently her enthusiasm for White House scandal depends greatly on which party is occupying the White House.

Why oh why can't we have a better press corps?

Friends don't let friends pay any money to the Washington Post corporation. Friends don't let friends buy from advertisers in the publications of the Washington Post corporation.


The WSJ News Pages Weigh in: Don't Blame CRA (The Sequel)

Of all the bizarre things coming out of the Republican Party and the Austrian economics fashion is the claim that the financial crisis is the result of government regulation that forced banks to lend to poor people--especially to poor brown and black people.

Here the WSJ news pages weigh in on this most ridiculous and bad-faith of claims:

Real Time Economics : Don't Blame CRA (The Sequel): A pair of economists from the Federal Reserve Bank of San Francisco added another piece of evidence to the case that the 1977 Community Reinvestment Act wasn’t the cause, or even a major contributor, to the subprime mortgage debacle.

In a paper focused on California that was presented at a Fed conference on housing and mortgages in Washington, D.C., Elizabeth Laderman and Carolina Reid say the data “should help to quell if not fully lay to rest the arguments that the CRA caused the current subprime lending boom by requiring banks to lend irresponsibly in low and moderate-income lenders.” Fed governor Randall Kroszner made a similar case earlier this week.

Among the specific findings in “Lending in Low- and Moderate-Income Neighborhoods in California: The Performance of CRA Lending During the Subprime Meltdown”:

  • Overall, lending to low and moderate income communities comprised only a small share of toal lending by CRA lenders, even during the height of the California subprime lending boom.
  • Loans originated by lenders regulated under CRA in general were “significantly less likely to be in foreclosure” than those originated by independent mortgage companies that weren’t covered by CRA.
  • Loans made by CRA lenders within their geographic assessment areas covered by the law were “half as likely to go into foreclosure” as those made by the independent mortgage companies.
  • 28% of loans made by CRA lenders in low income areas within their geographic assessment areas were fixed-rate loans, compared with 18.2% of loans made by independent mortgage companies in low income areas.
  • 12% of the loans made by CRA lenders in these areas were high-priced loans, a technical definition of subprime, compared with 29% of the loans made by those lenders outside their assessment areas and 52.4% of loans made by independent mortgage companies in low-income areas.

Real Time Economics : Fed's Kroszner: Don't Blame CRA: Federal Reserve governor Randall Kroszner, a conservative economist on leave from a teaching post at the University of Chicago Booth Graduate School of Business, says the Community Reinvestment Act isn’t to blame for the subprime mess, despite some accusations to the contrary.

“First, only a small portion of subprime mortgage originations are related to the CRA. Second, CRA- related loans appear to perform comparably to other types of subprime loans. Taken together… we believe that the available evidence runs counter to the contention that the CRA contributed in any substantive way to the current mortgage crisis,” he said in a speech today in Washington.

The Community Reinvestment Act, which dates to the 1970s, was crafted to combat discrimination and red-lining. It requires regulators to press banks to lend to low-income and minority neighborhoods. Kroszner’s speech summarized research the Fed has been doing on two basic questions: (1) What share of subprime loans were related to CRA? Answer: “Loans that are the focus of the CRA represent a very small portion of the subprime lending market, casting considerable doubt on the potential contribution that the law could have made to the subprime mortgage crisis.” (2) How have CRA-related subprime loans performed relative to other loans. Answer: “[D]elinquency rates were high in all neighborhood income groups, and that CRA-related subprime loans performed in a comparable manner to other subprime loans.”

Fed economists found that about 60% of higher-priced loan originations — the technical definition of subrpime — went to middle- or higher-income borrowers or neighborhoods who aren’t targeted by CRA. More than 20% of the higher-priced loans were extended to lower-income borrowers or borrowers in lower-income areas by institutions that aren’t banks — and aren’t covered by CRA.

The “striking result,” Kroszner said: “Only 6% of all the higher-priced loans were extended by CRA-covered lenders to lower-income borrowers or neighborhoods in their CRA assessment areas, the local geographies that are the primary focus for CRA evaluation purposes.”

“This result undermines the assertion by critics of the potential for a substantial role for the CRA in the subprime crisis. In other words, the very small share of all higher-priced loan originations that can reasonably be attributed to the CRA makes it hard to imagine how this law could have contributed in any meaningful way to the current subprime crisis.” Banks can also meet CRA obligations by buying loans from mortgage brokers, he noted. But less than 2% of the higher-priced loans (those would help banks meet CRA requirements) sold by independent mortgage companies were purchased by CRA-covered institutions.


Momentum Trading

Robert Waldmann wishes that more people read our work :-).

Hoisted from comments:

Grasping Reality with Both Hands: The Semi-Daily Journal of Economist Brad DeLong: Monkeys Trade Assets I: I'm sure you're shocked, shocked that the way to make money is to drive prices away from fundamentals in order to take advantage of momentum traders which you certainly didn't claim that 18 years ago in "Positive Feedback Investment Strategies and Price Destabilizing Rational Speculation," The Journal of Finance vol 65 pp 379-95 (June 1990) (which cited the original Smith et al experiment).

Hot news now, published 18 years ago. Now that's what I call getting ahead of the bubble.

Posted by: Robert Waldmann | December 14, 2008 at 03:21 AM


  • J. Bradford DeLong, Andrei Shleifer, Lawrence H. Summers, and Robert J. Waldmann (1991), "The Survival of Noise Traders in Financial Markets," Journal of Business 64: 1 (January), pp. 1-20.

  • J. Bradford DeLong, Andrei Shleifer, Lawrence H. Summers, and Robert J. Waldmann (1990), "Noise Trader Risk in Financial Markets," Journal of Political Economy 98: 4 (August 1990), pp. 703-738.

  • J. Bradford DeLong, Andrei Shleifer, Lawrence H. Summers, and Robert J. Waldmann (1990), "Positive-Feedback Investment Strategies and Destabilizing Rational Speculation," Journal of Finance 45: 2 (June), pp. 374-397.

  • J. Bradford DeLong, Andrei Shleifer, Lawrence H. Summers, and Robert J. Waldmann (1989), "The Size and Incidence of Losses from Noise Trading," Journal of Finance 44: 3 (July), pp. 681-696.


The model of NTRiFM was very pretty, and as a result I think that paper has had more than its proper share of influence. The models of the other papers are less pretty even though the ideas are, I think, at least as important--and they have not had much effect...


Washington Post Crashed-and-Burned Watch (Robert Samuelson Edition)

Why oh why can't we have a better press corps?

Hilzoy: "I take the point of [Robert Samuelson's] op-ed to be that he is not competent in his alleged area of expertise, and moreover lacks one of the basic skills that a PhD in a discipline almost always provides: the ability to spot good arguments in that discipline made by other people, and to decide who is worth listening to and who is not":

Obsidian Wings: What Do You Mean 'We', White Man?: Robert Samuelson has an infuriating op-ed in today's Washington Post. It's called "Humbled By Our Ignorance":

"It's the end of an era. We know that 2008, much like 1932 or 1980, marks a dividing line for the American economy and society. But what lies on the other side is hazy at best. The great lesson of the past year is how little we understand and can control the economy. This ignorance has bred today's insecurity, which in turn is now a governing reality of the crisis.

The entire column is devoted to explaining all these things that "we" were ignorant of. But who, specifically, are "we"? It's hard to say. Mostly, it seems to be the nameless subject of the passive voice:

"It was once believed that the crisis of "subprime" mortgages -- loans to weaker borrowers -- would be limited, because these loans represent only 12 percent of all home mortgages. (...)

It was once believed that American consumers could borrow and spend more, because higher home values and stock prices substituted for annual savings. Ed.: Apparently, it was also believed that stocks and home prices always went up.

It was once believed that the rest of the world would "decouple" from the United States.

And so on, and so forth. All these beliefs, and no believers in sight. All this bustle and commotion, and there's nobody around!

The closest Samuelson gets to identifying people who actually believed these things is at the beginning of his piece ("The great lesson of the past year is how little we understand and can control the economy"), and at the end ("Our ignorance is humbling.") Which is to say: it's "us".

And yet, strange to say, I did not believe these things. I'm almost sure I wrote about this in 2006, but I can't recall where, so this from March 2007 will have to do. In it I predict that the mortgage meltdown will knock the legs out from under consumer spending, create a serious credit crunch, and slam the many investors who own CDOs based on mortgages; and that the combination of these three things will be very, very bad, even without taking into account the possibility of systemic risk.

Apparently, I did better than Robert Samuelson. I'm not saying this because I think I deserve credit for that. I don't. That's the point. I'm not especially astute about the housing market, or an expert in economics. I do tend to be common-sensical and cautious about economics -- I do not, for instance, tend to believe such things as: that houses will go up in value indefinitely, or: that we can keep living way beyond our means forever. But that shouldn't exactly set me apart from anyone.

The only reason I saw this one coming was that I read people who know a lot more than I do: people like Paul Krugman, Dean Baker, Tanta at Calculated Risk, Stephen Roach at Morgan Stanley, and Nouriel Roubini. They all challenged one or another of the myths Samuelson lists, and they did so years ago. Moreover, they had arguments to back up their claims, and I found these arguments much more persuasive than the arguments of the people who disagreed with them.

There were very smart people who did predict this. Their writings were not arcane or hard to find -- I mean, I found them, and this is not my area of expertise. Nor was their basic point that hard to grasp. If I could grasp it, then anyone remotely worthy of having an economics column in the Washington Post should have.

Whether or not Samuelson realizes it, I take the point of his op-ed to be that he is not competent in his alleged area of expertise, and moreover lacks one of the basic skills that a PhD in a discipline almost always provides: the ability to spot good arguments in that discipline made by other people, and to decide who is worth listening to and who is not. In his shoes, I would ask myself what, in the absence of competence or the ability to learn from the writings of others, could possibly justify my continuing to take up valuable space in the Post. It's certainly not obvious to me.


James Kwak Is a Much Better Economist than Kevin Hassett or Lawrence White

He writes:

Community Reinvestment Act Makes Bankers Stupid, According to AEI Research: Many people who are more expert than I in the housing market have already debunked the CRA myth. Here are just a few: Janet Yellen, Menzie Chinn, Randall Kroszner, Barry Ritholtz, David Goldstein and Kevin Hall, and Elizabeth Laderman and Carolina Reid. Mark Thoma does a good job keeping track of the debate.

One of the main arguments against the CRA-caused-the-crisis thesis is that the large majority of subprime loans, and delinquent subprime loans, and the housing bubble in general, had nothing to do with the CRA; it was done by lenders who are not governed bythe CRA, and was done in places like the exurbs of Las Vegas or the beachfront condos in Florida, not poor neighborhoods (which generally saw less price appreciation than average). So [Peter] Wallison [and Kevin Hassett and Lawrence White and others] comes up with a new argument: relaxed lending standards, encouraged by the CRA, caused lending standards to be relaxed in the rest of the housing market. Really, I’m not making this up.... [Wallison] concludes with this:

Although it is difficult to prove cause and effect, it seems highly likely that the lower lending standards banks were required to adopt under the CRA influenced what they and other lenders were willing to offer to borrowers in prime markets.

At its core, the argument is that the government forced lenders to make bad loans in one market, so they went and decided to make bad loans in other  markets. Even conceding some of the premises for the sake of argument, this is illogical.... [I]f you (the bank) truly thought that you were being forced to make bad loans in one market, you would damned well keep those loans out of your other markets.... Wallison’s evidence is that flexible mortgage products became available to the prime market.... The most obvious explanation of that phenomenon is not that the CRA induced banks to make those products available to some customers, and that put them on a slippery slope to making them available to all customers, but that bank executives decided to make those products available to all customers. Still hoping to pin this on regulators, Wallison says, “Bank regulators, who were in charge of enforcing CRA standards, could hardly disapprove of similar loans made to better qualified borrowers.” I don’t know where to start here: someone who is against regulation is trying to argue that the CRA tied the hands of regulators who otherwise would have clamped down on flexible mortgages to rich people?...

Wallison says:

There is very little data available on the performance of loans made under the CRA. The subject has become so politicized in light of the housing meltdown and its effect on the general economy that most reports–favorable or unfavorable–should probably be discounted.

This is a very clear rhetorical tactic: when you can’t find data that you need to support your argument, say the data don’t exist, or that they are so politicized that they should be discounted.... Wallison does, however, cite one study:

One of the few studies of CRA lending in comparison to normal lending was done by the Federal Reserve Bank of Cleveland, which reported in 2000 that “respondents who did report differences [between regular and CRA housing loans] most often said they had lower prices or higher costs or credit losses for CRA-related home purchase and refinance loans than for others.”

This is the sentence immediately before the one Wallison cites, plus the one he does cite:

A large proportion of respondents in all bank-size categories reported that CRA-related and other home purchase and refinance loans have very similar origination and servicing costs, credit losses, and pricing on a per-institution basis. However, the respondents who did report differences most often said they had lower prices or higher costs or credit losses for CRA-related home purchase and refinance loans than for others.

Read that first sentence again: a large majority of banks say CRA loans do just fine. This is Wallison’s source I’m quoting. This is the best evidence Wallison can find, and presumably (since this is his specialty, not mine) he went looking for it. Not only does the plane not get off the ground, but the airline canceled the flight before boarding...


John Judis Says that Marty Peretz Is the Madman in the Attic

For some... decades now, people who work for the New Republic have been telling the rest of us that Marty Peretz embarrasses them too--and that will we please not judge the magazine by its editor-in-chief.

Now John Judis says so openly in the New Republic's pages:

Trash Talk - The Plank: I want to take issue with Martin Peretz’s description of my former colleague Spencer Ackerman’s articles as “trash.” Maybe I am sensitive because Spencer co-authored several with me, including a piece of the Bush administration’s deception about Iraqi weapons of mass destruction (“The First Casualty”), which Marty praised at the time. Spencer also co-authored a terrific profile of Dick Cheney with current editor Frank Foer (“What Dick Cheney Really Believes,” November 20, 2003). But Spencer wrote much on his own, including regular commentary on the Iraq war for The New Republic’s website, during which he changed, like others at the magazine, from a supporter to opponent of the decision to go to war. I particularly remember an outstanding cover story Spencer wrote on American Muslims. I would like to link to it, but the links to our archives are broken. It was called “Religious Protection: Why American Muslims haven’t turned to Terrorism,” and appeared Dec. 12, 2005. 

Thanks, John.

Now where are Foer? Wieseltier? Beinart? Chait? Cohn? Cottle? Crowley? Franklin? Scheiber? Siegel? Zengerle? Fairbanks? Orr? Rosen? Zimmerman? Kurlantzick? All still missing in action.


A Word from the Soon to Be Ex-President

George W. Bush:

Think Progress: BUSH; Well, I have obviously made a decision to make sure the economy doesn’t collapse. I’ve abandoned free market principles to save the free market system. I think when people review what’s taken place in the last six months, uh, and put it all in one, in one, (sigh), you know, in one package, they’re realize how significantly we have moved...

Or realize how wrong Bush and his sycophants were in the first place.

If adhering to free market principles leads to an economic collapse, perhaps free market principles aren't a good idea? The old-style Keynesians had a name for something that was a good idea: the mixed economy.

Stupidest man alive.


Milton Friedman Did a Bad, Bad Thing...

He left no students at Chicago.

Uncle Milton said:

  • Have the government buy and sell shirt-term assets in order to keep the stock of inside money balances growing smoothly.

  • That is the "free market" policy.

  • And it is good because "free market" policies are always good.

But he never explained to any students why government intervention to stabilize the output of the retail banking sector--checking account deposits--was a free market policy (why not some other sector?why not auto production? freight car loadings?).

And he never explained what to do if stabilizing checking account deposits wasn't enough.

And so now Chicago has nothing coherent or useful or constructive to say about our current situation.

cf. krugman.blog.nytimes.com, passim.


Milton Friedman Did a Bad, Bad Thing...

He left no students at Chicago.

Uncle Milton said:

  • Have the government buy and sell shirt-term assets in order to keep the stock of inside money balances growing smoothly.

  • That is the "free market" policy.

  • And it is good because "free market" policies are always good.

But he never explained to any students why government intervention to stabilize the output of the retail banking sector--checking account deposits--was a free market policy (why not some other sector?why not auto production? freight car loadings?).

And he never explained what to do if stabilizing checking account deposits wasn't enough.

And so now Chicago has nothing coherent or useful or constructive to say about our current situation.

cf. krugman.blog.nytimes.com, passim.


Yes, Your Money Will Still Be Liquid in the Morning

John Gapper:

John Gapper - Hedge funds are going down with dignity: The hedge fund industry, which enjoyed rapid growth in the first years of the century, is imploding. It took time for the financial crisis that started in banks and investment banks to work its way through to hedge funds. But they are now suffering on an epic scale. Hedge funds that have invested heavily in illiquid assets have lost money rapidly in the past two months. That has encouraged rich investors, who are scared of the chaos in markets and want to hoard cash, to pull out their money at a record rate. The panic is affecting not only small funds but some of the largest institutions in the industry – those that not long ago looked like rivalling troubled investment banks.

Citadel, the Chicago hedge fund run by Ken Griffin, lost 13 per cent of its value in November and is 47 per cent down for the year. D.E. Shaw & Co and Farallon Capital Management, which manages $30bn, have both limited redemptions to investors in an effort to stop cash pouring out and having to liquidate assets. Morgan Stanley estimates that hedge funds’ assets could fall by up to 45 per cent between last June and this January. According to some estimates, the industry will lose about $1,000bn (€791bn, £686bn) in assets from its peak of $2,200bn at the start of 2007. Some of this will have been withdrawn by investors but a lot will have been lost....

[T]he era of hundreds of bankers and investment managers flooding out of big banks and setting up as hedge fund managers – funded and supported by the banks they had just left – is over. Investment banks are cutting back on prime broking, the business of financing hedge funds, and investors are not going to fall for it (for a few years at least). It is not just a matter of many of these funds having lost their investors money. More traumatic is the way in which hedge funds have erected “gates” to stop their investors taking out their cash. These investors are being forced to watch as their assets dwindle away and will remember that experience for some time...

How much will the fact that you cannot withdraw your money at will reduce willingness to invest in hedge funds in the future?


Oh Noes!!

The New York Times crash-and-burn watch continues. To Ben Stein the Times has added...

CATHERINE RAMPELL: I’m pleased to introduce Casey B. Mulligan, an economist at the University of Chicago, as the newest addition to our “Daily Economist” panel...

Why oh why can't we have a better press corps?

Casey Mulligan says--wait for it--that the reason that unemployment is the 7% it is right now rather than the 4.4% it was two years ago because workers today face "financial incentives that encourage them not to work":

Are Employers Unwilling to Hire, or Are Some Workers Unwilling to Work?: Employment has been falling over the past year... if total hours worked had continued the upward trend they had been on in the years before the recession, they would be 4.7 percent higher than they are now.... [Today s]ome employees face financial incentives that encourage them not to work.... [T]he decreased employment is explained more by reductions in the supply of labor (the willingness of people to work) and less by the demand for labor (the number of workers that employers need to hire)...

If the New York Times has a future, it is as a trusted intermediary. This does not help.


Andrew Samwick Judges the Bush Administration

Andrew Samwick writes:

Repeat After Me: We Are Responsible for Our Own Mistakes: Mark Landler makes a number of good points in his New York Times article, "Chinese Helped Inflate American Bubble," but he leaves out the most important one. The U.S. government, on behalf of U.S. citizens, decided to run budget deficits during a fiscal expansion. U.S. consumers decided to use their lower tax burden during the last eight years to spend rather than save. No one else can be held responsible for those decisions.

The thrust of the article is that the willingness of the Chinese government to orient itself around exports, keeping its currency cheap (and thus the consumption of its citizens down), did enable us to make those decisions at a lower cost than we would have otherwise. The Chinese government was so desperate to hold Treasuries that it was willing to overpay for them. How did we take advantage of that willingness? We consumed rather than invested. We borrowed to buy houses, not infrastructure. Many things were possible -- we chose some of the least sensible things. The fault for that lies within our borders, not outside them.


The Problem with Online Newspapers Is that You Can Block the Ads

Felix Salmon explains why it is that cheaper deliv ery through the internet hurts newspaper profitability: you make people see the ads as they thumb through the paper, but you can't make them see as many ads as they page through the screens:

Newspaper Economics: Jim Surowiecki's column on newspapers is a good one, especially when he talks about the drop-off in advertising revenues and newspapers' failure in the online space. I have to take issue with this, however:

People don't use the Times less than they did a decade ago. They use it more. The difference is that today they don't have to pay for it... For a while now, readers have had the best of both worlds: all the benefits of the old, high-profit regime--intensive reporting, experienced editors, and so on--and the low costs of the new one. But that situation can't last. Soon enough, we're going to start getting what we pay for, and we may find out just how little that is.

Ask Sam Zell whether this is true, and he'll laugh. It turns out that subscribers are more expensive, not less expensive, than online readers. Yes, they pay more -- but they're not paying for intensive reporting, experienced editors, and the like. They're paying for printing presses, mobbed-up newspaper delivery operations, and the whole enormous physical infrastructure.... It's a hugely expensive operation, and its costs are nowhere near covered by subscription revenues.

Newspapers are, first and last, devices for delivering ads to readers. It's the ads which account for all the profits, not the cash coming from subscribers or people who buy their paper at the newsstand. Yes, news itself is free, nowadays. But it always has been. What we've been paying for all these years was never news, it was papers.


Spending Does too Work!

Tyler Cowen is too pessimistic:

Marginal Revolution: Fiscal policy and the burden of proof: Don't let those switches distract you.  My point is simple: it is very hard to find examples of successful fiscal stimulus driving an economic recovery.  Ever.  This should be a sobering fact.

But surely we believe that if the U.S. government were to follow the Countrywide plan--to send its representatives out onto the streets to have them walk up to people and say: "Here's $500,000. You can have it if you go buy a house"--then that would drive a recovery, right? I mean it drove a recovery in 2003-2006, didn't it?

Even the Austrians believe that spending--in their case, driven by credit-expansion created by the malefactors of fractional-reserve banking--works. So why can't the government do what fractional-reserve bankers can?


Talking Points for Asia Trip

Talking Points for Asia Trip

Governance:

  • America has only one president at a time.
  • The genius of the British Empire was that Britain used its time as the world's hyperpower to make a world in which Britain could live comfortably after other superpowers had arisen.
  • Richard Cheney and George W. Bush are not geniuses.
  • Barack H. Obama and Joe Biden ate not fools.

International Trade:

  • In the United States we--that is, my faction within the Democratic Party--have lost the argument over whether trade is good for America's middle class.
  • This is very frustrating: trade is good for America's middle class.
  • But the era of increasing globalization has also been an era of rapidly-increasing income inequality--and people think that there is a connection.
  • So for the next decade free trade will have to be sold within the U.S. as part of broader foreign policy--free trade as a soft-power tool for security and global environmental goals.
  • Nevertheless, the Obama-Biden administration is certain to be better on free trade than the Cheney-Bush administration.

Financial Crisis:

  • Since 1844 and the Westminstet debate over the renewal of the Bank of England charter, it has been accepted doctrine that avoiding deep depression requires that central banks keep financial assets from collapsing.
  • At least one price is too important to be left to the market.
  • Delicate issues of moral hazard: seek also to minimize "Greenspan puts."
  • Kindleberger: the lender-of-last-resort must always arrive, but its arrival must never be relied on in advance; this is a tricky business.
  • Usually central banks can manage asset prices in a crisis sufficiently by managing the price of duration--buying safe but longer-term assets in exchange for cash that served as reserves and means of payment.
  • Sometimes not: default, risk, information. What then?
  • Keynes:
  • Government spending.
  • Tax cuts.
  • Danger: debt accumulation can crack government's status as provider of safe assets...
  • Bernanke--and Trichet, and King
  • Making it up as they go.

Global Imbalances:

  • All the issues of global imbalances we used to worry about remain.
  • As do all the long-run global warming issues.
  • As do all the long-run global aging issues.

This Week in Journamalism

Our candidates:


First, John Harris and Alexander Burns of the Politico, who write:

Straw Man? Historians say Obama is no Lincoln: In Barack Obama's appearance last month on CBS's "60 Minutes," the conversation turned to the president-elect's long-time love of Lincoln. "There is a wisdom there," Obama told interviewer Steve Kroft, "and a humility about his approach to government, even before he was president, that I just find very helpful."

Humility? Obama's frequent invocations of Abraham Lincoln — a man enshrined in myth and marble with his own temple on the National Mall — would not at first blush say much about his own instincts for modesty or self-effacement. And now there are early rumblings of a backlash to Obama's ostentatious embrace of all things Lincoln, with his not-so-subtle invitations to compare the 44th president to the 16th, the "Savior of the Union."

Ta-Nehisi Coates calls shenanigans:

Coates on Harris and Burns: Let us leave aside the fact that it takes some serious semantic games to turn a comment on Obama's admiration of Lincoln into him making the comparison.... Let us also mercifully ignore that the Politco, in a shocking bit of unwitting humor and irony, headlined their own story"Strawman"...

Harris and Burns continue:

Simply put, some scholars think the comparisons have gone a bit over the top hat. Sean Wilentz... said many presidents have sought to frame themselves in the historical legacies of illustrious predecessors, but he couldn't find any examples quite so brazen. "Sure, they've looked back to Washington and even, at times, Jackson. Reagan echoed and at times swiped FDR's rhetoric," said Wilentz. "But there's never been anything like this, and on this scale. Ever."

Eric Foner, a Columbia historian who has written extensively on the Civil War era, agreed that comparing one's self to Lincoln sets a rather high bar for success, and could come off like "a certain kind of hubris." "It'd be a bit like a basketball player turning up before his first game and saying, 'I'm kind of modeling myself on Michael Jordan,'" he said. "If you can do it, fine. If you're LeBron James, that'll work. But people may make that comparison to your disadvantage"...

Eric Foner writes that he did not say that Obama's "comparing [him]self to Lincoln... could come off like 'a certain kind of hubris'," but said something different:

The reporter asked me about the ubiquitous comparisons between Obama and Lincoln and I tried to introduce a note of realism, as a historian. Frankly, I wish reporters and others would stop these comparisons as the two men have almost nothing to do with one another and Obama has enough problems to deal with...


Second, Charlie Savage and David Kirkpatrick of the New York Times. Outsourced to Matthew Yglesias:

Matthew Yglesias » Home Page: [They] move on to some weird stuff:

Several other spouses of people tapped for top Obama administration jobs have careers connected to government. Susan E. Rice, the United Nations ambassador pick, is married to a producer of the ABC program “This Week With George Stephanopoulos.” Gregory B. Craig, the White House counsel designate, is married to a graphic designer who has worked on Postal Service stamps. And the wife of Timothy F. Geithner, who is Mr. Obama’s choice for Treasury secretary, once worked for Common Cause, a watchdog group that lobbies for tighter ethics rules.

The worry is that Geithner might be unduly influenced by his wife’s penchant for ethical government? That Craig will somehow pervert the ordinary postage stamp design process? That doesn’t make any sense. A married person who lives in Washington, DC and has a spouse will almost certainly have a spouse who has some kind of connection to politics and government. That’s pretty much what people do here. But being married to a graphic designer who’s done contract work for a semi-independent government agency is about as far from a conflict of interest as you’re going to find.


Third, David Brooks of the New York Times. Outsourced to Ezra Klein:

EzraKlein Archive | The American Prospect: David Brooks['s column]... does seem like an effort to have it both ways. Brooks isn't making the case against massive spending, he's just suggesting that it makes him uncomfortable. And it wasn't that long ago, of course, that Brooks himself was proposing massive new infrastructure investment beneath the rubric of a "national mobility project." But you could read Brooks' column without really understanding that we're on the precipice of an incredible economic calamity -- one that our best efforts may well prove insufficient at averting. Under those circumstances, there should be some recognition that the massive spending plans are an attempt to apply the best remedies we have to an urgent crisis. They're not, as Brooks would have it, some sort of psychological dysfunction, or social mania. For a columnist, the stance of caution might be a good play. But were the government to decide that spending should be pure and the policies implemented slowly, the human cost could be tremendous, and the financial cost could be far greater.

Meanwhile, a question for Brooks. He asks, "Why do so many of the plans being offered rely upon a Magic Technocrat — an all-knowing Car Czar who can reorganize Detroit, an all-seeing team of Olympians who decide which medicines doctors will be allowed to prescribe?" Can he -- can anyone? -- name the sponsored piece of legislation, or even proposed piece of legislation, that would appoint "an all-seeing team of Olympians who decide which medicines doctors will be allowed to prescribe?"


Fourth, Robert Samuelson of Newsweek and the Washington Post, who argues that Our New Ruling Class is the mighty Center for Budget and Policy Priorities, which warps American public policy by successfully lobbying for policies that take the wealth of the deserving rich and give it to the middle class and the poor:

We here in Washington are anticipating a stampede of lobbyists, influence peddlers, media consultants, paid "experts" and self-styled crusaders. Who brought us this onslaught of special pleaders? Why, it's Barack Obama, the man who vowed to "change" how Washington works and banish from the political arena all those "special interests" that were depicted as a form of low-life devoid of all respectability.... The more powerful government becomes, the more lobbying there will be.... Obama's ambitions for more expansive government will promote special pleading.... Lobbyists have a bad rap.... Myth number one is that lobbying is anti-democratic, because it frustrates "the will of the people." Just the opposite is true: lobbying is an expression of democracy. We are a collection of special interests.... A second myth is that lobbying favors the wealthy... the facts contradict that.Sure, the wealthy extract privileges from government, but mainly they're its servants.... As for the poor and middle class, they do have powerful advocates. To name three: AARP for retirees and near retirees; the AFL-CIO for unionized workers; the Center on Budget and Policy Priorities for the poor...

A former CBPP employee comments:

As a former employee of the CBPP, I find this to be really disappointing. If I had been made aware of my awesome ability to soak the rich and turn America into even more of a worker's paradise than it already is, I never would have quit in the first place. In the future, they might want to make people aware during orientation or via some kind of written material included in the new employee's packet, malong with the W-2, health insurance forms, etc...


Fifth, The Washington Post's Richard Cohen:

Piercing the Bubble of Presidential Isolation: The Bubble... can swallow a presidency, isolating the chief executive from both the news he should know and the opinions he should hear, and ensuring that he goes through his day attuned to the comforting chirping of yes men -- the siren song that serenaded George W. Bush as he plunged us into the muck of Iraq....

Michael Boskin, a White House aide to the first President Bush, recalled in a recent New York Times article exactly what Obama has in mind. Boskin took business leaders into the Oval Office to warn George H.W. Bush of a dire economic forecast. Instead they spent their time praising the president for his handling of the Persian Gulf War....

For some odd reason, Obama has fastened on to his BlackBerry as an antidote to The Bubble. It won't work. When the BlackBerry is valued for e-mail, it is no different from staff. It will be only as candid as the people on the other end....

There is a remedy of sorts. It is called The Newspaper.... The paper will give the president more policy options than his staff will, and more news as well.... A BlackBerry is of limited utility.... You cannot have a hearty family breakfast with everyone gathered around the BlackBerry. But with a good newspaper, the president could read the hard-news section, the first lady could adhere to gender orthodoxy and read the softer sections...

Duncan Black snarks:

Eschaton: * Do The WaPo Editors Let Just Anything Through:* Richard Cohen doesn't think Michelle Obama will be worrying her beautiful mind about "hard news"...

And Cohen blathers on:

A high-quality newspaper is a repository of leaks. Presidents don't care for leaks, but like awful-tasting medicine, leaks are good for presidents. Leaks are an important way that one part of the government can communicate with another. An assistant Cabinet secretary cannot pick up the phone and call the president. His boss won't let him. His boss might block something the president should know. This is where leaks come in. The low-level guy leaks the information to a newspaper and the president reads about it at breakfast. This cannot happen with a BlackBerry.

I can appreciate how this column might be seen as self-serving. It is, of course.... But... a newspaper can on occasion do what no BlackBerry can -- burst The Bubble.

Matthew Yglesias snarks:

Matthew Yglesias: Richard Cohen: Online News Reading is Undermining My Sexist Stereotypes: A colleague observes to me that someone needs to tell Richard Cohen that you can read newspapers on your BlackBerry.... If the case for newspapers is that they help bolster gender orthodoxy, I think it’s probably a good thing that print is doomed...

Let me just snark by pointing out that neither Richard Cohen nor anybody else he talks to at the Washington Post understands the first thing about how the U.S. government works. Assistant Secretaries don't leak to the Post to talk to the President. Assistant Secretaries talk to the Deputy Assistant to the President, who talks to the Assistant to the President, who talks to the President. Presidents--George W. Bush is an exception--aren't stupid enough to let cabinet members block the information flow.


And sixth and last, Reuel Gerecht, as dealt with by Matthew Yglesias and John Holbo:

A Wonderful, Awful Idea: [T]here has been some indignation in response to Gerecht’s piece in the NY Times, defending torture and extraordinary rendition. Yglesias starts like so: “Because Reuel Marc Gerecht adheres to an appalling and cruel ethical system and the people who decide what runs on major newspaper op-ed pages have no ethics whatsoever...” I would just like to add that [Gerecht's] op-ed in question explicitly concedes that the policy it sets out to defend is ‘reprehensible’: “Liberal Democrats in Congress intend to deploy a more moral counterterrorism, where the ends — stopping the slaughter of civilians by Islamic holy warriors — no longer justifies reprehensible means.” ‘Reprehensible’ – that is, “condemnable: bringing or deserving severe rebuke or censure”; or, if you prefer: “Blameworthy, censurable, guilty; deserving of reprehension.” Gerecht admits all that, then. He just denies that behavior that is deserving of severe rebuke or censure should be severely rebuked or censured. He denies that behavior that is blameworthy is, in fact, therefore worthy of blame. As a philosopher, I feel this raises certain conceptual issues. As a citizen, I weep...


Vote for your "favorite" in comments! And don't let any of Newsweek, the Washington Post, the New York Times, or the Politico--or any of their advertisers--get any of your money. Just say no.


Early Thursday Morning Exam Blogging

Last time I gave a big exam I baked brownies--but there was at least one complaint that the sugar rush, insulin release, and them blood-sugar crash adversely affected performance on the long essay at the end of the exam.

So this time we have brought oranges...Early Thursday Morning Exam Blogging


The Regional Pattern of the Recession

Paul Krugman:

Southern discomfort: Southern discomfort Heartrending story in the Times about the woes of South Carolina. In fact, unemployment rates in the Southeast have risen more than in the United States as a whole; there’s a sort of Slump Belt extending from the industrial Midwest down to the Carolinas. Why is this happening? The Slump Belt does sort of look like the “auto corridor”; maybe what we’re seeing is the geographical location of cyclically sensitive manufacturing industries. Anyway, it’s striking that the worst of the crisis is hitting states that largely didn’t experience a housing bubble...

This is news to me. I had been confidently expecting the dollar to fall and manufacturing to pick up and lead the economy out of the recession. Time to rethink what is going on.


General Glut Wins the Day!

Tyler Cowen rediscovers the general glut and Keynesian economics:

Marginal Revolution: The economic crisis, the calculation debate, and stability theory: Is the financial crisis -- which is rapidly becoming the "real economy" crisis -- somehow the "dual" of the socialist calculation problem? 

A'la Hayek, say the price of copper goes up.  Markets will make many adjustments and the proper adjustments usually cannot be foreseen by a central planner.  Nonetheless there is some iterative process by which those adjustments get made and, I am sad to say, our understanding of that process involves a good deal of hand waving.  It's fine to talk about entrepreneurship but the net effect need not be equilibrating.  The relationship between local adjustment, where we have decent Marshallian theories, and global adjustment, about which we know little, remains tricky.

General equilibrium stability theory used to assume gross substitutability to derive the convergence to a new equilibrium but in fact convergence did not usually come easily in the models.  (I take gross substitutability as meaning that a decline in the price of one good will, on the whole, lead to increased expenditures on other goods, but here are some alternate specifications.)  Most of the time we hope that the proper local adjustments get made and the whole pinwheel turns and mutates in the proper directions over time. 

Are there conditions, however rare, under which market adjustment and convergence does not occur?  If a few of the vertices get stuck, can it become impossible for the economy to fulfill its mutating pinwheel program of change and adaptation?...

The Keynesian answer (the monetarist answer to) is that Say's Law is not true in theory--that if the economy does eventually grope its way to a new full-employment equilibrium, it is not guaranteed to get there in a timely fashion. When actual real money holdings are less than desired real money holdings, the tatonnement process involves a fall in nominal prices--but in a world of nominal debt contracts and fixed money wages, et cetera, that fall in nominal prices (a) may not occur and (b) may do more damage in the short and medium run than it can do help. The Keynesian (and the monetarist) answer is to find specific limited government interventions in key markets so that even though Say's Law is not true in theory we can make it true enough in practice. Or at least get close enough for government work.

The way I think of it is that all of a sudden the economy demands shorter duration and less risky assets in its portfolio, the economy cannot respond--cannot liquidate the real capital stock that backs the portfolio--and the resulting adjustments in nominal prices that are triggered either do not happen or do not help. But it is not clear to me that that is the best way to think about these issues.

And yes, they are in some metaphorical sense dual to the socialist calculation problem: socialism cannot assemble the information and provide the right incentives; the unaided free market cannot always pass price signals from finance to the real economy that are helpful.


Fisman and Miguel, Economic Gangsters

Links:

http://www.amazon.com/Economic-Gangsters-Corruption-Violence-Poverty/dp/0691134545

http://www.economicgangsters.com/


Questions and Answers:

Brad: Sub-Saharan Africa looks like it has gone significantly backward in real GDP since 1960 while it has gone significantly forward in literacy and (except for AIDS) public health. Why do education and health seem to evolve according to different logics of corruption and rent-seeking than does the economy?

Ted: You raise an important point, which is that not everything is gloom and doom in Africa. There have been some positive trends, most notably in education and Africa’s recent successes in holding freer democratic elections. But the gains remain fragile, as we witnessed in Kenya’s recent slide towards chaos following elections last year and in the collapse of Zimbabwe and Ivory Coast, which had been held up as African success stories as recently as the 1990s.

Ray: The problem of HIV/AIDS, which you note parenthetically, is more emblematic of future challenges rather than past success. Thus far, public health systems all over Africa have failed abysmally to deal with this mounting problem. It’s hard to separate the continent’s various problems from one another. It’s surely the case that by applying some of the lessons we’ve learned in Economic Gangsters in fighting violence and corruption, the benefits would spill over into education, health, and other non-GDP measures of development success.

Brad: Even the poor of the world today are rich according to the yardstick provided by our ancestors of three centuries ago--as shown by indicators like life expectancy and adult height. Can we take the idea of a "poverty trap" seriously given that if such a thing exists our ancestors of three centuries ago were presumably caught in it as well?

Ray: We’d also side with the view that the evidence for a poverty trap is really thin. Decades of foreign aid, totaling billions of dollars for some countries, haven’t been enough for many poor countries in Africa, South Asia, and Central America to break out of extreme poverty. And some of the world’s greatest economic miracles in recent years, including China, Korea, and the other so-called Asian tigers, have done well without much foreign aid at all. So it can’t be that simply throwing more money at poor countries will jumpstart the growth process.

Ted: One of the goals of our book is to understand why all of this foreign aid hasn’t had the impact you might think it would. We focus on the role played by corruption and violence, and the economic gangsters responsible for these calamities.. Attempts to break countries out of poverty traps – by building schools and roads meant to boost future economic productivity – have too often failed because foreign aid has fallen into the hands of thieving dictators, or the fruits of aid have been destroyed by civil wars. You can’t understand the modern economic development experiences of most poor countries without tackling the issues of corruption and violence head-on.

Brad: A successful developmental state has to be fettered enough to respect entrepreneurship and enterprise while at the same time being unfettered enough to control roving bandits, local notables, and its own functionaries. Isn't this an impossible state of affairs? Why is life in America today so relatively uncorrupt, anyway?

Ray: There are trade-offs, to be sure. But that’s very different from saying we can’t strike a balance between bureaucratic oversight and unleashing the spirit of enterprise. This is actually a very interesting time to be thinking about this, as the spirit of financial innovation in America seems to have gotten a little out of hand of late, and most sensible people think we could use more oversight of Wall Street’s own bandits. For the many less developed countries that are over-regulated, though, the more important risk at this time is of an anti-market, anti-globalization backlash.

Ted: How did America become relatively uncorrupt? It’s worth remembering that it wasn’t always this way. And there’s been plenty of talk about Chicago political machines and our own lingering corruption in recent weeks, with the Blagojevich Senate seat scandal. We can learn a lot from the American experience but I don’t think there’s a one-line answer. The world is much too complicated for grand unified theories of the economy and society. I’d recommend your readers check out Economic Gangsters for more nuanced answers.

Brad: Someone said that your book is the opposite of Malcolm Gladwell--that he has a simple central theory and a lot of evidence that does not fit it while you have a lot of evidence well-presented but no central theory. If Malcolm Gladwell had written your book, what would it have been called and what would your central theory have been?

Ted: It’s certainly flattering to be compared to one of the world’s best-selling non-fiction authors of the past decade or so! I like to think that if Malcolm Gladwell had written Economic Gangsters, he would have called it Economic Gangsters, too. Our central premise is that lots of global development problems can be understood by thinking about the individual economic incentives to do things that are bad for society as a whole. That’s where the rational, calculating economic gangster comes in. Al Capone, after all, was an accountant before he started applying his skills to such businesses as racketeering, prostitution, and rum running during Prohibition.

Ray: That said, it’s the nature of good economics research to proceed carefully and methodically. So understanding these and other problems will necessarily involve precision bites rather than grand sweeping statements. But the evidence we present – and the stories we tell – do help us chip away at the world’s development problems one by one, using new insights from research.

Brad: You state somewhere that in Meatu, Tanzania, there are people hacking to death their grandmothers with some regularity--and that this is largely motivated by economics, by the fact that you are in near-famine conditions and that if you off your grandmother for being a witch you get to consume 20% more calories per capita over the next year. But why is the "witch" required? And what is different about Meatu from all the regions that don't accuse grandma of being a witch and hacking her to death in a famine?

Ted: A witch is certainly not required. In many poor societies there are similarly brutal responses to extreme resource shortages that have nothing to do with witchcraft. Among certain Inuit groups, for example, when food runs short the elderly are placed on ice floes and pushed out into the sea to die. And the Inuit are not alone: related traditions hastening the death of the elderly during lean times have been documented in Iceland, the Amazon, Siberia, Fiji, among North American Hopis, Gabon Fang, and Australian Tiwi, among other groups. It sounds unbelievably barbaric to modern sensibilities, but people living on the edge of subsistence cannot avoid this harsh calculus of survival.

Ray: Some societies have also learned to deal with shortages in less macabre ways. There’s an interesting case we highlight in our book, about the region of Ulanga in Tanzania where witchcraft is similarly strong as in Meatu, but where few if any witch killings take place. The difference? In Ulanga a safety net put in place by local healers saves old women accused of sorcery from an otherwise grim fate,. Traditional healers take in accused witches during hard times, feed them and take care of them, and go through some rituals to “cleanse” them of their witchcraft. Then when the lean times ease up, they return to their families, who later pay the healers back. The same idea is behind our proposal for a new foreign aid mechanism to provide insurance for poor households during economic downturns; you can read the details in Economic Gangsters.

Brad: In what sense was Suharto--who delivered 5% growth in per capita income a year for a quarter century--"corrupt"? Shouldn't we want more of this kind of "corruption"?

Ray: It’s not that we’d want more corruption (though some economists have in fact taken that point of view in the past). Yet not all corruption is created equal. It’s crucial to understand the differences between the relatively “benevolent” corruption of Suharto, and the destructive kleptocracies of Zimbabwe’s Robert Mugabe and others. In Economic Gangsters we lay out the crucial differences between centralized systems of corruption like Suharto’s from the more chaotic situations that prevail in many of the poorest African countries.

Ted: It’s also the case that Indonesia might have experienced even faster economic growth in recent decades had it not been for the grabbing hands of Suharto and his cronies. Ray’s comments about the different types of corruption also gets to the heart of what sets our work apart from most other recent books on global poverty. Simple one-size-fits-all descriptions and prescriptions of the world – like those who say “more foreign aid is always good” or “this is the way to eliminate corruption” – are unlikely to work out as advertised. We need evidence-based development economics to take hold if we’re going to make real progress in fighting global poverty. Half the world’s population still lives on less than two dollars a day. This is too important a problem to be left to ideologues.


Jennifer Palmieri Blows It...

This was a mistake on many levels:

A Special Note Re: Third Way: This is Jennifer Palmieri, acting CEO of the Center for American Progess Action Fund.

Most readers know that the views expressed on Matt’s blog are his own and don’t always reflect the views of the Center for American Progress Action Fund. Such is the case with regard to Matt’s comments about Third Way. Our institution has partnered with Third Way on a number of important projects - including a homeland security transition project - and have a great deal of respect for their critical thinking and excellent work product. They are key leaders in the progressive movement and we look forward to working with them in the future...

And Angry Sam hits the right note in response:

I believe the post was a typo. It should have read:

Third Way are important power brokers and fund raisers, so we’re really sorry Matt called them out for having no policy proposals of weight or merit.

They don’t even have a softball team. WTF.

I, being a liker of hyper-incrementalist bullshit, like Third Way. But Matt doesn't have to. And Jennifer Palmieri should think very hard about how credibility is attained in retained in the twenty-first century.


The Government Will Probably Make a Fortune with This Nationalization of Housing Finance

We are drifting toward nationalizing housing finance. And as long as the government can borrow at the Treasury rate it can buy up and refinance the country's stock of mortgages without paying a dime in the long run. The largest risk-arb operation in history--and since the government can mobilize the entire risk-bearing capacity of America, a very low-risk one

James Kwak:

We Have a Winner? « The Baseline Scenario: After seeing dozens of mortgage proposals emerge over the past several months, there are news stories that Larry Summers and the Obama economic team are converging on an unlikely candidate: the proposal by Glenn Hubbard and Christopher Mayer first launched on the op-ed page of the Wall Street Journal on October 2. Hubbard and Mayer published a summary of the plan in the WSJ last week; a longer version of the op-ed is available from their web site; and you can also download the full paper, with all the models.

I say “unlikely” not only because Hubbard was the chairman of President Bush’s Council of Economic Advisors, but because it doesn’t look like a Democratic plan; then again, it doesn’t look much like a Republican plan, either. Most plans I have seen have focused on minimizing foreclosures through some form of guaranteed loan modification for delinquent homeowners. Before getting to the policy specifics, though, I want to outline two of the premises.... First, Hubbard and Mayer, like many others, have the goal of preventing an overcorrection on the downside (housing prices falling further than where they need to go to be reasonable). But unlike many others, they have calculated where prices need to go, and one of their central arguments is that we are already there.... The authors divide cities into three markets - cyclical (San Francisco), steady (Chicago), and recent boomer (Miami), and conclude that (Figure 10): cyclical city prices are 10-20% above their average level of affordability over the last twenty years, but that is consistent with 2% expected annual real appreciation for these highly desirable cities; steady city prices are at their average level of affordability already; and recent boomers still have some way to fall. Looking at the imputed rent-to-income ratio (Figures 6-8), they find that housing prices are already where they should be in most markets.

Second, Hubbard and Mayer argue that housing prices are mainly a function of real mortgage rates. While they acknowledge that other factors took over at the peak of the boom, their model shows that most housing price appreciation through 2005 was due to fundamentals.... Right now, they argue, mortgage rates are historically high relative to Treasury bond yields, and those high mortgage rates are pushing housing prices below their long-term levels....

Given those premises, the policy proposal is simple: force mortgage rates down to 4.5% (by reducing the cost of Fannie/Freddie debt relative to Treasuries), thereby propping up housing prices at a level that Hubbard and Mayer think is sustainable....

This isn’t a program for reducing mortgage foreclosures; this is a program for boosting housing sales and refinancings across the board. This does have the nice property of eliminating all those worries about how to prevent solvent homeowners from turning insolvent in order to profit from a bailout....

The goals of the program are to stop the slide in housing prices, stimulate the economy by unfreezing home sales and through the wealth effect of increased housing prices, and stabilize the value of mortgage-backed securities, thereby aiding the financial sector.... One question is whether the loans will be sustainable. Hubbard and Mayer say that 1.9% is more than enough because the ordinary spread is 1.6%. But these are not ordinary times, and even if the plan does help turn around the economy, we are probably looking at 1-2 more years of rising unemployment and resulting defaults. Furthermore, conforming mortgages rates are already down to 5.2% (thanks in part to the Fed talking rates down), so Fannie and Freddie could face the problem of getting stuck with riskier mortgages while the private sector keeps the better ones. But in any case there are signs that some version of this plan will be brought to the floor.


The Past Month's Worth of Egregious Moderation

Political Economy:

Dean Baker: Yet More Incompetent and Biased Journamalism from the Washington Post About the Auto Industry
James Surowiecki: Government Meddling Is Bad, Except When We Do It: The Balance Sheet
Dani Rodrik: Naomi Klein is very hard to understand
Josh Micah Marshall: Neo-Hooverite Republicans
Thoreau: Different poxes on different houses
Matthew Yglesias: Private Jets
Matthew Yglesias: Long and Deep

History:

Katha Pollitt: Bill Ayers Whitewashes History, Again
John Maynard Keynes: An Open Letter to President Roosevelt, December 31, 1933
John Maynard Keynes’s Private Letter to Franklin Delano Roosevelt of February 1, 1938
NathanNewman: Amnesia on the Death of Reconstruction

Economics:

Paul Krugman: The Madoff Economy
Dean Baker: Yet More Incompetent and Biased Journamalism from the Washington Post About the Auto Industry
Julian Zelizer Answers Your Political-History Questions
James Surowiecki: Government Meddling Is Bad, Except When We Do It: The Balance Sheet
Matthew Yglesias: Great Moments in Jargon
Randall Smith in 1992: Wall Street Mystery Features a Big Board Rival
Barry Ritholtz: More CRA Idiocy
Tyler Cowen: Keynes's General Theory, chapter four, *The Choice of Units*
Matthew Yglesias: The Most Dangerous Man in Europe
Dani Rodrik: Naomi Klein is very hard to understand
Paul Krugman: The German problem
Menzie Chinn: The Employment Situation in Pictures
Barry Ritholtz: FDIC Chairman Sheila Bair on CRA: NOT Guilty
Robert Waldmann on Joe Stiglitz as Political Actor
Josh Micah Marshall: Neo-Hooverite Republicans
Felix Salmon: The Great Recession Bites
John Berry: Bloomberg: The Fed's Balance Sheet Swells to $3 Trillion
John Maynard Keynes: An Open Letter to President Roosevelt, December 31, 1933
Ezra Klein: The People on the Financial News Shows Are Idiots Who Are Trying to Make You Poor
Kenneth Rogoff: Fear of inflation is like worrying about getting the measles when one is in danger of getting the plague
Paul Krugman Even More on Nominal Wages in the Great Depression
John Maynard Keynes’s Private Letter to Franklin Delano Roosevelt of February 1, 1938
Paul Krugman: What to Do
Calculated Risk: Hoocoodanode?
Garrett Jones: Monetary Policy and the Great Depression

Politics:

Zaz Hollander: Levi Johnston's mother hit with drug charges
Mark Kleiman: Optimism
Greg Anrig: The Top Dozen Insights of Conservatives, 2008
The Economist on Michael Barone, and the Congress
James Surowiecki: Government Meddling Is Bad, Except When We Do It: The Balance Sheet
Amanda Terkel: Powell lashes out at Palin: I’m from the South Bronx, ‘and there’s nothing wrong with my value system.’
Dani Rodrik: Naomi Klein is very hard to understand
The Poor Man: When the feeling’s gone and you can’t go on? It’s a tragedy
Karen Tumulty: Henry Kissinger Is a Liar
Josh Micah Marshall: Neo-Hooverite Republicans
Matthew Yglesias: Strange Swing: Joe the Plumber
Neal Gabler: The GOP's McCarthy gene
Jonathan Zasloff: The Great Krugman-Mankiw Debate
Matthew Yglesias: The Irrelevant House Republicans
Pro Growth Liberal: Healthcare Debate: So This is Why Conservatives Hate Social Security
Ezra Klein: The Best and the Brightest
Paul Krugman: About that advisory board
Steve Benen: The President's Economic Recovery Advisory Board
Charlie Cook: Missing: Seller's Remorse
Stan Collender: Quick Question: Big 3 Auto Companies
Thoreau: Different poxes on different houses
The Economist: The Republican Party: Ship of Fools
Matthew Yglesias: Private Jets
Matthew Yglesias: Long and Deep
Michael Bérubé on the Weathermen


Yet More Burning Wreckage from the Crashed-and-Burned Washington Post

Why oh why can't we have a better press corps? Spencer Ackerman:

ATTACKERMAN » Again And Never Again And Again And Never Again And Again: Speaking of war crimes, Ruth Marcus says to get over it, since the best way to prevent future war crimes is not to punish current war criminals. Glenn Greenwald is to this column what Charles Graner was to Abu Ghraib...

Every copy of the Washington Post is an abomination in the sight of The One Who Is.

I wouldn't go within five blocks of the Washington Post building, or remain in the same room as a copy of Newsweek.

Just saying...


We Are Live on Economist Free Exchange at the Greenspan Roundtable

J. Bradford DeLong (2008), "Contribution to Greenspan Roundtable," Economist (December 18):

Greenspan roundtable: Is $250 billion enough? | Free exchange | Economist.com: FOUR factors impose haircuts on the values of financial assets. The first is default: perhaps your counterparty simply will not be around when the financial asset you hold matures. The second is duration: even if you are certain that your counterparty will be around, and even if you are certain that you understand the situation, and even if you don't care about risk, you would still rather have your money now than at its maturity date in the future. The third factor is information, or rather its lack: maybe you don't understand what you are buying, for if it is such a good deal for you to buy it at this price why is the seller so eager to sell the asset to you? The fourth is risk: even if your counterparty will be around and even if you don't care about getting your money now rather than later and even if you understand the security perfectly, you still are not sure how valuable the security will be to you in your particular situation when it matures.

Duration is not an issue in this financial crisis. Central banks have pushed the time value of money down to zero in nominal terms, and negative in real terms. Default is only a very minor issue in this financial crisis. But risk is a big issue—banks feel that they should be holding less-risky portfolios than they currently hold because just one more bad shock may see them or at least their stockholders' equity and their executives' option wealth disappear, so risky assets are at a deep discount. And information is a big issue—everyone is scared that the assets others are trying to sell are for some reason they don't fully understand assets that nobody would wish to buy.

Alan Greenspan hopes that another $250 billion of capital for the American banking sector would bring information and risk discounts back to normal levels and resolve the financial crisis (at bank capitalisation ratios of 15% as opposed to the 10% that we used to think of as normal a couple of years ago). But he cautions that "[simple] linear calculations, of couxe, can only be very rough approximations."

I hesitate to disagree with Alan Greenspan—by my count, I have been wrong seven out of the ten times that I have, in my mind, had significant disagreements with his policies over the past quarter century. Those are not good odds. But I fear that this time he is wrong: that $250 billion will not be enough of a recapitalization of the banking system to return risk and information discounts to their normal levels.

First, the big information problem is that banks fear that what is being sold to them is simply not worth buying. Government guarantees of assets can resolve that problem, as well as the issuance of safe Treasuries and the purchase of risky assets. But government or private injections of capital into the banking system cannot.

Second, the big risk problem is not so much a fear of long-run default as a fear of a deeper short-run liquidity squeeze. It is not a fear that investing in risky assets will be bad in the long run, it is a fear that investing in risky assets robs you of the cushion needed in the short run, should there be another negative shock and should the government then decide that it must, for political reasons, confiscate the equity of financial institutions that come back to it for more liquidity support. Thus, in my view, banks are more likely to sit on additional capital injections than to increase their risk tolerance and seek to invest them at higher long-run yields.

This is a bad situation. With financial-asset prices at their current low levels, the businesses that should be expanding cannot raise the money for expansion on terms that make expansion profitable, while the businesses that should be contracting are contracting rapidly. We need either a substantial increase in financial-asset prices in order to give the businesses that should be expanding the incentive to profitably expand, or we need massive increases in government spending to provide the demand the private sector is not. We would rather have the first if we have the choice—private-sector demand we know will be for things that people regard as useful, while government-sponsored stimulus programmes have a different more political logic—but we may not have the choice.

Thus I am swinging around toward a more radical proposal than Greenspan's large-scale bank recapitalizations. Have the American government take formal complete ownership of Fannie Mae and Freddie Mac, and give them the mission of borrowing at the Treasury rate and buying up and refinancing mortgages on terms that make a profit for the Treasury. This would be a financial operation on a never before seen scale. But as the government bought and the supply of risky assets on offer to the private sector shrank their price would go up and the mortgage-backed assets that suffer the biggest information problems would disappear from the market. And as asset prices went up the banking sector would recapitalise itself.

Or so it would work, unless the large scale of the intervention cracked financial sector-confidence in the American Treasury bond as the safe asset standard for the global economy. 


How Many of These Plants Will Ever Reopen?

Chrysler:

FT.com / Companies / Automobiles - Chrysler to shut all plants for a month: Chrysler to shut all plants for a month By Daniel Dombey in Washington, John Reed in London and Julie MacIntosh in New York: Published: December 17 2008 23:58 | Last updated: December 18 2008 00:46: Chrysler said it would shut all 30 of its plants for at least a month in the latest sign of the growing travails of the US car industry. The carmaker said that in response to “the continued lack of consumer credit for the American car buyer”, and an accompanying drop in sales, it would make “all manufacturing operations” idle from tomorrow night. “Impacted employees will not return to work any sooner than Monday January 19,” it said, highlighting that in a recent meeting at Chrysler headquarters dealers complained they had lost 20-25 per cent of sales volume due to lack of financing...


Charles Dickens Blogging

Paul Krugman says we should all go read--no, not A Christmas Carol, but rather Little Dorrit:

Madoff/Merdle - Paul Krugman Blog - NYTimes.com: I’m ashamed to admit that I’ve never read Little Dorritt, by Charles Dickens. But I guess I’ll download it to my Kindle. A reader points out that the BBC is currently doing a dramatization, and that the character of Mr. Merdle, the fraudulent financier, bears a strong resemblance to Bernard Madoff...


Market Power!

I am told I should read:

Yasheng Huang (2008), "Capitalism with Chinese Characteristics: Entrepreneurship and the State."

The problem is the price:

Kindle Price: $21.10

I think it is time to draw the line: either people send me review copies, or I buy it for the Kindle at single-digit prices, or I wait until it shows up at Berkeley library. When a print copy costs $23.44, to charge $21.10 for a Kindle copy is ridiculous...


Hedge Fund-of-Fund Returns

Tom Bozzo has a reasonable request to make of Andrew Ang, Matthew Rhodes-Kropf, and Rui Zhao:

Marginal Utility: Big Fraud in Little Madison: Earlier in the year I reviewed the investments held by the Madison Cultural Arts District's trust fund... the MCAD trust's assets, it held $17.9 million — just under 18 percent of its $100M portfolio of the time, in the Fairfield Sentry fund. (In early '06, they had an even greater exposure.) At the time, Fairfield Sentry was among the trust's high-flying investments, relatively speaking. I said "who knows" with respect to how Fairfield found its alpha.

Well now we know! Per Bloomberg (via), Fairfield Sentry was 100% invested in Bernard Madoff's mega-swindle! I hope they actually managed to liquidate their balance. If they did get out soon enough, then at least the MCAD trust may not have been the biggest of suckers in one respect.

Otherwise, big potential losers are Andrew Ang, Matthew Rhodes-Kropf, and Rui Zhao, whose April '08 NBER working paper concluded that funds-of-funds "on average, deserve their fees-on-fees." At a minimum, they should delete the Madoff suckers and recalculate.

How about it guys? How significant is -$50 billion? You say that "the total funds under management for funds-of-funds is $156 billion." And do you calculate arithmetic or geometric rates of return?


Fall 2008 American Economic History Podcasts

Economics 113: American Economic History

http://tinyurl.com/43sufu; http://delong.typepad.com/american_economic_history/2008/08/economics-113-s.html

J. Bradford DeLong delong@econ.berkeley.edu Evans 601: Lecture: 4 LeConte; MW 4-5:30

Andrej Milivojevic andrej@berkeley.edu: Sections: T4-5 87 Dwinelle, W8-9 61 Evans
Marc Gersen mgersen@econ.berkeley.edu: Sections: F2-3 55 Evans, F3-4 55 Evans
Matthew Sargent sargent@berkeley.edu: Sections: M9-10 85 Evans, Th1-2 45 Evans


W Aug 27: OVERVIEW: Lecture Notes: Administration and Overview; Why Are We Here? On the Lecture and the University; Lecture Audio: http://www.j-bradford-delong.net/2008_mov/20080827.mp3

W Sep 3: Amerindians, Conquistadores, Explorers, Settlers, and Empires: Lecture Notes: 10000 BC to 1800; Pre-Industrial Growth Accounting; Lecture Audio: http://www.j-bradford-delong.net/2008_mov/20080903.mp3

M Sep 8: Colonists, 1600-1776: Lecture Notes: "Growth Accounting, Natural Resources, and Pre-Civil War America"; Notes for September 8; Lecture Audio: http://www.j-bradford-delong.net/2008_mov/20080908.m4a

W Sep 10: Westward, Ho!: Lecture Notes: Notes for September 10; Audio

M Sep 15: Slavery and Its Legacy, 1600-1929: Lecture Notes: http://delong.typepad.com/american_economic_history/2008/09/20080915-econ-1.html Audio

W Sep 17: Government, 1600-1870: Audio

M Sep 29: Financial Crisis Teach in Audio

W Oct 1: Technologies, Factories, and Trade, 1870-1929: * Lecture Notes: Growth Accounting, 1865-1929: The Great Traverse Audio

M Oct 6: Workers, Unions, and Government, 1870-1929: Audio

W Oct 8: Depressions and Panics, 1840-1933: Lecture Notes: The Coming of the Great Depression Audio: The Coming of the Great Depression

M Oct 13: Great Depression, continued: Lecture Notes: The Great Depression Audio

W Oct 15: The New Deal, 1933-1941: Lecture Notes: 20081013 Great Depression; Audio

M Oct 20: The New Deal, Continued: Lecture Notes: The Gold Standard in the Twentieth Century Audio

W Oct 22: World War II and Cold War, 1941-1956: Lecture Notes: The Global Economy; Audio

M Oct 27: Mass Production, 1910-1980: Lecture Notes: ; Audio

W Oct 29: Workers, Unions, and Wage Compression, 1929-1975: Lecture Notes: American Income Inequality; Audio

M Nov 3: Focus on Women, 1870-present:

W Nov 5: Focus on African-Americans, 1900-present: Lecture Notes: Audio

M Nov 17: Focus on Immigrants, 1870-present: Lecture Notes: Immigration Audio

W Nov 19: Stabilization, Full Employment, and Inflation, 1950-present: Lecture Notes: Stabilization Policy: http://tinyurl.com/dl20081119 Audio

M Nov 24: Comparisons: Looking East and Looking South: Why Has There Been so Little Social Democracy in the United States? Why Has America Been so Successful?: Lecture Notes: Audio

M Dec 1: The End of the American Dream? The Productivity Slowdown, the Inflation of the 1970s, and the Great Widening: Lecture Notes: The Inflation of the 1970s

W Dec 3: The Productivity Speedup of the 1990s: Lecture Notes: Audio

M Dec 8: The Crisis of Social Insurance: Pensions and Doctors

M Dec 15: Resources, Suburbs, Global Warming: Limits? Final Review: Review Lecture: Evans 10 Monday December 15 4-6 PM


Will Bank Recapitalization Work?

Will Bank Recapitalization Work? A Contribution to “Free Exchange”

J. Bradford DeLong

University of California at Berkeley and NBER brad.delong@gmail.com; http://delong.typepad.com; 925-708-0467

December 18, 2008

Four factors impose haircuts on the values of financial assets. The first is default—perhaps your counterparty simply will not be around when the financial asset you hold matures. The second is duration—even if you are certain that your counterparty will be around, and even if you are certain that you understand the situation, and even if you don’t care about risk, you would still rather have your money now than at its maturity date in the future. The third factor is information—maybe you don’t understand what you are buying, for if it is such a good deal for you to buy it at this price why is the seller so eager to sell the asset to you? The fourth is risk—that even if your counterparty will be around and even if you don’t care about getting your money now rather than later and even if you understand the security perfectly, you still are not sure how valuable the security will be to you in your particular situation when it matures.

Duration is not an issue in this financial crisis: central banks have pushed the time value of money down to zero in nominal terms, and negative in real terms. Default is only a very minor issue in this financial crisis. But risk is a big issue: banks feel that they should be holding less-risky portfolios than they currently hold because just one more bad shock may see them or at least their stockholders’ equity and their executives’ option wealth disappear, so risky assets are at a deep discount. And information is a big issue: everyone is scared that the assets others are trying to sell are for some reason they don’t fully understand assets that nobody would wish to buy.

Alan Greenspan hopes that another $250 billion of capital for the U.S banking sector would bring information and risk discounts back to normal levels and resolve the financial crisis—at bank capitalization ratios of 15% as opposed to the 10% that we used to think of as normal a couple of years ago. But he cautions that “[simple] linear calculations, of couxe, can only be very rough approximations…”

I hesitate to disagree with Alan Greenspan—by my count, I have been wrong seven out of the ten times that I have in my mind had significant disagreements with his policies over the past quarter century. But I fear that he is wrong: that $250 billion will not be enough of a recapitalization of the banking system to return risk and information discounts to their normal levels.

First, the big information problem is that banks fear that what is being sold to them is simply not worth buying. Government guarantees of assets can resolve that problem—government issuance of safe Treasuries and purchases of risky assets can resolve that problem—but government or private injections of capital into the banking system cannot.

Second, the big risk problem is not so much a fear of long-run default as a fear of a deeper short-run liquidity squeeze. It is not a fear that investing in risky assets will be bad in the long run, it is a fear that investing in risky assets robs you of the cushion needed in the short run should there be another negative shock and should the government then decide that it must, for political reasons, confiscate the equity of financial institutions that come back to it for more liquidity support. Thus in my view banks are more likely to sit on additional capital injections than to increase their risk tolerance and seek to invest them at higher long-run yields.

This is a bad situation. With financial asset prices at their current low levels, the businesses that should be expanding cannot raise the money for expansion on terms that make expansion profitable, while the businesses that should be contracting are contracting rapidly. We need either a substantial increase in financial asset prices now in order to give the businesses that should be expanding the incentive to profitably expand, or we need massive increases in government spending to provide the demand the private sector is not. We would rather have the first if we have the choice—private-sector demand we know will be for things that people regard as useful, while government-sponsored stimulus programs have a different more political logic—but we may not have the choice.

Thus I am swinging around toward a more radical proposal than Greenspan’s large-scale bank recapitalizations. Have the U.S. government take formal complete ownership of Fannie Mae and Freddie Mac, and give them the mission of borrowing at the Treasury rate and buying up and refinancing mortgages on terms that make a profit for the Treasury. This would be a financial operation on a never before seen scale. But as the government bought and the supply of risky assets on offer to the private sector shrank their price would go up and the mortgage-backed assets that suffer the biggest information problems would disappear from the market. And as asset prices went up the banking sector would recapitalize itself.

Or so it would work, unless the large scale of the intervention cracked financial sector-confidence in the U.S. Treasury bond as the safe asset standard for the global economy.

References

Alan Greenspan (2008), “Banks Need More Capital,” Economist (London) http://www.economist.com/finance/displaystory.cfm?story_id=12813430.


Blogging Krugman's The Return of Depression Economics Over at TPM Cafe...

TPMCafe | Talking Points Memo | What Is Non-Depression Economics?: This discussion has so far one major lack: it does not tell us what "depression economics" is supposed to replace--it does not tell us what non-depression economics is, or was.

So let me try my hand at a definition of non-depression economics.

Non-depression economics believes that:

  • Short-run economic policy should be left to the central bank--the legislature and the executive should focus on the long run and keep their noses out of year-to-year fluctuations in employment and prices.
  • The highest priority for central banks should be to maintain their credibility as guardians of price stability.
  • Once that highest goal has been achieved, central banks can turn their attention to trying to keep the economy near full employment.
  • They should try to keep the economy near full employment by influencing asset prices--pushing asset prices up when unemployment threatens to rise, and pushing them down when an inflationary spiral appears on the horizon.
  • Central banks should influence asset prices through normal open-market operations--by buying and selling short-term government securities for cash, thus changing the safe interest rate and the price of longer-duration assets.
  • Central banks should stand ready to intervene to prevent bank runs. Otherwise, central banks should let the financial sector run itself with a light regulatory hand--financiers can take care of themselves, and the central bank should view itself not as chaperone or duenna but rather as the designated driver in the case of financial speculative excess.

That is what Paul Krugman is arguing is no longer sufficient doctrine for our age.


TPMCafe | Talking Points Memo | What Is Going to Be the New Leading Sector?: What is going to be the new leading sector? What is going to allow us to maintain full employment without running huge long-term budget deficits that will, eventually, sap our rate of economic growth somewhat?

If it weren't for the fact that the furshlugginer dollar refuses to fall in value, the answer would be obvious: we will have a boom in import-competing manufacturing (and exports). But then the rest of the world has a long-run problem: if we decide to no longer be the world's importer of last resort, than what serves as a locomotive to keep it near full employment?

But if the dollar doesn't fall, then we have a long-run problem. The only answer I can think of is for the U.S. to then become the world's largest private-equity fund: they lend us their money, and we then invest the money back in their economies--in industries and companies that then have a very high demand for U.S. high-tech goods and for U.S. services exports.


TPMCafe | Talking Points Memo | What Is to Be Done Now?: Paul Krugman writes:

[M]y main answer to Brad's question is that the events of 1997-1998 were, for me, a wake-up call. Before then I'd taken it for granted that central banks could always pump up demand, but Japan showed that the liquidity trap was a very real danger in a world in which inflation rates were fairly low.... I'd also assumed that bank runs were a thing of the past, but the Asian and LTCM crises showed that events functionally equivalent to bank runs could happen even if depository institutions - the denizens of big marble buildings with "FDIC insured" signs in their windows -- were protected. So I didn't take much comfort in the fact that a makeshift, cobbled-together set of measures managed to contain the crisis; it seemed all too obvious that the next crisis could be too big for improvisation to handle...

So what, in the long run, should the new regulatory and management system consist of?

Back in 1992 Larry Summers and I egged each other on to say that the target rate of inflation should be 5% per year--that anything less leaves you too vulnerable to a liquidity trap, and that as long as inflation is 5% per year it's hard to see any form of debt-deflation-credit-channel taking hold: even minimal principal amortization writes down the real value of debts and hence debt overhang very rapidly. Was this one of the (many) stupid things I have written in my career, or was it a really smart insight?...

We clearly need to extend the lender-of-last-resort umbrella to cover the shadow banking system--which means that someone has to oversee and regulate their portfolio leverage as well...

We clearly need to mandate that the Princes of Wall Street and Canary Wharf be paid not in cash bonuses and option rights but in restricted stock--to bail them into their institutions for a decade or so...

We clearly need to separate capital adequacy regulation from rating agencies that can be gamed in order to eliminate regulatory arbitrage...

But how do we impose capital requirements? Do we require that everybody unwind the derivatives in their portfolios and express them in a stocks-and-bonds-and-currencies basis, and then require monthly capital adequacy checks limiting their functional leverage to less than ten-to-one? I don't understand these issues well enough to have an informed view. And I don't see how I could implement a proper capital adequacy framework even if I were suddenly made head of bank regulation at the Federal Reserve...

And what, in the short run, is to be done with the crisis?

I am swinging around to (a) massive fiscal stimulus, plus (b) profit-making financial intervention: assign Fannie Mae and Freddie Mac to borrow from the Treasury and buy up mortgages at market prices until they have pushed the risky interest rate down to something reasonable. It's time for monetary policy to take on the role not just of managing the risk-free interest rate but managing the risky rate as well.

There is a big question here: is this possible? We know that the Federal Reserve can manage the riskfree rate without breaking a sweat. But I have Ricardian-equivalence worries about whether large scale government financial operations can actually move risky interest rates very far...


TPMCafe | Talking Points Memo | Japan's Fifteen-Year Long Crisis: Paul Krugman writes:

My first answer is that the 1998 crisis was not, in fact, resolved all that easily. Bear in mind that there were really two crises: the high-speed capital-flight crises of Southeast Asia and the prolonged Japanese slump. The capital-flight crisis did subside quickly -- although even there it left permanent damage (Indonesia, with a bigger population than all the other crisis countries combined, has never recovered to its old growth track.) But Japan's woes went on and on. And Japan was the clearest omen for the United States...

Touche...


TPMCafe | Talking Points Memo | Dean Baker Talks to His Inner Hayek: Dean Baker wrote:

Several Bush administration officials have suggested reducing mortgage interest rates to 4.0 percent, or possibly lower, with the intention of boosting the housing market. While there are markets in which it would be reasonable for the government to intervene to prevent a downward spiral of house prices, it is difficult to see anything good that would come from delaying a full adjustment in the markets that have still yet to fully deflate.

If extraordinarily low mortgage rates can succeed in preventing prices from falling back to trend levels, then house prices in these markets will presumably plummet when the economy recovers and mortgage interest rates return to more normal levels...

I disagree.

The mortgage interest rate is made up of four things. Compensation for inflation--call it 2% per year. Real time preference--the fact that because we will be richer in the future we value future goods at less than par in terms of present ones--call it 2% per year. The default discount--which in a well-run housing market should be small. And the risk discount--the extra return mortgage lenders demand because they are not sure when their payments are going to come exactly or what they will be worth exactly when they do come--and I am under the spell of Richard Thaler and Matt Rabin who argue that this discount should also be very small.

Thus I think that 4.0% per year is what mortgage interest rates ought to be. There is no higher "normal" that they ought to return to. The fact that they are not at 4.0% on average is a sign of a significant market failure--a failure to appropriately mobilize the collective risk-bearing capacity of the y.

But a 4% mortgage rate would push up housing prices. Wouldn't that tend to make housing less affordable? No--because it would also push down the mortgage payment you would have to make to carry a mortgage of a given principal amount. And the two effects should offset each other.

So I say: unleash Fannie Mae and Freddie Mac. Let them borrow at the Treasury rate and buy and buy up mortgages until the mortgage rate is down to inflation plus 2% per year. That seems to me to be a good use of public money--and in all likelihood a profitable one.


TPMCafe | Talking Points Memo | 1998 and 2008: What's Different?: Let me ask Paul two related questions:

Paul, you wrote the first version book a decade ago, back when you were worried that the East Asian financial crisis of 1997-8 was a dying canary in a coal mine, a reflection not of faults in the Asian model but rather a sign that the old business cycle malady that we thought was controlled by monetarist eurythromycin was gaining immunity. But the East Asian financial crisis of 1997-1998--although sharp--was quickly cured (i) once the International Monetary Fund realized that the crisis was not one to be cured by administering painful medicine to governments, (ii) once the U.S. Treasury was freed from the fetters that Alfonse D'Amato and Bob Dole had imposed on it, (iii) once the IMF and the U.S. Treasury understood that their role was that of a lender-of-last-resort, and (iv) once Bob Rubin had bailed the big New York banks into Korea. The old monetarist eurythromycin seemed to work pretty well.

So, first, why did you back in 1998 think that the business cycle malady had developed some immunity?

And, second, why now does it seem as though the business cycle malady has developed some immunity?


Greg Mankiw Joins the Inflation Caucus

He writes:

Greg Mankiw's Blog: The Next Round of Ammunition: The next step for the Fed is to drop the "price stability" rhetoric. The Fed has never been truly committed to stable prices.... Now that zero, or even below zero, is a possibility, the Fed needs to convince people that we are going back to the normal inflation rate of 2 to 3 percent.... Some would view this as a radical change in monetary policy. In some ways, it would be. Given how weak the economy is, however, a bit of radicalism may be called for. I am more comfortable having the Fed commit itself to modest inflation than having the federal government commit itself to a trillion dollars of new spending. The more we can rely on monetary rather than fiscal policy to return the economy to full employment and sustainable growth, the better off future generations of taxpayers will be...

But doesn't this imply an average inflation rate of more than 2% per year? That is, if we are supposed to keep the inflation rate at 2-3% per year in a depression when inflation is low, doesn't this require that inflation be 5-6% in a boom, and and average 3-4% rather than 2%?


Ooops. In Which I Apologize to Jeffrey Frankel...

It is a very good line, and we should credit Jeff as its originator:

The Tenth-Ranked Quotation of 2008?: The Yale Book of Quotations seeks to fulfill a useful service: It tabulates well-known sound-bites, but tries to get the exact quote and citation right, which is rare.... The editor compiles an annual list of Top Ten Quotes of the Year.... Number 1 for example is “I can see Russia from my house,” carefully attributed to the Tina Fey parody rather than what Sarah Palin actually said. The good news is that the title line in my blogpost of July 17 was chosen as one of the top ten quotes of 2008 (tied for tenth place, it is true). The bad news is that the quote was attributed to Paul Krugman, who had used it subsequently on the Bill Mayer Show.    

The sentence is: “If there are no atheists in foxholes, there are no libertarians in financial crises.”   I had originally used it in 2007 as the first line of an article in a Cato Journal issue devoted to financial crises.  Among the others who subsequently picked up on the line were Ben Bernanke, Mark Shields, Bloomberg, WallStreetJournal.com, Brad deLong, and Tom Keene--generally with attribution, when the format permitted.... Krugman immediately set the record straight on his blog, as I knew he would...

And then Jeffrey starts meditating on a peculiar phenomenon--one best expressed, I think, by an offhand remark by a non-economist friend of mine: "I loath Paul Krugman, and the fact that he was completely totally spectacularly right about Bush and his administration doesn't make me loath him any less." Which is strange because to us Paul is a thoughtful, generous, rather shy personality. (Well, he does owe Laura d'A. Tyson a big apology...)

Jeff writes:

But there are some other, more interesting, aspects. One is an illustration of how tough is the world in which highly visible columnists like Krugman live. There are lots of Krugman-haters out there... [because] he consistently has been liberal and anti-Bush (not precisely the same thing). But the antipathy goes very deep.

The Yale/AP list was called to my attention yesterday by one Joel West.   I told him I was indebted to him for pointing out the misattribution.   But I also told him that I was sure that there had been no desire on Paul’s part to steal my line:  TV shows like Bill Maher don’t customarily allow their guests to display footnotes. But Mr.West must be one of the Krugman-haters, because his subsequent blogpost blithely accused Krugman of dishonesty. As had another Krugman-hating blogpost before that....

Ironically, of the other two soundbites that share tenth place... [one] is from the all-time champion Krugman-hater, Donald Luskin. Luskin earned the Top Ten honor when quoted as saying “Anyone who says we’re in a recession, or heading into one — especially the worst one since the Great Depression — is making up his own private definition of “`recession’”  in the Washington Post, September 14. This was, of course, after a huge fraction of economic commentators had already decided that the country was probably in recession, as turns out to have been the case...

I attribute the "phenomenon" to two factors.

First, there were an awful lot of people who knew in the summer of 2001 exactly what Paul Krugman knew, and I knew--that George W. Bush was a horrible president, intellectually lazy, incurious, suspicious and fearful of expertise, yet convinced that it was his job to be the "decider" and to make decisions based on inadequate information and then never to revisit them--for that would be a sign of "weakness." But they didn't say what they knew. And know they feel very guilty. And one way the guilt works itself out is by denigrating those--like Paul Krugman, like Ron Suskind, like Philippe Sands--who were brave enough to say that the emperor was buck-naked at the time.

Second, the right-wing slime machine worked spectacularly well in the 1990s.. And the slimers continued into the 2000s. And a bunch of other people said: "Hey, if it worked for Rush Limbaugh, it can work for me." And so you got the first wave of Krugman-haters--the Mickey Kauses, the Andrew Sullivans, the Donald Luskins--and from then on it was monkey-see monkey-do.

What to do going forward is unclear. It is certainly the case that in a good world nobody who was not denouncing Bush by the end of 2003 would have any place in American politics or in our public sphere of discourse--to have been so spectacularly wrong or so spectacularly cowardly or both tells us something about their judgment and honesty, and there are lots of politicians and commentators of good judgment and honesty out there to listen to, who should have the available slots...


Global Capital Markets: Water Flowing Uphill

Matthew Yglesias says that these questions are too hard for him. Well, they are too hard for me too:

Matthew Yglesias: Questions That Are Too Hard for Me: The way this is “supposed” to work is that Chinese people, being poor but growing rapidly, consume more than they produce. The current accounts balance out because savers in rich countries should be investing money in China — building up China’s capital stock and so forth. Investments in capital-poor developing countries “should” offer a high rate of return for developed world savers, and the injection of foreign capital should speed China’s growth. And for “China” you can substitute “Mexico” or “India” or what have you. The world, however, doesn’t actually work like that. Instead, China has been running persistent surpluses. And so have various energy-rich developing countries. So money keeps getting plowed into various US investments. But the US isn’t a poor, developing, capital-poor country. And so a lot of the investment in the United States seems to be going into speculative bubbles — first dot-com stocks, then MBS. Now people are buying up no-interest treasury bonds.

Paul Krugman wrote the other day about how to achieve rebalancing:

That’s where things get complicated: a lower US trade deficit means lower surpluses and/or higher deficits elsewhere. Who’s the counterpart to our adjustment? OK, the Middle East, which no longer has its oil windfall. But China is having its own slowdown, as is Japan.

In other words, trying to figure out where we go from here is a sort of global jigsaw puzzle — and I haven’t managed to solve it yet.

So, yeah, he wrote about it but he didn’t have the answer. Brad DeLong offers this:

If it weren’t for the fact that the furshlugginer dollar refuses to fall in value, the answer would be obvious: we will have a boom in import-competing manufacturing (and exports). But then the rest of the world has a long-run problem: if we decide to no longer be the world’s importer of last resort, than what serves as a locomotive to keep it near full employment?

But if the dollar doesn’t fall, then we have a long-run problem. The only answer I can think of is for the U.S. to then become the world’s largest private-equity fund: they lend us their money, and we then invest the money back in their economies–in industries and companies that then have a very high demand for U.S. high-tech goods and for U.S. services exports.

I’ve heard some economists argue that we’re pursuing some kind of misguided strong dollar policy that’s responsible for our currency’s refusal to devalue, but I don’t actually see what policy that might be. We appear to be doing everything you would do to shake investor confidence in U.S. public finances and spark a decline in our currency.

Maybe the answer to these difficult questions is lurking inside CAP’s global new deal report. I’ll need to read it.


Mark Thoma Consults His Inner Hayek

Mark wonders what to do:

Real Time Economics : Secondary Sources: TARP and Democracy, Cascading Failures, Bubbles: Fed and Bubbles: Writing on TPMCafe, Mark Thoma looks at the issue of the Fed’s pre-emptive busting of asset bubbles:

The Fed needs a rule like it uses to guide its decisions about the federal funds rate, a rule that compels the Fed to respond to asset prices early enough and forcefully enough to prevent catastrophic bubbles from developing. For example, the Fed could add an asset price index to the rule for the federal funds rate so the federal funds rate responds to asset prices in addition to responding to inflation and output. But that is not the only approach, the point is to create an automatic procedure that can be followed (and used as cover against criticism) so that we don’t wait too long to step in when asset prices begin to escalate...


Oats: A Grain that in England Is Fed to Horses, and in Scotland to People...

...which is why England has such fine horses, and Scotland has such fine people.

Harry Brighouse lowers his cholesterol:

Recipe Corner: Staffordshire Oatcakes: Talking of made up family traditions, Staffordshire Oatcakes a la Brighouse Mothersname household are a nice light-ish alternative to regular pancakes. I was first served them as a teenager by the Leek, Staffs, native parents of a friend of my sister’s; then completely forgot about them until coming across them in a children’s story several years ago. You’re supposed to use half medium oatmeal (scottish oatmeal in the US) and half regular flour, but I prefer to use oat flour with just a couple of spoons of medium oatmeal for texture. I make them when my eldest has friends over for sleepovers and they are always popular; I make the batter the night before, and its all ready to cook in the morning. You can serve them with butter and syrup (Golden Syrup is best, but maple is fine); or, for a light lunch, with grated cheese on top (fold the pancake to melt the cheese, gruyere is best).

1 teaspoon dried yeast
1/2 teaspoon salt
1 tablespoon sugar
3 cups oat flour and 3 tablespoons of medium/scottish oatmeal
2 cups water and 2 cups milk
(or 4 cups of liquid, with milk and water in whatever proportion you want, really).
2 tablespoons of melted butter

Dissolve the yeast and sugar into the liquid, and leave covered for 10 minutes. Add all the other ingredients except the butter, and whisk thoroughly so there are no lumps. Leave in a mixing bowl, covered with plastic wrap, for at least an hour (overnight is fine; 2 days is fine, frankly) in a not-too-warm place.

Just before cooking, mix in the melted butter. Cook like pancakes on a moderate griddle in butter. Serve immediately (or keep them in a hot oven, but don’t stack them, please). You can add more flour, or more liquid, any time you want, to get the consistency you prefer; this recipe should make the consistency a bit thicker than crepes.

It is somewhat remarkable how much many of the recipes the foodies are now recommending resemble those eaten in the years of dearth before the coming of the Black Death...


Socialism in One Sector--the Housing Sector

Glenn Hubbard and Charlie Mayer call for the effective nationalization of the mortgage finance sector:

Low-Interest Mortgages Are the Answer: Recent news articles suggest that the Treasury Department is considering a plan to offer a 4.5% mortgage for home buyers for a period of time. Let's hope it does. It would help arrest the decline in house prices that is at the base of the ongoing financial crisis and recession.

Raising the demand for housing makes sense now. While fundamental factors clearly played a role in driving down house prices that were at excessive levels two years ago, we have argued in a paper (to be published in the Berkeley Electronic Journal of Economic Analysis and Policy) that in most markets house values are today lower than what is consistent with the average level of affordability in the past 20 years.

Nonetheless, without policy action house prices are likely to continue falling, thanks largely to the meltdown in mortgage markets and the weakening employment outlook. Conversely, we see little risk that increasing the demand for housing will touch off another housing bubble. And indexing the mortgage rate to the Treasury yield could avoid this outcome in the future. While the economy is contracting, low interest rates would spur housing activity. When economic activity improves, the U.S. Treasury yield and mortgage rates would rise.

A 4.5% mortgage rate is not too low. The 10-year U.S. Treasury yield closed at 2.3% on Dec. 12, 2008. Hence a 4.5% mortgage rate is 2.2% above the Treasury yield, above the 1.6% spread that would prevail in a normally functioning mortgage market.

Some have argued that lenders should earn more than the average 1.6% spread, to compensate for the fact that housing is a much riskier investment today. We don't think so. Recall that a mortgage can be thought of as a risk-free bond plus two possibilities that increase risk to lenders: default and/or prepayment. Historically, the risk of default adds about 0.25% to the interest rate. The remaining spread of the mortgage rate over the Treasury yield represents the risk of prepayment and underwriting costs. With falling house prices, the risk of default could indeed add 0.75% or more for a newly underwritten and fully documented loan. But 4.5% would be the lowest mortgage rate in more than 30 years -- so the additional risk to lenders of prepayment would be almost nil. And low mortgage rates would substantially reduce the risk of further house price declines...

The Treasury doesn't have the know-how to offer mortgages. Fannie and Freddie do.

All in all, I approve of the plan: having Fannie and Freddie buy up mortgages at market prices and refinance them at 4.5% could do a lot of good for the country and make a fortune for the government.

I am, however, gobsmacked to see Glenn Hubbard proposing it.


A Socratic Dialogue About Bernie Madoff

Thrasymakhos: "Your boss is quite a card player, Mr. Hooker." "Well, Mr. Lonigan, he cheats."

Glaukon: Which of the many possibilities prompted this? Madoff? On Madoff, I like this juxtaposition -- "The SEC Looked Into Madoff Front Running Claims Last Year" ["there's no front running here - just a $50B Ponzi scheme - close the file"] http://clusterstock.alleyinsider.com/2008/12/the-sec-looked-into-madoff-front-running-claims-last-year with "How We Knew Bernie Madoff Was A Fraud" (answer - we asked people things) http://clusterstock.alleyinsider.com/2008/12/how-we-knew-bernie-madoff-was-a-fraud.

Thrasymakhos: Madoff. The SEC is truly extraordinary. The Madoff fraud goes much deeper than David Mamet. It is a confluence of the two oldest and most elemental frauds. The second oldest con is “you are in the con” a la Doyle Lonnegan in “The Sting”. However, the dark eloquence of “the Sting” is eclipsed by the savage profundity of the deepest analysis of con in human history. I speak, of course, of the acts of Sylvester McMonkey McBean chronicled in the Dr. Suess classic “the Sneetches”.

Glaukon: I was forced to refresh my recollection of the classics via Wikipedia, but yes -- Madoff's reluctance to let people give him their money, and the way he got them to beg him to take it -- were they socially worthy enough to become a Madoff investor? -- pure brilliance. I do love the contrast between the SEC and the advisory firm that refused to recommend him after a cursory investigation (such as noting that he had no infrastructure).


Hale "Bonddad" Stewart Is Scared

The Federal Reserve reacts to the fact that the economy train has arrived in Depression City.

Stewart writes:

Hale "Bonddad" Stewart: The Fed's Kitchen Sink Interest Rate Policy: The Fed announced their policy of establishing "a target range for the federal funds rate of 0 to 1/4 percent." This brings two points to mind:

  1. The Fed has no interest rate moves left. This is it.
  2. The Fed is terrified about the economy. And they have good reason:

Since the Committee's last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined. Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further....

The Fed will step up their other activities:

The focus of the Committee's policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve's balance sheet at a high level. As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities. Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity.

To the point: the Fed is scared right now. I mean really scared. And they will do anything even remotely possible right now.