Ten Economics Pieces Worth Reading: January 8, 2010
1) Calculated Risk: More Worries about end of Fed MBS Purchase Program:
From Liz Rappaport and Jon Hilsenrath at the WSJ: Fed Plan to Stop Buying Mortgages Feeds Recovery Worries: "The Federal Reserve's pledge to stop buying mortgages by the end of March is sparking fears among home builders, mortgage investors and even some Fed officials...." Others are even more worried, from the WSJ: "Ronald Temple, portfolio manager at Lazard Asset Management... sees mortgage rates rising by a percentage point when the Fed stops buying. A withdrawal of government support, combined with high unemployment and rising mortgage foreclosures, could push home prices down 20%, he said... home builders and others are hoping the Fed will flinch...." Although the Fed has made it clear - repeatedly - that they would either continue the program or restart it if they felt it was necessary, I think it is likely that the Fed will stop buying MBS by the end of March - and then react to whatever happens...
2) Roger Lowenstein: Walk Away From Your Mortgage!:
The housing collapse left 10.7 million families owing more than their homes are worth. So some of them are making a calculated decision to hang onto their money and let their homes go. Is this irresponsible? Businesses — in particular Wall Street banks — make such calculations routinely. Morgan Stanley recently decided to stop making payments on five San Francisco office buildings. A Morgan Stanley fund purchased the buildings at the height of the boom, and their value has plunged. Nobody has said Morgan Stanley is immoral — perhaps because no one assumed it was moral to begin with. But the average American, as if sprung from some Franklinesque mythology, is supposed to honor his debts, or so says the mortgage industry as well as government officials. Former Treasury Secretary Henry M. Paulson Jr. declared that “any homeowner who can afford his mortgage payment but chooses to walk away from an underwater property is simply a speculator — and one who is not honoring his obligation.” (Paulson presumably was not so censorious of speculation during his 32-year career at Goldman Sachs.) The moral suasion has continued under President Obama...
3) Menzie Chinn: Reserves Are Revised Upward, the Dollar Share Declines:
Perhaps the most startling thing about the new COFER data on reserves released by the IMF is not the declining dollar share in total reserves, but rather the fact that reserves have risen relative to where we thought they were [0]. The change is entirely due to the upward revision in unallocated reserves by emerging market and LDC central banks.... Total reserves were revised up $381 billion in 2009Q2, as were total emerging market/LDC reserves, and unallocated emerging market/LDC reserves. The revision in total reserves constituted a 5.5% change – quite substantial...
4) Greg Ip: The Fed discovers Hyman Minsky:
[Y]ou should read the Fed staff working paper that formed the basis for most of Mr Bernanke’s speech.... They cite a self-reinforcing feedback loop of rising home prices, declining lending standards, financial innovation, and buyer euphoria. They explicitly endorse the models of Robert Shiller, a leading proponent of the role of psychology in bubbles, Charles Kindleberger, author of the classic "Manias, Panics and Crashes", and Hyman Minsky. While Mr Bernanke, in his speech, blames exotic mortgages for feeding the bubble, the working paper’s authors, Jane Dokko, Brian Doyle, Michael Kiley, Jinill Kim, Shane Sherlund, Jae Sim, and Skander Van den Heuvelgiven, are more nuanced....
My own search of the Fed’s web site found only two previous references to Mr Minsky—one in a staff working paper, another in a speech in 2000—and just one to Mr Kindleberger. (Mr Shiller gets a lot.) The prior negligence is understandable.... The Fed's economists have traditionally personified the technical, evidence-based, progressive school of economics which holds that individuals are mostly rational, innovation is mostly good, and given sufficient examination and enlightened action, recessions can be avoided. This is one reason the Fed has traditionally been reluctant to assign a lot of importance to greed, fear and bubbles. This paper’s embrace of Mssrs Minsky, Shiller and Kindleberger may bely a subtle shift to a less utopian, more fatalistic view...
5) Simon Johnson: Still No To Bernanke:
We first expressed our opposition to the reconfirmation of Ben Bernanke as chairman of the Fed on December 24th and again here on Sunday. Since then a wide range of smart economists have argued – at the American Economic Association meetings in Atlanta - that Bernanke should be allowed to stay on. I’ve heard at least six distinct points. None of them are convincing. 1. Bernanke is a great academic.... 2. Bernanke ran an inspired rescue operation for the US financial system from September 2008.... 3. Bernanke was not really responsible for the failures of the Fed under Alan Greenspan.... 4. Bernanke understands the folly of the Fed’s old bubble-building ways.... 5. Bernanke will be tough on banks when needed.... 6. Dropping Bernanke would disrupt the process of economic recovery...
6) David Leonhardt: If the Fed Missed That Bubble, How Will It See a New One?:
[L]et’s consider what an empowered Fed might have done during the housing bubble, based on the words of the people who were running it. In 2004, Alan Greenspan, then the chairman, said the rise in home values was “not enough in our judgment to raise major concerns.” In 2005, Mr. Bernanke — then a Bush administration official — said a housing bubble was “a pretty unlikely possibility.” As late as May 2007, he said that Fed officials “do not expect significant spillovers from the subprime market to the rest of the economy.” The fact that Mr. Bernanke and other regulators still have not explained why they failed to recognize the last bubble is the weakest link in the Fed’s push for more power. It raises the question: Why should Congress, or anyone else, have faith that future Fed officials will recognize the next bubble?
Just this week, Mr. Bernanke went to the annual meeting of academic economists in Atlanta to offer his own history of Fed policy during the bubble. Most of his speech, though, was a spirited defense of the Fed’s interest rate policy, complete with slides and formulas, like (pt - pt*) > 0. Only in the last few minutes did he discuss lax regulation. The solution, he said, was “better and smarter” regulation. He never acknowledged that the Fed simply missed the bubble.
This lack of self-criticism is feeding Congressional hostility toward the Fed...
I... think the key insight here is to make financial reform the thing you’re willing to not get done. The whole problem with the health care issue, from the get go, has been that the reform push was “too big to fail” to the Joe Liebermans of the world can hold everything hostage, threatening disaster for the progressive project, unless they get their way. The genius of financial regulation is that while it’s important to fix this it’s actually not critical that it be done in 6 months as opposed to 18 or 24 months. This is an issue where if a block of 44 Senators want to filibuster you can draw a line in the sand, let them filibuster and run around the country complaining about it. That’s a campaign issue. That’s a time to show the base some gutty feisty fightiness. An opportunity, in other words, for people to see their president fighting hard. And also to see that a hard-fighting president isn’t enough—he needs a congress that’s willing to vote for progressive bills.
Saying you’re determined to get something done amounts to saying you’re determined to make whatever compromises are necessary to get a bill on your desk. What’s needed is determination to fight for what’s right, whether it can get sixty votes or not.
8) BEST NON-ECONOMICS THING I'VE READ TODAY: Matthew Yglesias: Profiling Lite:
I wrote yesterday that if the right gets its way on “profiling” of Muslims, the country will end up much worse off. It’s worth saying from this perspective that the “profiling lite” the Obama administration has decided to pursue in the form of its 14 “countries of interest” list really isn’t much better. If you look at, say, Lyndon Johnson’s approach to Vietnam, it’s really striking how much damage can be done by a Democratic President constantly looking over his shoulder in terror of being labeled “soft” by the right-wing. The fact of the matter is that you can never be brutal or racist enough to stop the right from attacking. But you can be scared enough that you do things that harm the nation.
9) STUPIDEST THING I'VE READ TODAY: Brian Tamanaha: What Is the Law?:
"If, as Holmes said and as CLS reiterated, what the law "is" is what the courts will do in fact, the thing to do is to figure out which side of the argument can count to five first. Or, put another way, remember Bush v. Gore?" By almost all accounts, Bush v. Gore was an embarrassing failure of legal analysis, a historic stain on the court to the enduing shame of the five who signed on....[M]uch more is involved than getting to five.... The crucial mistake of CLS was its failure to emphasize that, while legal analysis is frequently capacious enough to support any outcome (especially at the level of Supreme Court cases), nonetheless, usually certain arguments are legally stronger than others.... It is not just about marshaling five votes, at least not for judges with integrity, but about coming up with and adhering to the most compelling legal argument. The more often we emphasize this the harder it will be for judges to engage in cynical analysis... [I have not yet found a Republican who will say in public that Bush v. Gore was an embarrassing failure of legal analysis. If you find one, let me know.]
10) HOISTED FROM THE ARCHIVES: This Is Funny (Janury 21, 2006):
I put these two questions: (1) Should the Washington Post have a "World Columnist" who does not know that it is Canberra, not Sydney, that is the capital of Australia? (2) Should a man who thinks that the capital of Australia is Sydney be pontificating about foreign affairs in any forum? "Still the Colossus: Robert Kagan: In East Asia, meanwhile, U.S. relations with Japan grow ever closer as the Japanese become increasingly concerned about China and a nuclear-armed North Korea. China's (and Malaysia's) attempt to exclude Australia from a prominent regional role at the recent East Asian summit has reinforced Sydney's desire for closer ties..."