links for 2008-10-04

• Dissecting the decoupling debate - Vox EU
• Should the Reserve Bank of India follow the Fed? - Vox EU
• Dinner with the Econ - Information Processing
• Liberalising visas and work permits: Possible negotiating initiatives - Vox EU
• Don't Let Google Freeze the Airwaves - WSJ.com
• HIV, fertility, and Africa’s future - Vox EU
• Rotten Economics and Rotten Teeth - Richard H. Serlin
• The Problem Is Still Falling House Prices - Feldstein - WSJ.com
• Early Boomers and the Economic Mess - Robert Reich

Comments

[a]

I'm really sorry, but if Feldstein thinks the solution to the present crisis is to prop up housing prices, then he should be laughed out of town.

[World Standards]

MF..."Experts say that an additional 10% to 15% decline in house prices is needed to get back to the pre-bubble level."

Prices are supposed to rise and fall to redirect resources to needy sectors. The problem is excessive leverage. No one else in the world uses the type of mortgages used here. That is because they create disasters. Get in step with the rest of the world.

Trying to keep prices rising once they have reached bubble levels is unrealistic. Youngsters can't possibly work any more jobs than they already are in order to service ever more gigantic loans, and shell shocked foreigners aren't going to loan them any more on silly terms.

says...

http://www.nytimes.com/aponline/world/AP-AS-Pakistan.html?ref=world&pagewanted=print

October 4, 2008

Suspected U.S. Missile Strike Kills 20 in Pakistan
By ASSOCIATED PRESS

Militants buried Arab comrades who were among at least 20 people killed when suspected U.S. missiles hit a house near the Afghan border, Pakistani officials said.

[Another Democratic-Republican foreign policy initiative.]

[anne]

Look for more of the same in Somalia, but look carefully because American news ignores the war we encouraged and supported in Somalia in December 2007 that is progressively laying waste to lives and countryside. Appropriately enough for the times though even public television has just dropped the only international news program the network had carried.

[That was me, forgetting me, above.]

[ken melvin]

Feldstein simply doesn't understand the role of housing.

[Will Transfer Payments Be Enough?]

RR..."The house you’ve been living in for twenty-five or thirty years and were planning to cash in for retirement is worth far less now than the last time you looked. So is that 401-k plan you were counting on."

Instead of saving in more stable bank accounts/bonds, inflation forced citizens to save using volatile inflation hedges. Unfortunately, so many people moved into the hedges that future returns are likely to be very low. The 10 year real return on the S&P is negative, with dividends still at historic lows. Homes? Well, they are incapable of producing products/services, so they were never a productive place to park the nation's savings. Doing so created a very large imbalance of payments with other nations.

RR..."One saving grace. At least the Bushies didn't have the votes to privatize Social Security."

As the only COLA adjusted vehicle available to the private sector, it is most that many people will have left. That is the general experience of people in nations with too much inflation. Total dependence upon transfer payments. Will it be enough?

[anne]

"Instead of saving in more stable bank accounts/bonds, inflation forced citizens to save using volatile inflation hedges."

Investment idiocy, but do keep trying since I get all tingly at the advice.

[De Jure Monopolies]

"If you cut the number of dentist in half because the ADA is fighting an increase in dental school capacity, there won't be a shortage in the number of dentists but only because the price will rise so high that half the population won't purchase dental care."

De jure monopolies increase the wages of monopolists, but simultaneously reduce the purchasing power of consumers.

[anne]

http://www.nytimes.com/2008/10/04/business/04insure.html?hp&pagewanted=print

October 4, 2008

A.I.G. Uses $61 Billion of Fed Loan
By MARY WILLIAMS WALSH

The American International Group said on Friday that it had already drawn down $61 billion of the $85 billion emergency bridge loan it received from the Federal Reserve two weeks ago, an announcement that startled credit ratings agencies.

The emergency loan was supposed to buy the company time to sell its troubled assets in an orderly manner. But the sell-off has not yet begun, and now the insurer faces the additional pressure of trying to sell the businesses at a time when potential buyers are having trouble borrowing money.

Moody's downgraded A.I.G.'s senior unsecured debt on Friday and said it might downgrade other types of the company's debt, which could make it more expensive for A.I.G. to borrow money and do business.

A.I.G.'s chief executive, Edward M. Liddy, told securities analysts on Friday that $53 billion to $54 billion of the Fed's loan had gone to shore up A.I.G.'s troubled structured-finance unit and its securities lending business. Another big block of the Fed's money has been used to support A.I.G.'s daily operations, Mr. Liddy said in a conference call, because demand for the company's commercial paper has dried up as a result of the worldwide credit crisis.

After the conference call, Standard & Poor's said it had changed A.I.G.'s credit watch status to negative, expressing concern about whether A.I.G. would be able to restructure with the help of the Fed, as planned. The change indicated that a downgrade could be coming.

It was a series of downgrades in A.I.G.'s credit ratings in mid-September that set off certain contractual provisions requiring the insurer to post billions of dollars of collateral with its trading partners, a catastrophic event that led to the huge federal bailout....

[Balance]

"But rate cuts have had another, less recognized, motivation. Keeping the financial system functional in these difficult times has required banks and others to acquire capital and strengthen their balance sheets..."

Of course, if purchasing power is being transferred to banks, it necessarily must be transferred away from someone else. The people losing purchasing power are seldom considered in this zero sum transaction, which is why the equations don't balance. Anything you do on one side of the equal sign must be done to the other side also.

[anne]

http://www.nytimes.com/2008/10/04/world/asia/04afghan.html?hp&pagewanted=print

October 4, 2008

French Cable Proposes Afghan 'Dictator'
By ELAINE SCIOLINO

PARIS — A coded French diplomatic cable leaked to a French newspaper quotes the British ambassador in Afghanistan as predicting that the NATO-led military campaign against the Taliban will fail. That was not all. The best solution for the country, the envoy said, would be the installation of an "acceptable dictator," according to the newspaper.

"The current situation is bad, the security situation is getting worse, so is corruption, and the government has lost all trust," the British envoy, Sherard Cowper-Coles, was quoted as saying by the author of the cable, François Fitou, the French deputy ambassador to Kabul.

The two-page cable — which was sent to the Élysée Palace and the French Foreign Ministry on Sept. 2, and was leaked to the investigative and satirical weekly Le Canard Enchainé, which printed excerpts in its Wednesday edition — said that the NATO-led military presence was making it harder to stabilize the country.

"The presence of the coalition, in particular its military presence, is part of the problem, not part of its solution," Mr. Cowper-Coles was quoted as saying. "Foreign forces are the lifeline of a regime that would rapidly collapse without them. As such, they slow down and complicate a possible emergence from the crisis."

Within 5 to 10 years, the only "realistic" way to unite Afghanistan would be for it to be "governed by an acceptable dictator," the cable said, adding, "We should think of preparing our public opinion" for such an outcome.

Mr. Cowper-Coles, as quoted, was critical of both American presidential candidates, who have vowed, if elected, to substantially increase U.S. military support for Afghanistan to fight the Taliban.

In the short run, "it is the American presidential candidates who must be dissuaded from getting further bogged down in Afghanistan," he is quoted as saying.

On Wednesday, General David McKiernan, the senior American military commander in Afghanistan, called on NATO to send more troops and other support as soon as possible to counter the insurgency.

British officials said that the comments attributed to Mr. Cowper-Coles were distorted and did not reflect official British policy.

"It's not for us to comment on something that is presented as extracts from a French diplomatic telegram, but the views it quotes are not in any way an accurate representation of the government's approach," said a spokeswoman for the British Foreign Office, who, like other French and British officials, spoke on condition of anonymity under normal diplomatic rules.

The official confirmed, however, that the two men did have a meeting, but said that the British ambassador's comments were taken out of context. The ambassador's deputy was also present at the meeting, according to the French cable.

But Mr. Cowper-Coles, a British career foreign service officer who has served as ambassador to Saudi Arabia and Israel, is known for his frank talk, and other British officials who know him say that his words rang true.

Mr. Fitou, meanwhile, is considered a responsible and precise diplomat who would be unlikely to misreport a conversation, a senior French official said.

It is unclear whether the two men spoke in English or French.

French officials, who said they were deeply embarrassed about what they called a serious leak, criticized the broad dissemination of the cable and have started a leak investigation.

The senior French official described it as a "diplomatic disaster" that could put French soldiers at more risk.

Claude Angeli, one of the executive editors of Le Canard Enchainé and the author of the article, defended its publication.

"This is not the first time we have been the target of a leak investigation," he said in a telephone interview. "The cable is authentic and we reported its contents accurately."

The pessimistic British analysis comes as France has increased its troops in Afghanistan amid concern over a further erosion of popular support for French troops present there....

[anne]

http://www.nytimes.com/2008/10/04/world/asia/04afghan.html?hp&pagewanted=print

October 4, 2008

French Cable Proposes Afghan 'Dictator'
By ELAINE SCIOLINO

The pessimistic British analysis comes as France has increased its troops in Afghanistan amid concern over a further erosion of popular support for French troops present there.

[Here of course sending more soldiers to Afghanistan is all the rage, public opinion led ever so fiercely by the Democratic candidates for President and Vice President followed by the rest of the Democratic leadership.]

[hari]

Recall my Peace Plan for Afghanistan demands Taliban sitting across the table and made to choose participation in forming a gov of national unity. Or face the threat of a much more bombastic NATO interlude to reduce Hindu Kush to something like US did in Viet Nam ....

[anne]

Little noticed, or really not noticed at all so far as I can tell, was the comment by Senator Biden that American international assistance will be cut by the Obama Administration. This comment made along with the repeated and distorted criticism of the Bush Administration for spending too little on development assistance in Afghanistan, while assuring us as well that the Obama Administration would be sending more soldiers to Afghanistan.

So much for the prospect of peace or a simple promise of foreign policy decency.

[anne]

http://www.nytimes.com/2008/10/05/world/asia/05afghan.html?hp&pagewanted=print

October 5, 2008

Reports Link Karzai’s Brother to Heroin Trade
By JAMES RISEN

Assertions that the Afghan president’s brother is linked to the heroin trade have deeply worried top U.S. officials.

[Oh.]

[anne]

http://www.nytimes.com/2008/10/05/world/africa/05command.html?hp&pagewanted=print

October 5, 2008

U.S. Command for Africa Established
By THOM SHANKER

WASHINGTON — For decades, Africa was rarely more than an afterthought for the Pentagon.....

[Progress.]

[anne]

http://angryarab.blogspot.com/2008/10/u.html

October 1, 2008

"The U.S. Africa Command, the Pentagon's first effort to unite its counterterrorism, training and humanitarian operations on the continent, launches Wednesday amid questions at home about its mission and deep suspicions in Africa about its intentions." *

* http://www.mcclatchydc.com/world/story/53234.html

-- As'ad AbuKhalil

[Now I understand.]

[anne]

http://angryarab.blogspot.com/2008/09/you-can-never-accuse-western-media-of.html

September 29, 2008

You can never accuse Western media of ignoring the suffering of people in Africa (often due to Western interventions): "Elephants in Congo: Big and helpless." *

* http://www.economist.com/world/mideast-africa/displaystory.cfm?story_id=12304747

-- As'ad AbuKhalil

[anne]

http://www.democracynow.org/2008/7/18/headlines#6

July 18, 2008

Group: US Aid to Africa Increasingly Militarized
By Amy Goodman

The advocacy group Refugees International is warning US aid to Africa is becoming increasingly militarized at the expense of humanitarian needs. * In a new report, Refugees International says the Pentagon is exerting increasing control over aid traditionally run by the State Department and US aid agencies. The Pentagon now controls 22 percent of US aid money, up from three percent a decade ago.

* http://www.washingtonpost.com/wp-dyn/content/article/2008/07/17/AR2008071702550.html

[Bruce Wilder]

The Road to Serfdom, courtesy of the Republican Right

The Problem Is Still Falling House Prices - Martin Feldstein thinks peonage will help: "The federal government would offer any homeowner with a mortgage an opportunity to replace 20% of the mortgage with a low-interest loan from the government, subject to a maximum of $80,000. This would be available to new buyers as well as those with mortgages. The interest on that loan would reflect the government's cost of funds and could be as low as 2%. The loan would not be secured by the house but would be a loan with full recourse, allowing the government to take other property or income in the unlikely event that the individual does not pay. It would by law be senior to other unsecured debt and not eligible for relief in bankruptcy."

Wow. Just amazing.

Compare and contrast John McCain's plan to make health insurance cheaper for people, who don't need it, and to save money by not providing health care to people, who do need it.

[anne]

"Instead of saving in more stable bank accounts/bonds, inflation forced citizens to save using volatile inflation hedges."

Explaining; moderate inflation has been the experience of every developed country normally or under all but severe circumstances and moderate inflation can be indefinitely expected. Investment or saving that makes sense then must account for inflation or be an inflation hedge, and that means be willing to experience some moderate term volatility while knowing that in the long term an investment that is an inflation hedge makes complete sense. When long-term deflation or even price stability becomes the experience in developed countries, strategies may be changed. Me, I am not waiting till then.

[anne]

http://www.nytimes.com/2008/10/05/business/05fannie.html?hp&pagewanted=print

October 5, 2008

Pressured to Take on Risk, Fannie Hit a Tipping Point
By CHARLES DUHIGG

A decision, made under pressure from Congress and investors, to steer Fannie Mae into dangerous corners of the mortgage market proved to be disastrous.

[Well, then, Fannie Mae was the problem or became the problem after all.]

[Mark Thoma]

That mischaracterizes it. As I said in the original post, yes, they did take on more subprime debt, lots of it - nobody disputes that, or that management made awful decisions (a point I've made repeatedly). But they did not lead the market down, they followed it. Nothing in the article changes that assessment:But by the time Mr. Mudd became Fannie’s chief executive in 2004, his company was under siege. Competitors were snatching lucrative parts of its business. Congress was demanding that Mr. Mudd help steer more loans to low-income borrowers. Lenders were threatening to sell directly to Wall Street unless Fannie bought a bigger chunk of their riskiest loans.

So Mr. Mudd made a fateful choice. Disregarding warnings from his managers that lenders were making too many loans that would never be repaid, he steered Fannie into more treacherous corners of the mortgage market, according to executives. ...

“Fannie Mae faced the danger that the market would pass us by,” he said. “We were afraid that lenders would be selling products we weren’t buying and Congress would feel like we weren’t fulfilling our mission. The market was changing, and it’s our job to buy loans, so we had to change as well.”And once again, please do not mix up the cause of the financial crisis with the failure of Fannie and Freddie. They are not the same thing.

[anne]

Mark Thoma:

"And once again, please do not mix up the cause of the financial crisis with the failure of Fannie and Freddie. They are not the same thing."

Agreed; but the article is worrisome. I need to think about the commitment of Fannie Mae in 2000 to buy riskier loans to a $2 trillion extent.

Daniel Mudd was CFO at Fannie Mae from February 2000, and CEO from December 2004 when the buying of riskier loans was accelerated. What does the mean?

[Mark Thoma]

Searching for fundamental factors that explain a bubble is, by definition, fruitless...

[Mark Thoma]

I think the answer lies in the structure of these markets, and that agency issues are much more important than moral hazard issues. Couple that with a source of liquidity and the stage is set for a bubble to emerge.

[Julio]

"And once again, please do not mix up the cause of the financial crisis with the failure of Fannie and Freddie. They are not the same thing."

I understand that part.

"But they did not lead the market down, they followed it."

But if the problem is not just the kinds of loans (which always existed), but the extent to which they were issued, then an elephant-sized buyer joining in or staying out could make all the difference, no?

"Lenders were threatening to sell directly to Wall Street unless Fannie bought a bigger chunk of their riskiest loans.

So Mr. Mudd made a fateful choice."

This explains in a wonderfully pithy way why these companies should never have been privatized.

says...

"Searching for fundamental factors that explain a bubble is, by definition, fruitless..."

So noone is to blame?

says...

who is to blame for the stock market bubble?

[anne]

Mark Thoma seems quite right to me, but the problem remains since Fannie Mae was a specially trusted public-private company, what was the obligation of Fannie Mae and to whom was the obligation owed. The company was so large a force in the packaging of mortgage bonds.

I am completely sympathetic to extending credit for home buying to lower income or less wealthy borrowers, but there was recorded and publicized abuse of the most expensive mortgage products being sold to those who should have qualified for low cost mortgages. Was Fannie Mae needlessly buying the most expensive mortgages products from 2000, with no regard for the borrowers?

Why was Fannie Mae management acting apart from a Berkshire Hathaway, which can wait indefinitely for proper risk-reward terms at the expense of immediate too-risky profits while making a moderate short term return?

[Richard H. Serlin]

Mark writes, "Searching for fundamental factors that explain a bubble is, by definition, fruitless...". It's true that the bubble part of an appreciation is for non-fundamental reasons, exaggeration, asymmetric information, lying, conning, selling books like Dow 35,000, lotto like fantasies, etc., but often something fundamental starts the process; it just gets exaggerated, which leads to more exaggeration, get rich quick books and seminars, which leads to more exaggeration, and so on, until it gets so bubbled up that new fundamentals make it extremely hard to continue the great growth. As growth slows, this combined with people having gotten in deep, having invested a great deal of their money, sows doubts, which slows growth further, which sows more doubts, which sows more doubts, and so on, and the bubble pops -- or deflates relatively quickly. But the main point I want to make here is that real fundamentals could have been the catalyst that lead to the exaggerated bubble thinking.

[anne]

http://www.nytimes.com/2008/10/05/business/05fannie.html?hp&pagewanted=print

October 5, 2008

Pressured to Take on Risk, Fannie Hit a Tipping Point
By CHARLES DUHIGG

Shortly after he became chief executive, Mr. Mudd traveled to the California offices of Angelo R. Mozilo, the head of Countrywide Financial, then the nation’s largest mortgage lender. Fannie had a longstanding and lucrative relationship with Countrywide, which sold more loans to Fannie than anyone else.

But at that meeting, Mr. Mozilo, a butcher’s son who had almost single-handedly built Countrywide into a financial powerhouse, threatened to upend their partnership unless Fannie started buying Countrywide’s riskier loans.

Mr. Mozilo, who did not return telephone calls seeking comment, told Mr. Mudd that Countrywide had other options. For example, Wall Street had recently jumped into the market for risky mortgages. Firms like Bear Stearns, Lehman Brothers and Goldman Sachs had started bundling home loans and selling them to investors — bypassing Fannie and dealing with Countrywide directly.

“You’re becoming irrelevant,” Mr. Mozilo told Mr. Mudd, according to two people with knowledge of the meeting who requested anonymity because the talks were confidential. In the previous year, Fannie had already lost 56 percent of its loan-reselling business to Wall Street and other competitors.

“You need us more than we need you,” Mr. Mozilo said, “and if you don’t take these loans, you’ll find you can lose much more.”

Then Mr. Mozilo offered everyone a breath mint....

[anne]

http://www.nytimes.com/2008/10/05/business/05fannie.html?hp&pagewanted=print

On one occasion, a hedge fund manager telephoned a senior Fannie executive to complain that the company was not taking enough gambles in chasing profits.

“Are you stupid or blind?” the investor roared, according to someone who heard the call, but requested anonymity. “Your job is to make me money!” ...

[anne]

http://www.nytimes.com/2008/10/05/business/05fannie.html?hp&pagewanted=print

Capitol Hill bore down on Mr. Mudd as well. The same year he took the top position, regulators sharply increased Fannie’s affordable-housing goals. Democratic lawmakers demanded that the company buy more loans that had been made to low-income and minority homebuyers.

“When homes are doubling in price in every six years and incomes are increasing by a mere one percent per year, Fannie’s mission is of paramount importance,” Senator Jack Reed, a Rhode Island Democrat, lectured Mr. Mudd at a Congressional hearing in 2006. “In fact, Fannie and Freddie can do more, a lot more.”

But Fannie’s computer systems could not fully analyze many of the risky loans that customers, investors and lawmakers wanted Mr. Mudd to buy. Many of them — like balloon-rate mortgages or mortgages that did not require paperwork — were so new that dangerous bets could not be identified, according to company executives.

Even so, Fannie began buying huge numbers of riskier loans....

[Yes, but suppose the mortgages being packaged were not riskier because of the income and wealth levels of the borrowers but because of the abusive costs, the needlessly abusive costs of the mortgages?]

[anne]

But this is nutty:

“When homes are doubling in price in every six years and incomes are increasing by a mere one percent per year, Fannie’s mission is of paramount importance,” Senator Jack Reed, a Rhode Island Democrat, lectured Mr. Mudd at a Congressional hearing in 2006. “In fact, Fannie and Freddie can do more, a lot more.” ...

[anne]

But this is nutty:

“When homes are doubling in price in every six years and incomes are increasing by a mere one percent per year, Fannie’s mission is of paramount importance,” Senator Jack Reed, a Rhode Island Democrat, lectured Mr. Mudd at a Congressional hearing in 2006. “In fact, Fannie and Freddie can do more, a lot more.” ...

[anne]

http://krugman.blogs.nytimes.com/2008/10/04/global-shmobal/

October 4, 2008

Global Shmobal
By Paul Krugman

Giving a talk about changing dynamics of globalization at the National Ass’n of Business Economists; I’m focusing on the remarkable contagiousness of the current crisis. You can see my slides here. *

* http://www.princeton.edu/~pkrugman/contagion.pdf

says...

"who is to blame for the stock market bubble?"

I'd blame Greenspan. Then I'd blame guys like Blodget et al. for talking it up. Then the media for going along for the ride.

Shouldn't economists have a good idea about what a bubble looks and feels like?

[Patrick]

Blame? I think 'the system' as conceived simply didn't account for the possibility that everyone would simultaneously loose their grip on reality and forget how to do simple arithmetic. A simple budget for a familty of 4 grossing $100K buying a $500K or $600K house reveals that the lenders and borrowers were nuts, even given the most optimist assumptions.

says...

"Blame? I think 'the system' as conceived simply didn't account for the possibility that everyone would simultaneously loose their grip on reality and forget how to do simple arithmetic."

Maybe Greenspan, the economists, the media. They could certainly see it. Why didn't they say a thing?

Many people saw it and they didn't participate in it. But, their voices are drowned out the cheerleaders. And now those same voices are being drowned out by the fear mongers.