Thursday, September 30, 2010
More (all too rushed) between classes blogging. From Brad DeLong at Project Syndicate:
Economics for Parrots, by J. Bradford DeLong, Commentary, Project Syndicate: It is said that the early nineteenth-century British economist J.R. McCulloch originated the old joke that the only training a parrot needs to be a passable political economist is one phrase: “supply and demand, supply and demand.” Last week, US Federal Reserve Chairman Ben Bernanke said that McCulloch’s economics – the economics of supply and demand – was in no way discredited by the financial crisis, and was still extraordinarily useful.
It’s hard to disagree with Bernanke’s sentiment: economics would be useful if economists were, indeed, likeMcCulloch’s parrots – i.e., if they actually looked at supply and demand. But I think that much of economics has been discredited by the manifest failure of many economists to be as smart as McCulloch’s parrots were. ...[...continue reading...]...
One of the big problems during the financial crisis was a bank run in the shadow banking system when doubts emerged about the safety of deposits.
In my last column at the Fiscal Times, I talked about an approach to solving the problem that involves having deposits in the shadow system backed (insured) by high quality collateral.
But high quality collateral is not the only option. Another way to do this is through a type of insurance along the lines of what the FDIC does for the traditional banking system, along with restrictions on eligibility for the insurance. In reaction to my column, and in support of the insurance approach, Morgan Ricks of Harvard Law School emails:
I enjoyed your Fiscal Times piece and am glad you're focused on this issue.
I'm a big admirer of Gary and Andrew's work, but I would encourage you to give some more thought to whether collateral requirements for repo are likely to do the trick. Here are a few things to consider:
- Many of the short-term liabilities of the shadow banking system were and are uncollateralized (think about Lehman's reliance on unsecured commercial paper -- the default of which caused the Reserve Fund to "break the buck," igniting the run on money market funds; and Citigroup's SIVs, which financed themselves in the unsecured markets).
- Money market investors do not want to take possession of collateral and dispose of it. Even if the collateral is high quality, they don't want the interest rate risk. That's not their business. They don't want to deal with the consequences of a counterparty default. This is why, in the crisis, many money market investors stopped rolling even those repos that were fully secured by Treasuries and agencies:
- See Chris Cox's testimony on Bear Stearns (here http://www.sec.gov/news/testimony/2008/ts040308cc.htm): "For the first time, a major investment bank that was well-capitalized and apparently fully liquid experienced a crisis of confidence that denied it not only unsecured financing, but short-term secured financing, even when the collateral consisted of agency securities with a market value in excess of the funds to be borrowed"
- See also FRBNY's repo task force report (here http://www.newyorkfed.org/prc/report_100517.pdf): “Discussions in the Task Force emphasized repeatedly that many Cash Investors focus primarily if not almost exclusively on counterparty concerns and that they will withdraw secured funding on the same or very similar timeframes as they would withdraw unsecured funding.”
- Even if collateral requirements reduce the likelihood of runs, how do we calibrate them -- what is the objective function? Presumably we think maturity transformation (fractional reserve banking) is a good thing -- it increases the supply of loanable funds by pooling otherwise idle cash reserves and deploying them toward productive investments. Risk constraints (such as collateral requirements) necessarily reduce this surplus -- there is a real social cost. How do we appraise the corresponding benefit? That is, how do we estimate the systemic instability associated with any given level of collateral requirements? My argument is that we can't. And by "we" I mean not just the government, but anybody.
My paper argues that we avoid these problems with an insurance regime; that financial firms outside the insurance regime should be disallowed from conducting maturity transformation (i.e., they would have to rely on term funding, not money market funding); and that we should develop functional criteria of eligibility for the insurance regime. (By the way, this is not the same thing as "extending" insurance to shadow banks.)
Anyway, these are things worth thinking about. I think the insurance approach needs more serious consideration than it has received -- it's a little lonely over here ...
See here for nice summary of this approach and link to the underlying academic paper.
Austan Goolsbee, Chair of the Council of Economic Advisers, "tackles the tax cut fight and what it means that Congressional Republicans are 'holding middle class tax cuts hostage'"
Should the government guarantee a job for anyone who wants one?:
The Ghost of Full Employment, by Jefferson Cowie, TAP: After nearly two years of bad economic news,... the ... government's direct response to the jobs and poverty crisis has ... drawn only from the narrow menu of economic fundamentalism -- tax cuts and stimulus. Now that gross domestic product is positive, the unemployment problem is mostly considered "structural" -- a skills mismatch -- and thus beyond our capacity to solve.
Yet not that long ago, in the midst of another long-term economic meltdown, politicians dared to think beyond the idea that growth alone would solve all problems. National leaders, including mainstream politicians in both parties, went so far as to propose a federally mandated and legally enforceable right to a job for every American.
That's right -- the federal guarantee of a job.
Their premise? That people's livelihoods are too important to be left to market mechanisms. ... In 1974, when the United States faced another period of double-digit unemployment and global economic crisis,... Sen. Hubert Humphrey and Rep. Augustus Hawkins ..., teamed up to advance a seductive idea: national planning that wouldn't simply promote growth, support Wall Street, or prop up consumption but ensure a job for every person. ...
Humphrey and Hawkins looked to revive Franklin Roosevelt's famous Economic Bill of Rights, the core of which was, as FDR explained in 1944, "the right to a useful and remunerative job in the industries or shops or farms or mines of the nation." The aggressive Keynesianism of the Humphrey-Hawkins Act was simple in concept: Federal policy should promote full employment..., and if that failed, government would then be triggered as the employer of last resort. ...
To contemporary ears, the idea of a federally guaranteed job sounds like crazy talk...
Today, as a similar economic malaise haunts the land, we ... need ... spirit and imagination. Despite its failure to deliver much of anything, the Humphrey-Hawkins Act serves as a striking example of national leaders thinking boldly about the collective economic well-being of the citizenry. ...
President Barack Obama's failure is not on specific policy grounds; it is in his more significant inability to help the nation reimagine a constructive role for the state. ...
The boldness of the Humphrey-Hawkins Act remains a forgotten artifact of a bygone political era, buried deep in the ideological layers of the post-Reagan world. Perhaps it's time to dig it up and ask ourselves if ... we actually have the courage and imagination to govern ourselves.
I can imagine how to do this in a large, one-shot, New Deal kind of way in times where there is a substantial amount of idle labor, but it's harder to imagine how to design a job guarantee program that would operate on an ongoing basis.
I have a new post at MoneyWatch:
Depression Economics Needs to Become a Regular Part Macroeconomics: ... In recent decades, people studying short-run stabilization policy have focused mainly on how monetary policy can be used to fine tune the economy during relatively normal times. Fiscal policy and "depression economics" were not part of the mainstream research agenda.
But how to manage the economy during severe recessions and depressions -- a time when fiscal policy is generally a key component of the policy response -- needs to be an integral part of the research agenda in macroeconomics, and a larger part of the curriculum at the graduate and undergraduate levels. ...
But will that happen?
Brad DeLong reports:
Finally..., by Brad DeLong: At least one year late and many dollars short:
Sarah Bloom Raskin, of Maryland, to be a Member of the Board of Governors of the Federal Reserve System for the unexpired term of fourteen years from February 1, 2002
Janet L. Yellen, of California, to be a Member of the Board of Governors of the Federal Reserve System for a term of fourteen years from February 1, 2010
Janet L. Yellen, of California, to be Vice Chairman of the Board of Governors of the Federal Reserve System for a term of four years
We need a very different senate.
Will this change the balance of power enough to make a big difference? I hope so, but I'm not so sure that it will.
Wednesday, September 29, 2010
Mark Whitehouse at Real Time Economics notes that if the unemployment problem is mainly structural rather than cyclical, hiring intensity ought to be going up, not down::
Employers Aren’t Trying Hard to Hire, by Mark Whitehouse: Unemployed workers have a point when they complain that companies aren’t really trying to fill open jobs, a new study suggests.
In recent months, policy makers have puzzled over the inadequate rate at which job searchers and job vacancies are coming together. ...
Explanations have tended to focus on workers. Extended unemployment benefits could make people less willing to take jobs that pay poorly or don’t quite fit. Mortgage troubles and employed spouses could make it harder for people to move for work. People might not have the right qualifications for the jobs available.
A new paper, though, suggests employers themselves are at least part of the problem. The authors — Steven Davis of Chicago Booth School of Business, R. Jason Faberman of the Philadelphia Fed and John Haltiwanger of the University of Maryland — take a deep dive into Labor Department data and come up with an estimate of what they call “recruiting intensity,” a measure of employers’ vacancy-filling efforts including advertising, screening and wage offers.
Their finding: Employers haven’t been trying as hard as they usually do. Estimates provided by Mr. Davis suggest that over the three months ending July, recruiting intensity was about 12% below the average for the seven years leading up to the recession. Their lack of effort probably accounts for about a quarter of the shortfall in the hiring rate.
Depressing as it might seem, the finding is in some ways encouraging. It suggests that the trouble with hiring might be more a “cyclical” function of low business confidence than a chronic, “structural” ailment that will last for years to come.
In other news, some members of the Fed are finally waking up:
Fed's Kocherlakota revises down forecast, by CalculatedRisk: Minneapolis Federal Reserve President Narayana Kocherlakota spoke in London today. He has been one of more optimistic Fed presidents, and he revised down his forecast today ...
Kocherlakota ... still seems too optimistic, but he is moving in the right direction.
And on the coming QE2:My own guess is that further uses of QE would have a more muted effect on Treasury term premia. Financial markets are functioning much better in late 2010 than they were in early 2009. As a result, the relevant spreads are lower, and I suspect that it will be somewhat more challenging for the Fed to impact them.
...It is interesting that certain Fed presidents are now revising down their overly optimistic forecasts - all but guaranteeing QE2 (even if he thinks it will have little impact).
If only they'd listen:
...presently the Fed does not feel the benefits [of further action]outweigh the costs, and it remains in “wait and see” mode.
My first question for the Fed would be this. To date, you have overestimated the strength of the recovery at every step. ... Given the forecasts to this point, all of which have been too rosy, I would place more weight on the downside, quite a bit more...
So, in my view, the Fed should drop its relatively rosy forecast for the recovery and take more account of the downside risks, the Fed should place more weight on the unemployment problem, and have less fear of inflation — the risk right now is in the other direction. Making these adjustments that would compel the Fed to action instead of “waiting and seeing,” a policy that, to date, has kept the Fed from getting out in front of the economy’s problem.
It’s time for the Fed to stop playing catch-up as it waits and sees that its forecasts were wrong, and and take the steps needed to boost the economy. ...
People need jobs, or more social support until jobs appear, and both the Congress and the Fed are failing to do all that they can do to help. Apparently, imagined fears of deficits and inflation are more important than the real struggles of the unemployed.
A reciprocity requirement: The easy and legal way to stop currency manipulation, by Daniel Gros, Vox EU: The endless discussions about global imbalances, and China’s supposedly self-serving exchange-rate policy, have for a long time, resembled discussions about the weather; everybody talked about it, but nobody did anything. This is now changing. ...
The US political system has become so frustrated by this situation that Congress is now seriously considering whether to label the country a “currency manipulator” and impose trade sanctions which would be illegal under WTO rules and threaten to throw the global trading system into turmoil.
But there is another way. The US (and Japan) could easily prevent the Chinese Central Bank from continuing its intervention policy without breaking any international commitment. The US and Japan only need to invoke the principle of reciprocity and declare that they will limit sales of their public debt henceforth to only include official institutions from countries in which they themselves are allowed to buy and hold public debt. Instead of the “moral suasion”, tried in vain by the Japanese, the Chinese authorities would just be told that they can buy more US T-bills Japanese bonds only if they allow foreigners to buy domestic Chinese debt.
Imposing such a “reciprocity” requirement on capital flows would be perfectly legal..., there are no legal constraints on the impositions of capital controls.
This “reciprocity” measure would of course be equivalent to a very specific form of controls on capital inflows. Capital controls are always somewhat leaky, but not in this case because the Chinese Central Bank would find it difficult to hide its huge investments going through western financial institutions. No reputable financial institution would dare to become a hidden intermediary for the Chinese given that no institution bidding for hundreds of billions of T-Bills would take the risk of secretly fronting the Chinese government...
As a practical matter the introduction of the reciprocity requirement should provide a grand fathering of the existing stocks of Chinese official assets abroad (already above $2,500 billion). However, the Central Bank of China would not be able to continue its interventionist policy – and that is what counts for foreign exchange markets.
The immediate objection is, “What if the Chinese react emotionally and dump their holdings of T-Bills and US agency debt on the market? Would that not disrupt the US government debt market?” This “dumping” is not as simple as it sounds. What assets would the Chinese Central Bank buy when it sells T-Bills? There are not many choices if the Chinese Central Bank wants to dispose of thousands of billions of dollars. Either it holds cash in the form of bank deposits (this would mean a massive refinancing of the US banking system) or it buys other US assets (which would mean a refinancing of the US private sector). Moreover, the reciprocity requirement could be extended to private debt instruments as well. But this is probably not necessary as the Chinese Central Bank is unlikely to invest hundreds of billions of dollars (or euro) in private assets. Buying euro assets would of course constitute an alternative, but this does not appear too attractive at present, and would be prevented by the Europeans adopting the same reciprocity requirement.
The US might hesitate to impose a reciprocity requirement for sales of its public debt because (in contrast to Japan) it needs foreign financing for its public sector deficit. But this also constitutes the litmus test for the sincerity of the US position which cannot have it both ways, i.e. Chinese financing of its external deficit and an end to currency intervention. The choice is now up to the US, it can easily stop Chinese interventions without violating any international commitment if it is willing to rely on domestic savings to finance its own fiscal deficits.
I don't think most members of Congress would be willing to take the large risk they would attach to imposing reciprocity. But how large are the risks? Paul Krugman:
given the fact that we’re in a liquidity trap, a decision by China to buy fewer of our bonds would actually be doing us a favor — it would weaken the dollar, and help our exports.
Here's the latest:
House Is Likely to Pressure China to Raise Renminbi: The House is expected to give the Obama administration another tool in its diplomatic pouch to pressure China to let its currency rise in value, reflecting growing concern around the country over the loss of manufacturing jobs, persistently high unemployment and a rising trade deficit.
In what is likely to be one of Congress’s last significant measures before the election, the House will vote Wednesday on a symbolic but not insignificant measure threatening China with punitive tariffs on its imports to the United States. ...
But it is unclear whether the legislation, which faces cloudy prospects in the Senate, will succeed this time in prodding a China that has become more self-confident on the world stage. ...
“The legislation will strengthen the administration’s hand in its negotiations with China, but also risks provoking a strong backlash,” said Eswar S. Prasad ... of ... Cornell and a former head of the International Monetary Fund’s China division. “Ultimately its short-term effect is likely to be more symbolic than substantive.” ...
Professor Prasad ... warned that if the Congressional proposal went forward, China could retaliate by limiting American imports or denying American manufacturers and financial institutions “the coveted prize of access to rapidly growing Chinese markets.”
A policy that is "more symbolic than substantive" is my expectation as well.
Steven Pearlstein says the business community is "about to create a political monster":
Can business afford Jim DeMint?, by Steven Pearlstein, Commentary, Washington Post: For all you in the business community who are rooting for a Republican victory in the November elections, a bit of unsolicited advice: Be careful what you wish for.
You're probably thinking that with Republicans in control of one or both houses of Congress, business will be back on top again, setting the agenda... In reality, what you'll get is political paralysis for the next two years, and quite possibly longer than that.
Just ask Sen. Jim DeMint ... the new Republican kingpin and enforcer on Capitol Hill. DeMint told Bloomberg Businessweek last week that his goal for the next Senate is "complete gridlock." ... For DeMint, this is war. The only acceptable outcome is total victory...
I know what you're thinking. You're thinking that, once the heat of the election season has passed, cooler heads will prevail... Don't kid yourselves. You're about to create a political monster that you can't control...
It's convenient to blame the media, or cable news or the blogosphere for this state of political polarization. To that list of culprits I'd add you - business leaders who, in order to score modest wins in legislative or regulatory battles, make common cause with those who trample on the truth, poison the political conversation, demonize opponents and undermine respect and support for government.
Criticize President Obama - that's easy, guys. But is there anyone there at the Business Roundtable with the courage to criticize Jim DeMint?
With respect to gridlock -- I'm more worried about Obama and other Democrats trying to overcome gridlock and, in the name of centrism and bipartisanship, giving too much away.
Tuesday, September 28, 2010
Ryan Avent says the institutional structure of Congress inhibits good policy:
Built to break, by Ryan Avent: ...Congress is lame. ... Why? ... Why is it so difficult to pass decent policy?
South Carolina Sen. Jim DeMint warned Monday evening that he would block all legislation that has not been cleared by his office in the final days of the pre-election session.
Bret Bernhardt, DeMint's chief of staff, said in an e-mail to GOP aides that his boss would place a hold on all legislation that has not been cleared by both parties by the end of the day Tuesday.
Any senator can place a hold to block legislation - and overcoming that would require the Senate to take time-consuming steps to invoke cloture, which would require 60 votes.
This is a stupid rule. Why would the Senate adopt it? Well, as with most of today's procedural obstacles, it was put in place for a sensible reason—to pause the passage of legislation while senators from states directly affected had time to review the bill—but has come to be abused for partisan tactical purposes. The Senate is full of rules like this that can be used to bring business to a complete halt. Their use has, at various points in the past, gone from being frowned upon to being acceptable (or at least common). The filibuster falls into this category. Modern Americans may find it hard to believe that not so long ago contentious pieces of legislation passed the Senate with a simple majority vote. No longer.
Now, the story of why politics is so disappointing in America right now is more obviously more complicated than the increase in use of the Senate's procedural obstructions. But this is an important story. In economics, we understand that institutions—statutory and and cultural—have a powerful impact on economic outcomes. Incentive structures in institutions determine whether it's more profitable to invest or rent-seek. This in turn influences the allocation of capital, physical and human, which determines growth rates. And expected growth rates feed back into the decision of whether and where to invest...or rent-seek.
As observers of the political system, economists should take the incentives built into institutions seriously. Supermajoritarian rules limit accountability by driving a wedge between who is responsible for policy outcomes and who is held responsible. If opposition legislators have the ability to block bills, the failure of which will be laid on the ruling party, then there is no incentive for the opposition to bargain and compromise. If the legislature is sclerotic, then Congress will become less appealing to people interested in passing good policies and more appealing to those looking for a platform from which to demagogue. The result is an uptick in demagoguery, which makes Congress still less appealing to those interested in conducting actual business. ...
[P]eople choose whether to seek office based on the things they're likely to accomplish there, and they behave once in office according to the incentives they face. If government consistently disappoints, it's not the fault of the men and women in Congress. It's the institution itself. And the conversation should become less about which party should be in charge and more about which rules need to be reformed.
But why is it that "If opposition legislators ... block bills, the failure ... will be laid on the ruling party..."? Is this due to problems with the institutional structure of Congress, or with the media reporting on the issues? Is it due to a better GOP noise machine? Or is it due to something else entirely such as the tactical decisions made by Democrats. Democrats seem unable to do the simplest things the GOP does so well such as giving bills catchy names that imply a vote against the legislation is a vote against America, let alone pursue more complicated coordinated strategies. If the roles were reversed and Democrats were obstructing policies the GOP was trying to pass, I'm not so sure it would be the GOP that would be blamed.
Update: Via email:
Hey Mark -
Saw your post. FWIW political scientists think the reason the ruling party is blamed is that the public doesn't follow the mechanics of Congress lately and tends to hold the president's party accountable for the state of the country in midterms. Process-based explanations (they didn't let us pass our agenda) don't tend to work, nor do catchy bill names or spin tactics etc. In some ways, this is more encouraging than what pessimists say about democracy -- the public really does respond to results (very broadly defined) and isn't as easily manipulated as people think (at least in domestic policy) -- but there are lots of subtleties that are lost. With that said, of course a big question going forward is how to make our system work in a partisan era where the opposition party is empowered by the filibuster.
Part of another email:
..If Republican public relations pins the blame on the Democrats you’ve bought their spin with your criticism, “Democrats seem unable to do the simplest things the GOP does so well…”
Unemployment could continue rising through the first half of 2011:
Forecasting Growth over the Next Year with a Business Cycle Index, by David Lang and Kevin J. Lansing, FRBSF Economic Letter: The current economic recovery is proceeding at a tepid pace despite massive federal fiscal stimulus and extremely low interest rates. Forecasts derived from business cycle indicators produced by the Chicago and Philadelphia Federal Reserve Banks predict that real U.S. GDP growth through the first half of 2011 will remain at or below potential. If these forecasts prove accurate, then the historical relationship between real GDP growth and the labor market suggests that the unemployment rate could rise by as much as 0.5 percentage point during this period.
The National Bureau of Economic Research Business Cycle Dating Committee has determined that the recent recession ended in June 2009. Since then, the U.S. economy has recorded four consecutive quarters of positive real GDP growth. During this period, inventory accumulation by businesses accounted for more than half the growth, while real final sales of domestically produced goods and services grew only at an annual 1.1% rate on average. Due to the severity of the recession and the lackluster nature of the recovery so far, the level of real GDP at the end of the second quarter of 2010 was still 1.3% below the pre-recession peak reached more than 2½ years ago.
Recent weaker-than-expected economic data have raised concerns about the recovery’s staying power. In a recent Economic Letter, Berge and Jorda (2010) estimate the probability of falling back into recession during the next two years at around 50%. While discussions in the media often focus on the likelihood of a “double dip,” it is important to recognize that, even if the economy avoids another recession, future real GDP growth may not be strong enough to prevent the unemployment rate from rising. Standard macroeconomic models would predict an increase in the unemployment rate if real GDP growth over the next two to four quarters were to fall below the economy’s potential growth rate, defined as the sum of the long-run trend growth rates of productivity and the labor force. The Congressional Budget Office (CBO 2010) estimates that the U.S. economy’s potential annual growth rate over the next five years is 2.1%. Other estimates of potential growth are significantly higher. If real GDP growth were to fall below potential growth for a sustained period, then the unemployment rate would be expected to rise.
In this Economic Letter, we use two well-known business cycle indicators to help forecast real GDP growth two to four quarters ahead. According to our empirical forecasting models, real GDP growth will remain at or below estimates of potential growth through the first half of 2011, implying a significant risk of rising unemployment. ...[...continue...]...
One of the points I try to make in the post above this one is that a focus on alternatives to the NBER measure of the business cycle that give employment more weight could improve the policy response to unemployment problems.
Monday, September 27, 2010
In case you need a reminder of how the distribution of income has changed in recent decades:
Enough Is Enough on Tax Cuts for Wealthy, by Chuck Marr, CBPP: In yesterday’s New York Times, Richard Thaler ... neatly refuted the arguments for borrowing tens of billions of dollars each year to keep President Bush’s tax cuts flowing to the most affluent 2 percent of people in the country. He then posed a central question: “whether we want a society in which the rich take an ever-increasing share of the pie, or prefer to return to conditions that allow all classes to anticipate an increasing standard of living.”
As I’ve noted before, over the last three decades a stunning shift in income has taken place in this country, from the middle class to those few at the very top of the income scale. Back in 1979, the middle 20 percent of Americans had more than twice as large a share of the nation’s total after-tax income as the top 1 percent. But by 2007, the top 1 percent’s slice of the economic pie had more than doubled and in fact exceeded the middle class’s slice, which had shrunk.
This great income shift means the average middle-income American family had about $9,000 less after-tax income in 2007, and an average household in the top 1 percent had $741,000 more, than they would have had if the 1979 income distribution had remained. Here’s how this looks in graph and table form:
Fully two-thirds of the income gains in the last economic expansion (2001-2007) flowed to just the top 1 percent. This is not a healthy sign for a society. As Professor Thaler urges, we need to decide whether we want to promote still-greater inequality (by extending the high-income tax cuts) or lean against this trend. Each year the average millionaire gets about $125,000 from the Bush tax cuts, according to the Urban-Brookings Tax Policy Center. Now seems to be a good time to say enough is enough.
Let me ask again: Is it possible for an outcome to be equitable when, as in recent decades, nearly all of the gains from growth accrue to one class?
If you want to know why people are so angry, you're looking at a big part of the reason.
I'm having trouble getting here today, so here's something in the interim:
Update: One more:
Arguments that we can't do anything about the unemployment problem are structurally unsound:
Structure of Excuses, by Paul Krugman, Commentary, NY Times: What can be done about mass unemployment? All the wise heads agree: there are no quick or easy answers. There is work to be done, but workers aren’t ready to do it — they’re in the wrong places, or they have the wrong skills. Our problems are “structural,” and will take many years to solve. ...
Who are these wise heads I’m talking about? ...Narayana Kocherlakota, the president of the Federal Reserve Bank of Minneapolis,... has attracted a lot of attention by insisting that dealing with high unemployment isn’t a Fed responsibility: “Firms have jobs, but can’t find appropriate workers. The workers want to work, but can’t find appropriate jobs,” he asserts, concluding that “It is hard to see how the Fed can do much to cure this problem.”
Now, the Minneapolis Fed is known for its conservative outlook, and claims that unemployment is mainly structural do tend to come from the right... But some people on the other side of the aisle say similar things. For example, former President Bill Clinton recently told an interviewer that unemployment remained high because “people don’t have the job skills for the jobs that are open.”
Well,... what should we be seeing if statements like those of Mr. Kocherlakota or Mr. Clinton were true? The answer is, there should be significant labor shortages somewhere... — major industries that are trying to expand but are having trouble hiring, major classes of workers who find their skills in great demand, major parts of the country with low unemployment even as the rest of the nation suffers.
None of these things exist. Job openings have plunged in every major sector, while the number of workers forced into part-time employment ... has soared. Unemployment has surged in every major occupational category. Only three states, with a combined population not much larger than that of Brooklyn, have unemployment rates below 5 percent.
Oh, and where are these firms that “can’t find appropriate workers”? The National Federation of Independent Business has been surveying small businesses for many years, asking them to name their most important problem; the percentage citing problems with labor quality is now at an all-time low...
So all the evidence contradicts the claim that we’re mainly suffering from structural unemployment. Why, then, has this claim become so popular?
Part of the answer is that this ... always happens during periods of high unemployment — ...pundits and analysts believe that declaring the problem deeply rooted, with no easy answers, makes them sound serious.
I’ve been looking at what self-proclaimed experts were saying about unemployment during the Great Depression; it was almost identical to what Very Serious People are saying now. Unemployment cannot be brought down rapidly, declared one 1935 analysis, because the work force is “unadaptable and untrained. It cannot respond to the opportunities which industry may offer.” A few years later, a large defense buildup finally provided a fiscal stimulus adequate to the economy’s needs — and suddenly industry was eager to employ those “unadaptable and untrained” workers.
But now, as then, powerful forces are ideologically opposed to ... government action on a sufficient scale to jump-start the economy. And that, fundamentally, is why claims that we face huge structural problems have been proliferating: they offer a reason to do nothing about the mass unemployment that is crippling our economy and our society. ...
We aren’t suffering from a shortage of needed skills; we’re suffering from a lack of policy resolve. As I said, structural unemployment isn’t a real problem, it’s an excuse — a reason not to act on America’s problems at a time when action is desperately needed.
This sounds pretty fishy:
Raters Ignored Proof of Unsafe Loans, Panel Is Told, by Gretchen Morgenstern, NY Times: As the mortgage market grew frothy in 2006 ... ratings agencies charged with assessing risk in mortgage pools dismissed conclusive evidence that many of the loans were dubious, according to testimony given last week to the Financial Crisis Inquiry Commission. ...
D. Keith Johnson, a former president of Clayton Holdings, a company that analyzed mortgage pools for the Wall Street firms that sold them, told the commission on Thursday that almost half the mortgages Clayton sampled from the beginning of 2006 through June 2007 failed to meet crucial quality benchmarks that banks had promised to investors. Yet, Clayton found, Wall Street was placing many of the troubled loans into bundles known as mortgage securities.
Mr. Johnson said he took this data to officials at Standard & Poor’s, Fitch Ratings and to the executive team at Moody’s Investors Service. “We went to the ratings agencies and said, ‘Wouldn’t this information be great for you to have as you assign tranche levels of risk?’ ” ... But none of the agencies took him up on his offer, he said, indicating that it was against their business interests to be too critical of Wall Street. “If any one of them would have adopted it,” he testified, “they would have lost market share.” ...
Before assembling mortgage pools, brokerage firms hired independent analytical companies like Clayton to sample loans and flag any that were problematic. Clayton was one of two large due diligence companies that watched for loans that did not meet specifications like geographic diversity and the loan-to-value ratios..., as well as the credit scores and incomes of borrowers. ...
Because these loan samples were provided to the Wall Street investment banks that commissioned them, they could see throughout 2006 and into 2007 that the mortgages they were financing and selling to investors were becoming increasingly sketchy.
The results of the Clayton analyses were not disclosed to investors buying the loan pools. Instead, Wall Street firms used the information to pressure the lenders issuing the most troubled loans to accept a lower price for them, according to prosecutors who have investigated these cases.
A more proper procedure ... would have been for lenders ... to buy back the problem loans and replace them with higher-quality mortgages. But because these companies did not have enough capital to do that, they were happy to sell the troubled mortgages cheaply to the brokerage firms.
Since Wall Street firms were paying lower prices for the troubled loans, they could have passed along those discounts to customers, reducing investor risk. But Wall Street charged investors the same high prices associated with better-quality loans, thereby increasing their own profits on the problematic securities... To be sure, the prospectuses ... contained brief warnings that some of the mortgages might not meet stated underwriting standards. But few investors probably realized that huge portions of the pools had failed to meet the benchmarks. ...
Sunday, September 26, 2010
Republican Economics as Social Darwinism, by Robert Reich: John Boehner, the Republican House leader who will become Speaker if Democrats lose control of the House in the upcoming midterms, recently offered his solution to the current economic crisis: “Liquidate labor, liquidate stocks, liquidate the farmer, liquidate real estate. It will purge the rottenness out of the system. People will work harder, lead a more moral life.”
Actually, those weren’t Boehner’s words. They were uttered by Herbert Hoover’s treasury secretary, millionaire industrialist Andrew Mellon, after the Great Crash of 1929. But they might as well have been Boehner’s because Hoover’s and Mellon’s means of purging the rottenness was by doing exactly what Boehner and his colleagues are now calling for: shrink government, cut the federal deficit, reduce the national debt, and balance the budget. And we all know what happened after 1929, at least until FDR reversed course.
Boehner and other Republicans would even like to roll back the New Deal and get rid of Barack Obama’s smaller deal health-care law. The issue isn’t just economic. We’re back to tough love. The basic idea is force people to live with the consequences of whatever happens to them. In the late 19th century it was called Social Darwinism. Only the fittest should survive, and any effort to save the less fit will undermine the moral fiber of society.
Republicans have wanted to destroy Social Security since it was invented in 1935... Republicans also hate unemployment insurance. ... Finally, like Hoover and Mellon, Republicans want to cut the deficit and balance the budget at a time when a large portion of the workforce is idle.
This defies economic logic. When consumers aren’t spending, businesses aren’t investing and exports can’t possibly fill the gap, and when state governments are slashing their budgets, the federal government has to spend more. Otherwise, the Great Recession will turn into exactly what Hoover and Mellon ushered in – a seemingly endless Great Depression.
It’s also cruel. Cutting the deficit and balancing the budget any time soon will subject tens of millions of American families to unnecessary hardship and throw even more into poverty.
Herbert Hoover and Andrew Mellon thought their economic policies would purge the rottenness out of the system and lead to a more moral life. Instead, it purged morality out of the system and lead to a more rotten life for millions of Americans.
And that’s exactly what Republicans are offering yet again.
Richard Thaler says "Demanding that the rich get a tax cut as a condition for tax relief for others is simply elitist":
What the Rich Don’t Need, by Richard Thaler, Commentary, NY Times: Want to give affluent households a present worth $700 billion over the next decade? In a period of high unemployment and fiscal austerity, this idea may seem laughable. Amazingly, though, it is getting traction in Washington.
I am referring, of course, to the current debate about whether to extend all, or just some, of the tax cuts of President George W. Bush... President Obama has proposed retaining the current rates on incomes up to $200,000 for individuals and $250,000 for couples. ...
Republican leadership has drawn a line in the sand, saying it will oppose Mr. Obama’s bill unless all taxpayers remain at current rates. Although it wouldn’t put it this way, the Republican position is, in effect, that if the rich can’t share in the bounty, rates should rise for everyone.
They offer three arguments to support their view. The first is that it is folly to raise taxes in a weak economy. ...
Tax cuts are one of many ways to stimulate the economy. Building infrastructure, for example, is another. We have to choose. And if the primary goal is stimulating the economy, tax breaks to the rich are simply not cost-effective. ...
The second argument is that not extending the tax cuts to high-income earners would impose an excessive burden on small businesses. Here, however, ... the fact that 3 percent of the businesses earn nearly half of the money is precisely what many people are concerned about: growing income inequality.
Which brings us to the third argument. Conservatives say that to do anything other than extending tax cuts to everyone would amount to “class warfare.” The best response to that notion comes from Warren E. Buffett: “There’s class warfare, all right, but it’s my class, the rich class, that’s making war, and we’re winning.” ...
And what about incentives? Will the owners of the profitable small businesses work less hard, or hire fewer people, if their own after-tax income falls? This is a much-researched question, and ... we shouldn’t expect significant real reductions in economic activity...
The question comes down to whether we want a society in which the rich take an ever-increasing share of the pie, or prefer to return to conditions that allow all classes to anticipate an increasing standard of living. Demanding that the rich get a tax cut as a condition for tax relief for others is simply elitist. Tea Partiers, take note.
Is it possible for an outcome to be equitable when, as in recent decades, nearly all of the gains from growth accrue to one class?
Is Obama about to become more populist?:
Wall Street's attacks could turn President Obama into a true populist, by Jacob S. Hacker and Paul Pierson, Commentary, Washington Post: Corporate America's stance toward the Obama administration has recently deteriorated into vitriolic attacks and outright opposition. ... Far more ominous for the White House, business has been putting its money where its mouth is: In sector after sector, corporate campaign contributions ahead of November's elections are going to Republicans.
Conventional explanations for this mounting opposition focus on policies and personalities, insisting that the president has embraced runaway government or unnecessarily ruffled business's feathers. ...
But this has it exactly backward. The business-Obama divorce isn't about personalities, and it's not ... anti-business policies. Instead, it reflects a deeper disconnect between corporate leaders and the rest of America... This disconnect has blinded corporate leaders to the extent to which most Americans feel that the government, far from crushing corporate America, has been looking out only for those at the top.
Had Obama realized sooner that he would never win over corporate America, he might have pursued rhetoric and policies that would have alienated fewer voters. ... But could the president have ... won over the public by launching the very thing his detractors in the business community already accuse him of: a populist campaign to reform the economy?
To many on the left, the answer is yes. Journalist Robert Kuttner ... blames ... an economic team that was too solicitous of Wall Street. Democratic pollster Stan Greenberg, meanwhile, has found that Obama's fight against extending tax cuts to the very rich resonates powerfully with crucial voting blocs.
Still, the barriers to a more populist route weren't limited to Obama's temperament and his Cabinet. They extended to his Congress, in particular the conservative Democrats in the Senate and the "Blue Dogs" in the House... A more populist route would have alienated them, jeopardizing Obama's entire agenda.
After November, however, Democratic moderates will probably no longer be at the center of the action. With even more Republican votes needed to overcome a filibuster, and with the GOP shifting ever further to the right, Congress is likely to descend into gridlock.
At that point, tough talk will no longer threaten important legislative opportunities. The president will be free to speak frankly about middle-class concerns and draw sharper ideological distinctions. By swinging its support to the GOP, business could bring on a more strident Obama -- in rhetoric, and maybe even in substance.
Maybe Obama will change, but his heart of hearts does not seem to be populist by nature.
Saturday, September 25, 2010
Here we go again. Whenever there is discussion of raising taxes on the rich, the inevitable the charge that people in favor of raising taxes are suffering from "envy" of the success of others is levied. The argument is that the envious don't know what's good for them -- if the policies they favor are enacted, they will only hurt the economy and themselves. Further, the argument states, it's a mistake for the envious to suggest that "those making over $250,000 should feel guilty for the hard work they have done." You know, like the hard work Ben Stein did to inherit money from his parents:
Greed may not be good for the economy, but envy is worse, by Carlos Lozada, Commentary, Washington Post: ...[I]s greed capitalism's worst sin? Not so, argues economist Victor Claar. In a speech at the American Enterprise Institute last week, Claar posited that another deadly sin -- envy -- is an inherent part of the free-market system and can prove even more insidious.
Claar, a co-author of "Economics in Christian Perspective," relied on Thomas Aquinas's definition of envy: sadness at the good of another. He cited the biblical parable of the prodigal son, in which the older sibling is envious of his dissolute brother, whose return home sparks a big party. "It sounds like blue-collar frustrations that we hear today," Claar said. " 'I did everything the right way, I played by all of the right rules -- and here I am.' "
Whether because of differing intelligence, skill, ambition or luck, free markets produce different outcomes for different people, so envy is inevitable. And in democratic systems, "envious majorities" can push for policies that "narrow the gap between them and the targets of their envy."
But Claar worries that this road can lead to initiatives that, "in the guise of social justice," produce greater unemployment or less overall wealth. And those results in turn lead to "outrage at the system that generated the outcome."
Was Claar talking about President Obama's policies? "The current administration does seem to be keen on taking from the rich to give to the poor," he said in an e-mail. "Sometimes the tone is not mean -- 'spread the wealth around' -- yet at times it is, suggesting those making over $250,000 should feel guilty for the hard work they have done to contribute something others find valuable enough to voluntarily pay for. So our efforts to reduce envy may very well reduce long-term growth by discouraging effort, invention and discovery in the most talented among us." ...
Several points. First, the implicit assumption here is that the existing tax distribution is fair, and any deviation from the present distribution would be unfair to the wealthy. But why is the present tax structure more equitable than another? That question is not addressed, but there are plenty of reasons to believe that equitable taxes require a progressive structure. Whether it's too progressive or not progressive enough is worth asking, and I think a more progressive structure is quite consistent with equity -- partly for the reasons I'll outline below -- but the point is that there is nothing that says the current distribution is necessarily correct (and economics cannot speak to equity).
Second, there is an efficiency argument made in defense keeping taxes where they are. The argument is that if we raise taxes on the wealthy to levels where, in the past, growth was robust, it will harm growth. But at the tax rates being discussed presently, there's no reliable evidence that this is true. It's asserted to defend the existing tax structure, the 'you don't know what's good for you' defense, but again there is no basis for this assertion.
Third, the argument is that the wealthy deserve the income they receive as a reward for their for their skill, ambition, intelligence, hard work, and the resulting contribution to the social good. Consider, however, that most of the gains in recent years went to the financial industry, and mostly to the very, very top, and that the social gains from a huge financial meltdown and subsequent recession are hard to see. From this perspective, the efficiency argument rests on pretty shaky ground.
Fourth, the idea that incomes have nothing at all to do with inheritance and privilege, monopoly power, cronyism, and the like is not defensible. To the extent that higher taxes are clawing back unearned gains, as they do, there is nothing inequitable or inefficient about it. If anything, we are clawing back too little, not too much.
People aren't envious, they are frustrated and furious with a system that causes them to lose equity in their homes, have their retirement funds evaporate, have their employment prospects plummet, while at the same time bailing out those at the top who caused the problems. It's not envy, it's a plea for social justice, a plea for they typical household to get the same consideration as the wealthy on Wall Street. Just look at how quickly Washington moved to bailout Wall Street, and how much reluctance there is to tackle the unemployment problem. The argument is that it was necessary to save Wall Street to avoid an even bigger meltdown and a worse outcome for Main Street, and there is something to that, but the rewards could have been distributed differently. And if the ultimate goal was to help Main Street, why not offer more help directly instead of through a "help the big players and hope it trickles down" approach?
Most people do not begrudge income that is earned no matter how high that income is, but when it's clear that forces other than reward for hard work and contribution to the social good are behind the distribution of income, that's a different matter. When some households are struggling mightily just to keep up, let alone make gains, while others are rewarded in excess of their contribution to the social good, it's no wonder that people sense the system is set up to work against them, and that they are angry and frustrated with it.
David Cay Johnston takes a look at the Bush Tax cuts. What he sees isn't pretty:
So How Did the Bush Tax Cuts Work Out for the Economy?, by David Cay Johnston: The 2008 income tax data are now in, so we can assess the fulfillment of the Republican promise that tax cuts would produce widespread prosperity by looking at all the years of the George W. Bush presidency.
Just as they did in 2000, the Republicans are running this year on an economic platform of tax cuts, especially making the tax cuts permanent for the richest among us. So how did the tax cuts work out? My analysis of the new data, with all figures in 2008 dollars:
Total income was $2.74 trillion less during the eight Bush years than if incomes had stayed at 2000 levels. ...
Even if we limit the analysis by starting in 2003, when the dividend and capital gains tax cuts began, through the peak year of 2007, the result is still less income than at the 2000 level. Total income was down $951 billion during those four years.
Average incomes fell. Average taxpayer income was down $3,512, or 5.7 percent, in 2008 compared with 2000, President Bush's own benchmark year for his promises of prosperity through tax cuts. ...
The changes in average and total incomes are detailed ... in Table 1, the first of four tables analyzing the whole data. ...
Table 1. 2008 Average Incomes Fell Well Below 2000 Level
Click Here for Table 1
The tax cuts cost $1.8 trillion in the first eight years, according to an analysis by the Tax Policy Center, whose reliability the last administration went out of its way to praise. Those cuts were heavily weighted toward the people candidate George W. Bush famously called "haves and the have-mores . . . some people call you the elite. I call you my base."
Table 2. More Taxpayers, Less Revenue
Click Here for Table 2
In the two years since 2008, the cuts' total cost grew to $2.3 trillion, the Tax Policy Center estimated.
One of every eight dollars of the tax cuts went to the 1 in 1,000 taxpayers in the top tenth of 1 percent, the annual threshold for which was in the $2 million range throughout the last administration. The only other large beneficiary was parents with children under 17 who make enough to pay income taxes, thanks to the $1,000-per-child tax credit Republicans started championing in the mid-1990s.
Now let's look at wages, the source of most people's income. In 2008 the average taxpayer made $58,000. That was $5,100 less than in 2007, a decline of 8.1 percent.
Table 3. 2007 to 2008: Fewer Jobs, Less Money (Mostly)
Click Here for Table 3
The number of taxpayers reporting any wages in 2008 was 1.26 million fewer than in 2007, a scary figure when you consider that most people do not expect to be out of work for an entire year and that the population grew by more than a percentage point. In August 42 percent of the unemployed -- 6.2 million people -- had been out of work for 27 weeks or more, the Bureau of Labor Statistics said. The average for all jobless workers was 33.6 weeks of unemployment, the equivalent of going from New Year's Day through August 23 without a paycheck. ...
Table 4. 2008: Fewer Jobs, Lower Pay
(With Exceptions in Bold)
Click Here for Table 4
Total wages in 2008 fell by nearly 4 percent, compared with a year earlier, for the 87 percent of Americans whose total income was less than $100,000. Since 2000, population grew more than wages. ...
Figure 1. High-Income Paying Zero Tax 1998-2008
The number of people reporting incomes of $200,000 or more but legally paying no federal income taxes skyrocketed in the second Bush term. A decade ago it was fewer than 1,500 taxpayers; in 2000 it was about 2,300. This high-income, tax-free group jumped to more than 11,000 in 2007 and then doubled in 2008 to more than 22,000.
In 2008 nearly 1 in every 200 high-income taxpayers paid no federal income tax, up from about 1 in 1,500 in 1998. ...
The Statistics of Income data on tax-free, high incomes severely understate economic reality because they exclude deferral accounts, including those of hedge fund managers with billion-dollar incomes who can legally report no current income and borrow against their untaxed gains to live tax free.
The one bright spot in the SOI data at Table 1.4 was that the number of people making $100,000 to $200,000 grew significantly between 2007 and 2008. Their ranks increased by 393,465, or 3 percent, to more than 13.8 million taxpayers.
This truly is good news, because most of the increase had to be people who worked their way up into six-figure incomes from 2007 to 2008. ...
But despite that one sliver of good news about low six-figure incomes, the data show overwhelmingly that the Republican-sponsored tax cuts damaged our nation.
Examining performance against the promises, what do we find? Overwhelming evidence that the tax cuts of 2001 and 2003 made us much worse off.
Ignore the cynics who say the Republican leaders on Capitol Hill, in Wasilla, and on the airwaves care only about the rich. I don't believe that. I think they are captive to economic theories few of them understand and that are simplistic in the extreme. I take them at their word, that they truly believe their policies will produce broad benefits for all, but accepting that does not diminish the fact that the policies these Republicans promote also produce massive tax savings for the superrich who finance their campaigns.
The question to ask is whether their policies worked as promised. Have they even come close? Where is the prosperity...?
The hard, empirical facts:
The tax cuts did not spur investment. Job growth in the George W. Bush years was one-seventh that of the Clinton years. Nixon and Ford did better than Bush on jobs. Wages fell during the last administration. Average incomes fell. The number of Americans in poverty, as officially measured, hit a 16-year high last year of 43.6 million, though a National Academy of Sciences study says that the real poverty figure is closer to 51 million. Food banks are swamped. Foreclosure signs are everywhere. Americans and their governments are drowning in debt. And at the nexus of tax and healthcare, Republican ideas perpetuate a cruel and immoral system that rations healthcare -- while consuming every sixth dollar in the economy and making businesses, especially small businesses, less efficient and less profitable.
This is economic madness. It is policy divorced from empirical evidence. It is insanity because the policies are illusory and delusional. The evidence is in, and it shows beyond a shadow of a reasonable doubt that the 2001 and 2003 tax cuts failed to achieve the promised goals.
So why in the world is anyone giving any credence to the insistence by Republican leaders that tax cuts, more tax cuts, and deeper tax cuts are the remedy to our economic woes? Why are they not laughingstocks? It is one thing for Fox News to treat these policies as successful, but what of the rest of what Sarah Palin calls with some justification the "lamestream media," who treat these policies as worthy ideas?
The Republican leadership is like the doctors who believed bleeding cured the sick. When physicians bled George Washington, he got worse, so they increased the treatment until they bled him to death. Our government, the basis of our freedoms, is spewing red ink, and the Republican solution is to spill ever more.
Those who ignore evidence and pledge blind faith in policy based on ideological fantasy are little different from the clerics who made Galileo Galilei confess that the sun revolves around the earth. The Capitol Hill and media Republicans differ only in not threatening death to those who deny their dogma.
How much more evidence do we need that we made terrible and costly mistakes in 2001 and 2003?
Friday, September 24, 2010
Ben Bernanke says economic science is just fine, a few tweaks here and there and we'll have financial crises nailed. It's economic engineering and economic management that need to be improved.
I've made most of these points myself at one time or another, so I don't have any substantive quarrel with the general nature of what Bernanke says, but there is one difference. While I think we should see if the current models and tools can be amended appropriately to capture financial crises such as the one we just had, I am not as sure as he is that this will be successful and I'd like to see openness within the profession to a simultaneous investigation of alternatives. For example, models grounded in network and systems theory may have lots to offer in terms of how financial networks are formed, and in pinpointing their vulnerabilities:
Implications of the Financial Crisis for Economics, by Ben Bernanke, FRB: Thank you for giving me this opportunity to return to Princeton. ...
The financial crisis that began more than three years ago has indeed proved to be among the most difficult challenges for economic policymakers since the Great Depression. The policy response to this challenge has included important successes, most notably the concerted international effort to stabilize the global financial system after the crisis reached its worst point in the fall of 2008. ...
Despite these and other policy successes, the episode as a whole has not been kind to the reputation of economic and economists, and understandably so. Almost universally, economists failed to predict the nature, timing, or severity of the crisis; and those few who issued early warnings generally identified only isolated weaknesses in the system, not anything approaching the full set of complex linkages and mechanisms that amplified the initial shocks and ultimately resulted in a devastating global crisis and recession. Moreover, although financial markets are for the most part functioning normally now, a concerted policy effort has so far not produced an economic recovery of sufficient vigor to significantly reduce the high level of unemployment. As a result of these developments, some observers have suggested the need for an overhaul of economics as a discipline, arguing that much of the research in macroeconomics and finance in recent decades has been of little value or even counterproductive.
Although economists have much to learn from this crisis, as I will discuss, I think that calls for a radical reworking of the field go too far. In particular, it seems to me that current critiques of economics sometimes conflate three overlapping yet separate enterprises, which, for the purposes of my remarks today, I will call economic science, economic engineering, and economic management. Economic science concerns itself primarily with theoretical and empirical generalizations about the behavior of individuals, institutions, markets, and national economies. Most academic research falls in this category. Economic engineering is about the design and analysis of frameworks for achieving specific economic objectives. Examples of such frameworks are the risk-management systems of financial institutions and the financial regulatory systems of the United States and other countries. Economic management involves the operation of economic frameworks in real time--for example, in the private sector, the management of complex financial institutions or, in the public sector, the day-to-day supervision of those institutions.
As you may have already guessed, my terminology is intended to invoke a loose analogy with science and engineering. Underpinning any practical scientific or engineering endeavor, such as a moon shot, a heart transplant, or the construction of a skyscraper are: first, fundamental scientific knowledge; second, principles of design and engineering, derived from experience and the application of fundamental knowledge; and third, the management of the particular endeavor, often including the coordination of the efforts of many people in a complex enterprise while dealing with myriad uncertainties. Success in any practical undertaking requires all three components. For example, the fight to control AIDS requires scientific knowledge about the causes and mechanisms of the disease (the scientific component), the development of medical technologies and public health strategies (the engineering applications), and the implementation of those technologies and strategies in specific communities and for individual patients (the management aspect). Twenty years ago, AIDS mortality rates mostly reflected gaps in scientific understanding and in the design of drugs and treatment technologies; today, the problem is more likely to be a lack of funding or trained personnel to carry out programs or to apply treatments.
With that taxonomy in hand, I would argue that the recent financial crisis was more a failure of economic engineering and economic management than of what I have called economic science. The economic engineering problems were reflected in a number of structural weaknesses in our financial system. In the private sector, these weaknesses included inadequate risk-measurement and risk-management systems at many financial firms as well as shortcomings in some firms' business models, such as overreliance on unstable short-term funding and excessive leverage. In the public sector, gaps and blind spots in the financial regulatory structures of the United States and most other countries proved particularly damaging. These regulatory structures were designed for earlier eras and did not adequately adapt to rapid change and innovation in the financial sector, such as the increasing financial intermediation taking place outside of regulated depository institutions through the so-called shadow banking system. In the realm of economic management, the leaders of financial firms, market participants, and government policymakers either did not recognize important structural problems and emerging risks or, when they identified them, did not respond sufficiently quickly or forcefully to address them. Shortcomings of what I have called economic science, in contrast, were for the most part less central to the crisis; indeed, although the great majority of economists did not foresee the near-collapse of the financial system, economic analysis has proven and will continue to prove critical in understanding the crisis, in developing policies to contain it, and in designing longer-term solutions to prevent its recurrence.
I don't want to push this analogy too far. Economics as a discipline differs in important ways from science and engineering; the latter, dealing as they do with inanimate objects rather than willful human beings, can often be far more precise in their predictions. Also, the distinction between economic science and economic engineering can be less sharp than my analogy may suggest, as much economic research has direct policy implications. And although I don't think the crisis by any means requires us to rethink economics and finance from the ground up, it did reveal important shortcomings in our understanding of certain aspects of the interaction of financial markets, institutions, and the economy as a whole, as I will discuss. Certainly, the crisis should lead--indeed, it is already leading--to a greater focus on research related to financial instability and its implications for the broader economy.
In the remainder of my remarks, I will focus on the implications of the crisis for what I have been calling economic science, that is, basic economic research and analysis. I will first provide a few examples of how economic principles and economic research, rather than having misled us, have significantly enhanced our understanding of the crisis and are informing the regulatory response. However, the crisis did reveal some gaps in economists' knowledge that should be remedied. I will discuss some of these gaps and suggest possible directions for future research that could ultimately help us achieve greater financial and macroeconomic stability.
How much did the financial crisis cost in terms of lost GDP?
The Price of Crisis Prevention, by Jean Pisani-Ferry, Project Syndicate: Two years have passed since the financial crises erupted, and we have only started to realize how costly it is likely to be. Andrew Haldane of the Bank of England estimates that the present value of the corresponding losses in future output could well reach 100% of world GDP.
This estimate may look astonishingly high, but it is relatively conservative, as it assumes that only one-quarter of the initial shock will result in permanently lower output. According to the true doomsayers, who believe that most, if not all, of the shock will have a permanent impact on output, the total loss could be two or three times higher.
One year of world GDP amounts to $60 trillion... Assume that, absent adequate preventive measures, a crisis costing one year of world GDP occurs every 50 years (a rough but not unreasonable assumption). It would then be rational for the world’s citizens to pay an insurance premium, provided its cost remains below 2% of GDP (100%/50).
How much would it cost to reduce the frequency of financial crises?:
A simple way to reduce the frequency of crises is to require banks to rely more on equity and less on debt so that they can incur more losses without going bankrupt – a measure that is currently being considered at the global level. Thanks to reports just released by the Financial Stability Board and the Basel Committee ... we know more now about the likely impact of such regulation.
The first report finds that, starting from the current low level of bank capitalization, a one-percentage-point increase in capital ratios would permanently reduce the frequency of crises by one-third, while increasing interest rates by some 13 basis points (banks would need to charge more because it costs them more to raise capital than to issue debt). In other words, the price of losing one year of income every 75 years instead of every 50 years would lead banks to increase the rate on a loan from 4% to 4.13%. Such an insignificant increase would at most lead a few bank customers to turn to alternative sources of finance, most likely with no discernible effect on GDP.
It is stunning to find that a regulation can do so much good at such a small cost...
The article does hedge a bit on implementing the new requirements, expressing worry that imposing them too soon could raise capital costs and stall the recovery -- a worry I think is overblown -- but "There is no doubt that the long-term price of insuring against crises is worth paying." Stabilizing the financial sector will require more than just raising capital requirements, something I'll write more about early next week, but these requirements need to be part of the overall package of reforms.
Republicans have thoroughly embraced the Irving Kristol strategy for political effectiveness: "say whatever it takes to gain power":
Downhill With the G.O.P., by Paul Krugman, Commentary, NY Times: Once upon a time, a Latin American political party promised to help motorists save money on gasoline. How? By building highways that ran only downhill.
I’ve always liked that story, but the truth is that the party received hardly any votes. And that means that the joke is really on us. For these days one of America’s two great political parties routinely makes equally nonsensical promises. ... And this party has a better than even chance of retaking at least one house of Congress this November.
Banana republic, here we come.
On Thursday, House Republicans released their “Pledge to America,” supposedly outlining their policy agenda. In essence, what they say is, “Deficits are a terrible thing. Let’s make them much bigger.” The document repeatedly condemns federal debt — 16 times, by my count. But the main substantive policy proposal is to make the Bush tax cuts permanent, which ... would add about $3.7 trillion to the debt over the next decade — about $700 billion more than the Obama administration’s tax proposals.
True, the document talks about the need to cut spending. But as far as I can see, there’s only one specific cut proposed — canceling the rest of the Troubled Asset Relief Program, which Republicans claim (implausibly) would save $16 billion. That’s less than half of 1 percent of the budget cost of those tax cuts. As for the rest, everything must be cut, in ways not specified — “except for common-sense exceptions for seniors, veterans, and our troops.” In other words, Social Security, Medicare and the defense budget are off-limits.
So what’s left? Howard Gleckman of the nonpartisan Tax Policy Center has done the math. As he points out, the only way to balance the budget by 2020, while simultaneously (a) making the Bush tax cuts permanent and (b) protecting all the programs Republicans say they won’t cut, is to completely abolish the rest of the federal government: “No more national parks, no more Small Business Administration loans, no more export subsidies, no more N.I.H. No more Medicaid... No more child health or child nutrition programs. No more highway construction. No more homeland security. Oh, and no more Congress.”
The “pledge,” then, is nonsense. ... So how did we get to the point where one of our two major political parties isn’t even trying to make sense?
The answer isn’t a secret. The late Irving Kristol, one of the intellectual godfathers of modern conservatism, once wrote frankly about why he threw his support behind tax cuts that would worsen the budget deficit: his task, as he saw it, was to create a Republican majority, “so political effectiveness was the priority, not the accounting deficiencies of government.” In short, say whatever it takes to gain power. That’s a philosophy that now, more than ever, holds sway in the movement Kristol helped shape.
And what happens once the movement achieves the power it seeks? The answer, presumably, is that it turns to its real, not-so-secret agenda, which mainly involves privatizing and dismantling Medicare and Social Security.
Realistically, though, Republicans aren’t going to have the power to enact their true agenda any time soon — if ever. Remember, the Bush administration’s attack on Social Security was a fiasco, despite its large majority in Congress — and it actually increased Medicare spending.
So the clear and present danger isn’t that the G.O.P. will be able to achieve its long-run goals. It is, rather, that Republicans will gain just enough power to make the country ungovernable, unable to address its fiscal problems or anything else in a serious way. As I said, banana republic, here we come.
Paul Volcker on the difficulty of using discretionary authority to impose banking regulations that are restrictive during good times to discourage excessive risk taking, and somewhat more lax during bad times to encourage more lending:
Volcker Spares No One in Broad Critique, by Damian Paletta, RTE: ...On procyclicality — “It’s the hardest thing as a regulator in my opinion…when things are really going well, the economy is going well, the market is not disturbed, but you see developments in an institution or in markets that is potentially destabilizing, doing something about it is extremely difficult. Because the answer of the people in the markets is, ‘what are you talking about? Things are going really well. We know more about banking and finance than you do, get out of my hair, if you don’t get out of my hair I’m going to write my congressman.’” .
Rules that automatically vary procyclically can help with this problem, that is, if a Congress subject to regulatory capture will impose them and keep them in place. But rules can't cover everything -- it's often the things that the rules don't explicitly cover that are the most problematic -- and some degree discretionary authority is unavoidable in a well-regulated system.
Thursday, September 23, 2010
Just a quick heads up to the second installment of the Krugman and Wells review of The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession by Richard C. Koo, Fault Lines: How Hidden Fractures Still Threaten the World Economy by Raghuram G. Rajan, and Crisis Economics: A Crash Course in the Future of Finance by Nouriel Roubini and Stephen Mihm:
The Way Out of the Slump, by Paul Krugman and Robin Wells, NYRB: How can the economy recover? Of the three books under review, Raghuram Rajan’s Fault Lines says almost nothing about the question. He seems mainly concerned with preventing future bubbles, going so far as to call for an immediate rise in interest rates despite the depressed state of the economy. Nouriel Roubini and Stephen Mihm warn that recovery may be very slow—but they offer no solution, instead criticizing the solutions proposed by others. Only Richard Koo has something positive to propose—but his answer appears outside the realm of political possibility.
Most of the time, we count on central banks to engineer economic recovery following a slump, much as they did after the 2001 recession. Normally, when recession strikes, the Fed, the European Central Bank, or the Bank of England cuts the short-term interest rates it controls; market-determined longer-term rates fall in sympathy; and the private sector responds by borrowing and spending more.
The sheer severity of the slump after the 2008 housing bust means, however, that this normal response falls far short of what’s needed. One way to revive the economy is to consider the so-called Taylor rule, a rule of thumb linking Fed interest rate policy to the levels of unemployment and inflation. Applying the historical Taylor rule right now, with inflation very low and unemployment very high, would mean that the Fed’s main policy rate, the overnight rate at which banks lend reserves to each other, should currently be minus 5 or 6 percent. Obviously, that’s not possible: nobody will lend at a negative interest rate, since you can always hold cash instead. So conventional monetary policy is up against the “zero lower bound”: it can do no more. We’re in the classic Keynesian liquidity trap, in which the economy is so awash in liquidity that adding more has no effect. What’s left?
One answer is fiscal policy: the government can step in to spend when the private sector will not. We’ve already argued—in the first part of this review1—that a rise in government deficits played a key role in preventing the crisis of 2008 from turning into a full replay of the Great Depression. Why not use more deficit spending to push for a full recovery? ...[...continue reading...]...
On the run today -- time is short with the start of school approaching -- so a quick thought between meetings:
When I was a little kid, being rich meant being able to buy the stuff I wanted without having to worry about how much it costs.
But as I got older -- and maybe this explains my choice of jobs -- being rich was much more about the ability to do what I wanted with my time. In this sense, you can have considerable wealth, but still not be rich. In fact, the quest for more and more stuff gets in the way (though it depends in part on what you want to do with your free time, if it's to play golf at an expensive club, sufficient wealth is a necessary condition).
Some of the richest people I know are quite poor in terms of having the stuff other people want, but free of the rat race, and as far as I can tell, they are generally happy. I think a lot of people are actually looking for freedom as they accumulate wealth -- they imagine being able to do whatever they want -- but don't realize that working longer and longer hours until there is no time left for anything else is not the best the way to get the freedom they are looking for.
But today is not a rich day for me, so off to the next appointment.
Ezra Klein reacts to the GOP's 'Pledge to America':
The GOP's bad idea, by Ezra Klein: ...Their policy agenda is detailed and specific -- a decision they will almost certainly come to regret. Because when you get past the adjectives and soaring language, the talk of inalienable rights and constitutional guarantees, you're left with a set of hard promises that will increase the deficit by trillions of dollars, take health-care insurance away from tens of millions of people, create a level of policy uncertainty businesses have never previously known, and suck demand out of an economy that's already got too little of it.
You're also left with a difficult question: What, exactly, does the Republican Party believe? The document speaks constantly and eloquently of the dangers of debt -- but offers a raft of proposals that would sharply increase it. ... It says that "small business must have certainty that the rules won't change every few months" and then promises to change all the rules that the Obama administration has passed in recent months. It is a document with a clear theory of what has gone wrong -- debt, policy uncertainty, and too much government -- and a solid promise to make most of it worse. ...
I reacted to Republican plans a few days ago:
There don't seem to be any new ideas here, just a promise to undo what's been done since the Republicans lost power. Why would we want to return to the policies that brought us a stagnant middle class even in the best of times, widening inequality, out of control financial markets, the biggest recession in recent memory, declining rates of health care coverage, threats to Social Security and to social insurance more generally, tax policies that reinforce trends in inequality and create big holes in the budget (amid false claims that tax cuts more than pay for themselves), and two wars whose total costs to the nation go far beyond the large budgetary costs that have brought programs such as Social Security and Medicare -- programs vital to middle and low income households -- under increasing financial pressure?
This looks like a mess:
'Robo-signer' played quiet role in huge number of foreclosures, by Brady Dennis, Washington Post: The robo-signer lives on a quiet street in this small town an hour's drive northwest of Philadelphia. ... Many large mortgage lenders have come to rely on a relative handful of so-called robo-signers ... to attest to the accuracy of thousands of home foreclosure documents across the country. ...
Stephan - who declined to talk to a reporter -... works as the leader of the document execution team for GMAC Mortgage. He has signed off on as many as 10,000 foreclosures in a month, according to court documents. That's barely a minute per case, assuming he works a normal eight-hour day.
His signature indicated that the information in the cases was accurate to the best of his knowledge, and that he had signed in the presence of a notary. The problem was, that didn't always happen, according to depositions that Stephan gave in December and June...
He stated that he would glance at ... a few other numbers, but simply assumed most of the information in the files was correct. Stephan, who has more than a dozen people working under him, told attorneys that he had three days of training for the position and that he didn't know how the "summary judgment" affidavits he signed were used in judicial foreclosure cases.
Stephan's admission has cast into doubt thousands of mortgage foreclosure filings. ...
Maybe that's how this happens.
This is from an 1860 edition of Scientific American:
Against Homework, Scientific American: A child who has been boxed up six hours in school might spend the next four hours in study, but it is impossible to develop the child’s intellect in this way. The laws of nature are inexorable. By dint of great and painful labor, the child may succeed in repeating a lot of words, like a parrot, but, with the power of its brain all exhausted, it is out of the question for it to really master and comprehend its lessons. The effect of the system is to enfeeble the intellect even more than the body. We never see a little girl staggering home under a load of books, or knitting her brow over them at eight o’clock in the evening, without wondering that our citizens do not arm themselves at once with carving knives, pokers, clubs, paving stones or any weapons at hand, and chase out the managers of our common schools, as they would wild beasts that were devouring their children.
What are Democrats thinking? Will they really decide to run away rather than standing their ground and daring Republicans to vote no?:
Debate on Tax Cuts May Be Delayed, by David Herszenhorn, NY Times: Floor debate over the highly contentious issue of what to do about the expiring Bush-era tax cuts may be delayed until after the November elections, senior Democratic aides said on Wednesday.
Senate Democrats will meet over lunch on Thursday to discuss the issue, but appeared close to a decision to postpone a debate that was shaping up to be a fierce clash with Republicans. ...
Democrats nominally control 59 seats in the Senate, but would need 60 votes to overcome a likely filibuster... And no Republican has come forward willing to support legislation that does not extend the lower rates at all income levels.
Still, some Democrats have lobbied in favor of forcing a vote that they say would show that Republicans are obstructing tax relief for 97 percent of Americans while fighting to maintain the lower rates for millionaires.
Wednesday, September 22, 2010
The other day, Andrew Leonard of Salon's How the World Works said in response to a post that appeared here on, as he put it, Republican plans to "Erase the last two years and return to the good old days of George W. Bush":
I was struggling to find words to express my Monday morning dismay at this breathtakingly ambitious agenda for making America great again by repeating exactly the same mistakes that screwed the country up, but Mark Thoma, a professor of economics at the University of Oregon, beat me to it (posting shortly after midnight!).
My turn. I was trying to figure out how to say that appointing a CEO as head of the CEA plays into Republican charges that Obama is anti-business, but Andrew Leonard beat me to it:
The awesome stupidity of replacing Larry Summers with a CEO, by Andrew Leonard: If the Obama administration appoints a corporate executive to replace Larry Summers as National Economic Council director then the White House fully deserves the thumping it will get in November.
The ostensible reason for this colossal misunderstanding of the current political situation, sourced to anonymous administration officials, is that the White House wants "to allay the business community's doubts about administration policies."
This is nonsense. The only way for Obama to "allay" the so-called business community's "doubts" would be to join with Republicans in seeking a repeal of bank and healthcare reform, abandon his efforts to raise taxes on the wealthy, and fire Elizabeth Warren. By the definition currently employed on the opinion pages of the Wall Street Journal, anything to the left of Ayn Rand or Jim DeMint is "anti-business." The bleating from Wall Street executives who feel bullied and demonized only proves one thing: Anything less than their total freedom to pursue profit free of all government restraint is utterly unacceptable -- no matter what the consequences for the country at large.
The very notion that Obama is "anti-business" is an absolute charade, cooked up by conservative pundits and fed by financial industry lobbying muscle. It has no connection to on-the-ground reality, and if administration officials think it is one of Obama's problems then they are the worst kind of spineless idiots.
Obama's dilemma is that his middle-of-the-road approach to solving problems has outraged the base of both parties. ... But appointing former Time-Warner CEO Richard Parsons to Summers' job will not make an iota of difference...
Obama needs to reject the idea that Wall Street must be placated any further than it already has been. It's going to be tough enough over the next two years defending the ground that has already been won. He doesn't need to concede any more. What he really needs to do is fire whoever is floating to the press the idea that the administration is concerned about being perceived as "anti-business."
Paul Krugman agrees.
Brad DeLong says "nobody":
Who Can Replace Larry Summers?, by Brad DeLong: My view: nobody. The Obama administration is going to be weaker as a result of his forthcoming departure.
The job of Assistant to the President for Economic Policy has two components:
Making sure that the President hears and considers the arguments, and makes an informed decision.
Making sure that everybody thinks that the president has heard and considered their arguments, and made an informed decision, and that they are valued and respected members of the team who are being given due influence and deference.--and also to make sure that the president hears everybody's arguments and makes an informed decision.
Larry is superb at figuring out how to present complicated arguments to make them comprehensible to non-experts, and at setting up frameworks for discussion and debate that kept policy discussions on track and organized. That is most of the job. That is (1). And at that Larry is the best in the world.
The other part, part (2)--making sure that everybody thinks that their point of view has been given a fair shake, and that they are valued and respected measures of the team? Well, given who Larry is, he far, far exceeded expectations. Only one public shouting fight in the halls of the West Wing in two years is... quite good, really.
If I were Obama, I would (a) move Tim Geithner over to the West Wing job, for that is the job that matches his skill set where I think he would indeed by best in the world, and (b) bring Laura Tyson in to be Treasury Secretary...
Failing that, were I Obama, I would probably try to grab Alan Blinder from Princeton to fill the West Wing job...
And were I really devious, I would bring Ben Bernanke over to the West Wing and put Larry in the Fed Chair job...
That he wasn't as bad as expected at half his job "given who Larry is" doesn't say that he did it well, and it doesn't say he did it better than anyone else would have. I don't see how that translates to "irreplaceable." The public perception is that he captured the White House conversation and directed it in a particular way, and at times prevented dissenting views from being fully expressed. True or not, public perception matters and the idea that Summers was the one standing in the way of more populist policy was commonly held and hurt the president's standing with the base.
Maybe he's so good at the first part of the job that it more than compensates for failures at the second, but that depends upon the weights you attach to each part of the job, and it also depends upon the assumption that nobody else would be better at the first part. I guess I place more emphasis on the second part of the job than Brad, and I very much doubt that Summers is the only one in the world who can effectively "present complicated arguments to make them comprehensible to non-experts, and at setting up frameworks for discussion and debate that kept policy discussions on track and organized." There are others who can do this well, I think just as well. But even if they aren't quite as good at the first part of the job the difference wouldn't be that large, and their ability to do better at the second part of the job would more than compensate. Summers is not irreplaceable.
Arin Dube wonders how an alternative world might have played in the press:
Counterfactual: Or a Story that would have been Spun, by Arindrajit Dube: Six weeks before the midterm elections, the Democratic Party is facing major losses in both the House and the Senate, and is looking increasingly likely to lose control of the House altogether.
What is behind this rapid change in fortunes from only two years ago, when the Democrats swept into power? Based on extensive interviews with sources in both parties, including anonymous sources within the White House, it appears that an over-reach by the Obama administration pursuing a progressive and populist platform may have played an important role. Instead of an incrementalist, business-friendly strategy, the administration went to the hilt with policies focused on a greater role of government in providing jobs and healthcare, and perhaps pre-maturely ended American military involvement in both Iraq and Afghanistan.
Sources both inside and outside the administration agree that the pursuit of a health care policy with a strong role of the federal government (a “public option”) played a large role in solidifying the image of the administration as one that did not spend enough time courting moderate Republicans such as Senator Chuck Grassley. Had the administration not insisted on a strategy that fundamentally ended the control of the health insurance market by a handful of key companies, these sources say that a bipartisan compromise on universal healthcare would most certainly have been reached.
The pursuit of a second stimulus in late 2009 measuring $700 billion dollars was likely the second reason behind the quick turnaround in public opinion. While economists largely credit the second stimulus for lowering the unemployment rate to below 7% through a focus on aid to states and direct hiring initiatives, the political reality remains that there is increasing concern about burgeoning government debt. Although interest rates on treasury bills have not risen – yet – experts we spoke with worry about a sudden increase in such rates at any time. A more measured approach which let the structural problems arising from the bubble sort themselves out though the private market may have not lowered the unemployment rate at the short term. However, politically, our sources say, such an approach would have demonstrated a hard-headed approach that eschews populism, and would have calmed both the markets and an increasingly nervous electorate worried about countercyclical deficit financing.
Finally, while the administration’s economic advisors successfully pushed for a stringent and punishing regulatory policy with respect to the financial sector, some insiders grumble about the early decision by this administration to not recruit more palatable figures such as Timothy Geithner and Lawrence Summers. Lacking the “soft touch” approach championed by Clinoton-era protégé’s of Robert Rubin, the brash economic team under Obama moved quickly to cap bank size, impose draconian capital reserve requirements, re-instate Glass-Steagall, and strong-arm Congress to impose stringent limits on financial sector pay. While possibly creating a less risky financial market, it no doubt led to a flight of talent from the financial sector. Today, the financial sector’s share of employment is back closer to the late 1980s, which some believe is a cause for concern as financial innovations are unnecessarily stymied through regulatory pressure.
As a result of these and other factors, today’s electorate is taking a hard look at the Democratic Party and its brand of economic policies. Looking back with the advantage of hindsight, perhaps the Democratic Party leaders will decide that pursuing a less populist and redistributive strategy would have secured it a lock on both the Congress and the Presidency for generations to come. And that it was the focus on reducing unemployment and providing affordable healthcare – at the cost of securing bipartisan agreements – that lay the foundations for a resurgent Republican party.
There's another possibility. If Obama had fought harder for some of these things, he probably wouldn't have made much more progress than he did -- perhaps a little, but not much. But the battle would have been worth having as a means of signaling to the base that the things they care about are worth standing up for, and for painting the other side as obstructionists standing in the way of moving forward. I think there are alternative histories where the administration is more combative and less devoted to bipartisanship that would have turned out much better than the reality we are seeing today. But the Obama I want isn't the Obama I have.
I am not as familiar with these banks as I should be. What else should I know about them?:
An oversight on oversight: The Federal Home Loan Bank, by Mark Cassell and Susan Hoffmann: Debate over financial regulatory reform has been far-reaching (see Brunnermeier et al. 2009 and Wyplosz 2009). Yet one set of institutions has gone largely unnoticed: the Federal Home Loan Bank (FHLBank) system, a government sponsored enterprise composed of 12 regional bankers’ banks that has been at the centre of sustainable home ownership finance in the US since 1932 .
The lack of attention by lawmakers is not entirely a surprise. The Federal Reserve has long overshadowed the FHLBank system. Moreover, FHLBank leaders and supporters may well prefer flying under the Congressional radar to wait out the present financial storm. Regardless of the reason, we show in our recent book Mission Expansion in the Federal Home Loan Bank System (Cassell and Hoffmann 2010) that by neglecting the FHLBank system, lawmakers miss a chance to tap the most important source of housing finance expertise in the federal government. In addition, we lose an opportunity to reform the FHLBank system, which, while not at the centre of the current foreclosure and financial crisis, was certainly a player.
Tap the FHLBank system’s housing finance expertise
Responding to the home mortgage foreclosure crisis of the Great Depression era, President Herbert Hoover spearheaded construction of a national system of Home Loan Banks. Modelled on the Federal Reserve, the FHLBank system’s size and implied government guarantee enables Home Loan Banks to raise money collectively and cheaply in the capital markets and make wholesale loans – termed ‘advances’– to member institutions, primarily for homeownership lending. Thus, for 78 years the FHLBank system has been the primary source of housing finance expertise in the US. Lawmakers should take advantage of such expertise in two ways.
First, Congress and the administration should recognise that the FHLBank system has demonstrated administrative capacity to understand and oversee the range of functions necessary for responsible, sustainable home ownership finance including regulating mortgage structure, supervising mortgage origination, and licensing mortgage bankers. Consumer protection in housing finance should be placed with the FHLBank system’s regulator, the Federal Housing Finance Agency, and not with the Federal Reserve or the proposed Consumer Financial Protection Agency.
Second, federal policies to minimise the societal harm from foreclosures, including the Home Affordable Foreclosure Alternatives Program, should be placed in the FHLBank system, the agency whose primary mission for the past seven decades has been housing finance. At present foreclosure policies are housed mainly in the Department of Treasury, an agency with relatively little housing finance expertise.
The FHLBank system requires reforms
While it is an important resource that should be tapped, the FHLBank system also requires reform. IndyMac Bank and Countrywide Bank, two of our most notorious dealers of toxic loans, were both enabled by the cheap liquidity they received from the FHLBanks of San Francisco and Atlanta, respectively. A recent report by the Federal Housing Finance Agency found that in 2008, a fifth of the collateral used to secure advances from the FHLBanks were either non-traditional, subprime or Alt-A loans. The FHLBank system has taken important internal steps to tighten its lending and underwriting standards. Despite this, we suggest three major institutional reforms are also needed.
Tuesday, September 21, 2010
As I'm sure you heard, Larry Summers, Director of the administration's National Economic Council, is returning to Harvard at the end of the year. From a political point of view, as far as I'm concerned, it's not a moment too soon. As I said in May of 2009:
One more note on Summers. I wasn't in favor of him when he was picked to be part of the administration because I thought he carried far too much political baggage. If he has value, it is not as a spokesperson for the administration. But again and again I heard that he was the only one smart enough to do this job. I don't believe that and never will, but if it's true, fine, put him in an office somewhere, let him be smart and helpful, but above all keep him out of the public eye. He does not help as a spokesman for the administration, he hurts the cause every time he opens his mouth.
I have some comments on the Press Release from today's FOMC meeting at MoneyWatch:
A colleague, Bruce Blonigen, reacts to new measures "'focused on illegal import practices from non-market economies," and he explains why these new measures will harm US export competitiveness:
A New Marketing Campaign for Import Protection, by Bruce Blonigen: In a recent late August press announcement, U.S. Commerce Secretary Gary Locke announced “proposed measures – especially focused on illegal import practices from non-market economies - that will strengthen trade enforcement and help keep U.S companies competitive. These steps support President Obama’s National Export Initiative (NEI), which aims to double exports in the next five years and support the creation of several million new jobs.” (The link to the full announcement is here).
The press announcement ultimately details 14 proposed measures to “tighten” the U.S.’s enforcement of antidumping (AD) and countervailing duty (CVD) trade protection programs, which apply import duties on products where foreign firms are pricing their products “unfairly” low or foreign governments are subsidizing exports to the U.S. Among other things, these measures will lead to investigation of more small foreign exporters, alter the methods by which Commerce calculates the size of the duties (presumably to apply larger AD and CVD duties), and “tightening the deadlines for submitting new factual information in AD/CVD cases.” God forbid that facts get in the way of these investigations!
As sad and petty as these new policies are, the scary part is how bold Commerce is to package these old-style import protection policies into the National Export Initiative to increase exports. Let me briefly describe three ways in which these polices will unequivocally HARM U.S. export competitiveness.
First, any general equilibrium trade model will show that limiting imports will also limit exports. With the large trade imbalances we currently have, this point has less relevance for our current situation, but it is a warning about the long-run consequences of import protection and its connection to export competitiveness.
Second, and much more compelling for our current situation, is the real possibility of retaliation. Work by myself and Chad Bown (see here), as well as other leading AD scholars (see here and here) have found significant patterns of retaliation in worldwide patterns of AD investigations. So my advice to U.S. exporters is to get ready for much greater scrutiny and impediments in your foreign destinations in wake of these new Commerce AD/CVD policies.
Third, most U.S. AD/CVD import investigations are on products that are essential inputs to a large segment of U.S. manufacturing industries, particularly steel and chemical products. Greater import protection raises input prices for these downstream U.S. manufacturing industries, many of which are our engines of export growth. Higher input prices lead to higher output prices and a loss of export competitiveness on the world stage for our U.S. manufacturing companies.
Of course, one hope is that these types of activities to “fine-tune” current AD/CVD policies will have minimal impact. In prior work, however, I found that discretionary changes in methodology by Commerce were the major contributor of AD duties rising from an average of 15% in 1980 to an average of over 60% by 2000. Hopes crushed! It is clear that these new policies certainly have China in mind, with quite a few changes in methodology for non-market economies, a classification that often applies to Chinese firms subject to U.S. AD/CVD investigations. However, many of these policies will clearly affect all import sources as well.
After the world recession took hold in 2009, many observers expected major back-sliding on trade liberalization, and they were relieved that the leading countries of the world did not resort to these tactics. These recent policy changes by the U.S. should worry all of us that this may be changing. No official statistics will reflect this, but with this announcement, the restrictiveness of U.S. trade policy just got measurably stricter. Other countries will certainly take notice, and so the likelihood that other countries follow suit, especially in this period of economic uncertainty, is fairly high. As a leader of the world economy, this is a dangerous precedent for the U.S. to set.