Beat the Press is Dean Baker's commentary on economic reporting. Dean Baker is co-director of the Center for Economic and Policy Research (CEPR).

Follow on Twitter Like on Facebook Subscribe by E-mail RSS Feed

The NYT ran an article noting that homeownership rates in the UK are dropping which it attributed to the fact that, "disposable income has shrunk and loan requirements have toughened."

However somewhat later in the article it notes that:

"One reason homeownership remains attractive in Britain is because property values dropped less drastically than in the United States, in part because of a shortage in housing. Prices in some large cities, including London, have even increased recently."

If there really is a shortage of housing, then the tighter loan requirements, which are a main focus of the article, have nothing to do with the declining rates of homeownership. If loan requirements had remained lax, and nothing had changed to the supply of housing, then it would simply mean that prices would rise further and more people would be priced out of the market due to high house prices rather than tough loan conditions.

The ability of people in the UK to be homeowners is limited by the supply of housing. If there is really inadequate supply, as this article contends, then the terms of mortgage loans and even levels of disposable income will not affect homeownership rates.

Add a comment

I've been otherwise occupied so I didn't get around to beating up this utterly bizarre NYT story that features Argentina as presenting a clear warning to Greece of the dangers of default. Fortunately, Krugman picked up on it on his blog

The basic point is that Argentina's economy has done extremely well following its default. It is difficult to see why anyone in Greece would not default in an instant if they thought Greece's economy would follow the same path as Argentina's economy has over the last 9 1/2 years.

There are good reasons for thinking that Greece may not be as successful, most importantly that it does not currently have its own currency. But Argentina is a model that countries would likely want to emulate, not avoid.

Add a comment

The Washington Post piece on the new long-term budget projections from the Congressional Budget Office (CBO) began:

"The national debt will exceed the size of the entire U.S. economy by 2021 — and balloon to nearly 200 percent of GDP within 25 years — without dramatic cuts to federal health and retirement programs or steep tax increases, congressional budget analysts said Wednesday."

Actually, this is not what the projections showed. The CBO projections showed that if Congress simply followed current law, letting the Bush tax cuts expire, not fixing the alternative minimum tax, and most importantly, allowing the spending caps in the Affordable Care Act (ACA) to remain in place, then the debt to GDP ratio will soon stabilize and head downwards.

This is the CBO baseline scenario that is actually shown in the graphic accompanying the article, even though it is never mentioned in the article itself. The article focuses of the "alternative fiscal scenario" constructed by CBO, which assumes that Congress will deviate from the baseline in several important ways that will make the deficit worse. This fact should have been explained to readers. 

Instead the confusion is compounded with the assertion:

" If current policies are unchanged and the national debt continues to grow, the U.S. economic output could be as much as 6 percent smaller than current projections by 2025 and as much as 18 percent smaller by 2035."

It is unlikely that many readers would know that "current policies" includes the assumption that Congress will over-ride the spending caps that it voted into law with the ACA last year. It also would have been worth reminding readers that in 2025 per capita income is projected to be approximately 20 percent higher than it is today, so even with this worst case scenario, people would on average still have considerably higher incomes than they do today. In 2035 the projections show that per capita income would be about 40 percent higher.

The article also refers to President Obama's fiscal commission and tells readers:

"That commission produced a plan that would limit borrowing to a little over $5 trillion over the next decade."

This is not true. The commission did not issue a report because it did not have the necessary majority to get a report approved. The report referred to in the article is the report of the commission's co-chairs, Erskine Bowles and former Senator Alan Simpson.

Add a comment
In the top of the hour news segment on Morning Edition, NPR told listeners that the Congressional Budget Office warned that the national debt will soon equal the annual size of the economy and this could lead to a European-style crisis. This is not true, see below.
Add a comment

The NYT ran an AP article on the new long-term budget projections from the Congressional Budget Office (CBO) that began:

"The national debt is on pace to equal the annual size of the economy within a decade, levels that could provoke a European-style crisis unless policymakers take action on the federal deficit, according to a report by the Congressional Budget Office."

This is not true. The CBO report did not warn of "a European-style crisis." The reason it did not is that a European style crisis does not make sense in the context of the United States. The United States can never be like Greece or Ireland for the simply reason that we print out own currency.

In the event that we actually ran up against serious constraints in credit markets the United States would have the option to have the Fed buy up its debt. Greece and Ireland do not have this option. This could create a risk of inflation, but there is not the risk of insolvency that euro zone governments face.

The economists at CBO know the difference between the United States and the euro zone countries, which is why they did not make the comparisons attributed to them in this article.

Add a comment

I always enjoy reading Ezra Klein’s blog. He’s an excellent writer and he does his homework. However, he really missed the story in his review of Inside Job  (even though I do appreciate the favorable mention).

Ezra criticizes the movie for making the story one of corrupt economists blessing the evil doers of Wall Street:

“What’s remarkable about the financial crisis isn’t just how many people got it wrong, but how many people who got it wrong had an incentive to get it right. Journalists. Hedge funds. Independent investors. Academics. Regulators. Even traders, many of whom had most of their money tied up in their soon-to-be-worthless firms.”

This is the right point, but I think Ezra takes it in the wrong direction. Certainly all of these people were not on the take in the same way as some of the film’s heroes (i.e. former Federal Reserve Board Governor Frederick Mishkin who got paid six figures to write a report praising Iceland to the sky in 2006). However, it does not follow that they had incentive to “get it right.”

Getting it right meant that you had to say that the honchos were wrong. You had to say that Martin Feldstein, Gregory Mankiw,  Larry Summers, Alan Blinder, Ben Bernanke, and the Maestro, Alan Greenspan, were missing the largest asset bubble in the history of the world right in front of their eyes.

This would really put you on the firing line if you were an economist at the Fed, the IMF, or even an academic economist hoping to advance in the field. After all, you could be wrong, in which case you might as well spend the rest of your working career wearing a tin foil hat.

On the other hand, what is the cost of going along? It turns out that economists are a remarkably forgiving lot – not in respect to workers in workers in the United States or retirees in Greece – but certainly when it comes to each other. The mantra “who could have known?” has provided a pretty much blanket amnesty. Next to no one got fired and very few people even missed a scheduled promotion for missing the housing bubble; the collapse of which may wreck the economy for a decade. In fact, even Daniel Mudd and Richard Fuld, the men who bankrupted Fannie Mae and Lehman respectively, have both found their way back into very high-paying jobs in finance.

In short, there is a serious problem here of asymmetric  risk. There is no doubt that saying there was a bubble posed serious dangers to the careers of those who stepped outside of the consensus established by the top thinkers in the profession. However, just going along with the mainstream view carried no risk whatsoever. There is no reason to believe that anything about this story has changed in the years since the crisis.

Perhaps Inside Job can be blamed for not fully exploring the subtleties of this process, but it was a movie, not a book, and there is a need to be entertaining as well as informative. So, I can agree that the movie did not fully explain the dynamics that allowed for such a dangerous bubble to grow right under the nose of so many intelligent people, but I think it still got the essentials of the story right.

Like Ezra, I qualify as a nerd. But the movie was not intended to provide the full story to the discerning nerd. It was intended to give the essentials to the masses, and on this score I give it high marks.

Add a comment

It must be very hard to get information over at Fox on 15th Street. They still do not seem to have heard of the housing bubble. The Post noted the weak sales in existing homes for May reported yesterday, as well as the drop in prices, and told readers:

"The housing market is still struggling to recover from a historic slump, according to industry data released Tuesday."

Of course it is not struggling to recover from a historic slump. It is correcting an unprecedented bubble. There run-up in nationwide house prices between 1996 and 2006 was a break with a hundred-year long trend over which nationwide house prices just kept even with the overall rate of inflation. Over this period, they outpaced the overall rate of inflation by more than 70 percent.

It was the collapse of this bubble that gave us the huge economic slump than the country now faces, but apparently the Post still hasn't heard about the bubble. House prices have to fall another 8 percent or so to get back to their trend level. Rather than expecting a rebound, we should be expecting a further decline.

Add a comment

In its top of the hour news segment NPR told listeners that there is little else that the Fed can do to boost the economy. This is very seriously wrong.

The Fed could do more quantitative easing, it could target a long-term interest rate, for example targeting a 2.5 percent 10-year government bond rate, or it could target a higher inflation rate (e.g. 3-4 percent). All of these measures would some impact in boosting the economy.

The Fed is choosing not to go this route because its open market committee apparently feels the potential benefits do not outweigh the risks, however it is simply wrong to say that additional options to boost the economy do not exist. The Fed has simply opted not to take them.

NPR's mis-reporting on this point is important because the decisions of the open market committee are in part political ones. They respond to the larger debate within the country. If people do not even know that the Fed has options that could spur growth and reduce unemployment then they will be less likely to try to pressure the Fed to pursue such options.

Add a comment

In discussing the Fed's QE2 program, the NYT tells us that things are much different today than they were a year ago.

"Last year prices were falling; this year, prices are increasing."

Well, sort of. Here's the overall CPI where there is in fact a small drop between April and June, although it is completely reversed by the July increase.

btp-6-22-2011-fig1

Source: Bureau of Labor Statistics.

Of course, if we look at the core CPI which the Fed targets, there is no decline in prices at all in the summer of 2010. In fact, inflation looks pretty much exactly the same in the summer of 2011 as it did in the summer of 2010.

btp-6-22-2011-fig2

Source: Bureau of Labor Statistics.

In other words, what explains the difference in the Fed's behavior is not any obvious difference in inflation or even the growth outlook. (Growth projections were if anything stronger in the summer of 2010 than at present.)

Rather, the most obvious explanation is a difference in politics. There is a growing push against any effort to stimulate the economy, which is noted in the article. It is this change in politics that seems to explain the end of quantitative easing, not any change in the economy.

This article includes a peculiar statement by Mark Zandi, of Moody's Analytics, which attributes the economy's weakness to a loss of confidence. It would have been useful to ask how he thought low confidence was hurting the economy. Consumer spending continues to be very high relative to income and investment in equipment and software is quite strong given the low capacity utilization rates, so it is not obvious what sector of the economy is being constrained by a lack of confidence.

Add a comment

The United States has to cut back spending on the Commerce Department or it will bankrupt the country. Okay, I have no evidence for this and it really doesn't make any sense. The Commerce Department's budget is about $10 billion a year, less than 0.3 percent of total spending, but this note is written in the spirit of Thomas Friedman.

Just as Thomas Friedman can tell readers that Social Security and Medicare are bankrupting the country with no evidence, in my blognote I get to blame the Commerce Department. The reality of course is that Social Security is fully funded by its own dedicated tax revenue through the year 2036, meaning the program on net imposes no burden on the government.

Under the law, if nothing is done to increase revenues SS will only pay about 80 percent of scheduled benefits in years after 2036. It is prohibited from spending any money beyond what it collects in taxes. The projected shortfall over the program's 75-year planning period is equal to 0.6 percent of GDP, about one-third of the increase in annual defense spending between 2000 and 2011. It is difficult to see how a program that can only spend what it takes in from taxes could bankrupt the country, but this is Thomas Friedmanland.

There is more of an issue with run-away Medicare costs, but everyone outside of Thomas Friedmanland knows that this is an issue of run-away health care costs. If the United States paid the same amount per person for our health care as people in Canada, Germany, or any other wealthy country we would be looking at huge budget surpluses, not deficits.

This means that if we fix the U.S. health care system, then there will be no Medicare or budget problem. On the other hand, if we fail to fix the system, health care costs will bankrupt the U.S. economy even if we eliminate Medicare and other public health care programs altogether. People know this outside of Thomas Friedmanland, but in Thomas Friedmanland, you get to just make things up.

Add a comment

The WSJ told readers:

"because the banking sector isn't large enough to hold more mortgages without expanding its deposit base, securitization markets are an integral part of any lending expansion."

The problem with this assertion is that one of the main reasons that the banking sector doesn't have a larger deposit base is that investors can buy government insured mortgage backed securities. If the government reduces or eliminates its role in this market, then investors will have to look for alternative places for their money, such as bank deposits. So, rather than filling an unavoidable gap in private financing in the mortgage market, the government is helping to create this gap.

Add a comment

The people who are betting trillions of dollars in financial markets have considerable confidence in the ability of the U.S. government to pays its debts, as demonstrated by the fact that the interest rate on 10-year Treasury bonds remain extraordinarily low. However a front page Washington Post article told readers that these actors are mistaken, actually the United States is, "a nation already mired in red ink."

Most newspapers would restrict such sweeping and unsupported assertions to the editorial pages, however the Washington Post has made debt reduction a crusade. It has little concern for standard journalistic practices in pressing this agenda.

Add a comment

That's what Washington Post readers must have been thinking when they saw Milbank's line:

"The truth is that there’s not much more that government can do to boost jobs in the short term."

Since this is so obviously counter-factual and there is nothing in the article to support the statement, one must assume that this is the sort of truth that gets passed on in the family that is never supposed to be subjected to critical evaluation. Of course as a practical matter, there is an enormous amount that the government can do to create jobs.

The government can spend money. People work for money, meaning that government spending will create jobs. The government can also have more tax cuts or credits. If these tax breaks go to low and moderate income people, then they will spend money. This will create jobs. The Federal Reserve Board can deliberately raise the rate of inflation, thereby lowering real interest rates and reducing debt burdens. This will also lead to more spending and more jobs. The government could also push down the value of the dollar which will increase net exports. This will also create more jobs.

And, the government could provide incentives to employers to shorten workweeks as an alternative to layoffs. The German government has used this practice so successfully that its unemployment rate is lower today than it was at the start of the downturn, even though its growth has been slower than in the U.S. Furthermore, this path can actually be done at the state level by the governors who are the focus on this article.

So, there is a great deal that the government can do to boost jobs in the short-term, contrary to what Mr. Milbank's parents apparently told him when he was growing up.

Add a comment

If you ever wondered why manufacturing employment has not done well over the last 15 years, President Clinton gave us part of the answer in a column giving advice on job creation [thanks hapa]. His 13th item on job creation is "Enforce Trade Laws," where he tells readers:

"We lost manufacturing jobs in every one of the eight years after I left office. One of the reasons is that enforcement of our trade laws dropped sharply. Contrary to popular belief, the World Trade Organization and our trade agreements do not require unilateral disarmament. They’re designed to increase the volume of two-way trade on terms that are mutually beneficial. My administration negotiated 300 trade agreements, but we enforced them, too. Enforcement dropped so much in the last decade because we borrowed more and more money from the countries that had big trade surpluses with us, especially China and Japan, to pay for government spending. Since they are now our bankers, it’s hard to be tough on their unfair trading practices. This happened because we abandoned the path of balanced budgets 10 years ago, choosing instead large tax cuts especially for higher-income people like me, along with two wars and the senior citizens’ drug benefit. In the history of our republic, it’s the first time we ever cut taxes while going to war."

Okay, we have some real serious confusion here from the former president. First, it is true that the economy lost manufacturing jobs in the eight years after President Clinton left office, but the job loss began in his last three years in office. Here are the numbers:

                               Change in Manufacturing Jobs

1998                         -140,000

1999                         -170,000

2000                         -99,000

 

It is true that the pace of job loss picked up after Clinton left office, but this was due first and foremost to the recession caused by the collapse of the stock bubble. Blaming President Bush for that downturn would be like blaming Obama for the Lehman crisis if it happened to occur in February of 2009 rather than September of 2008. The downturn caused by the collapse of the bubble was the result of President Clinton's team failure to try to rein in the bubble. As a result of the collapse of the stock bubble, the country had at the time the longest period without job growth since the Great Depression. It only began to create jobs again once the housing bubble began to fuel a construction and consumption boom.

Now for the other part of Clinton story:

"Enforcement dropped so much in the last decade because we borrowed more and more money from the countries that had big trade surpluses with us, especially China and Japan, to pay for government spending."

Actually, if President Clinton paid attention to economic data he would have noticed that not only were we losing manufacturing jobs during his last three years in office, but the trade deficit was soaring. The trade deficit grew from just over 1 percent of GDP in 1996 to over 4.0 percent of GDP by the 4th quarter of 2000. President Clinton's team must have been doing one heckuva job enforcing trade laws.

More importantly, the rest of his story makes no sense either. The United States borrows from China, Japan and other countries because of our trade deficit, not our budget deficit. We were borrowing huge amounts from Japan and China at the end of the Clinton presidency, but most of their loans went to buy stocks, private bonds, and mortgage backed securities, not government bonds. In fact, by the end of the Clinton presidency, because of the large trade deficit, the country was accruing debt to foreigners at a then record pace.

Anyone who thinks that this didn't matter because the foreigners were holding private assets and not government debt should realize that if they desired for some reason to own government debt, any day of the week they could sell their stock, bonds, or mortgage backed securities and buy government debt. The issue is indebtedness to foreigners and the potential drain on future income. It matters not at all whether the debt is on the public or private side.

This raises the final point, why did the trade deficit soar in the last years of the Clinton administration (aside from the fact that President Clinton apparently was not paying attention)? The answer is simple. The value of the dollar soared.

This was the result of Treasury Secretary Robert Rubin's high dollar policy. This was a rhetorical point when he first took over as Treasury secretary in 1995. He put the muscle of the IMF behind it in the East Asian bailouts of 1997. These bailouts forced the East Asian countries to repay debts in full. This could only be done by allowing the value of their currencies to plunge against the dollar, making their exports hyper-competitive.

Also, the IMF bailouts were considered so onerous by the rest of the developing world that every country that could decided it had to accumulate massive amounts of reserves to avoid ever being forced to turn to the IMF. This meant pushing down the value of their currencies against the dollar as well. In the late 90s, the normal flow of capital from rich countries to poor countries was reversed in a major way, with developing countries becoming massive lenders to the United States.

This was definitely bad policy, but it was President Clinton's policy, not President Bush's. The dollar actually depreciated moderately under President Bush. He certainly should have done more to push down its value, which would have corrected the imbalances built up in the Clinton years, but President Clinton has events seriously backward in this piece.

Add a comment

Robert Samuelson devoted his column today to the problem of structural unemployment. He tells us that many positions are going unfilled, in spite of the high rate of unemployment. In fact, according to the Bureau of Labor Statistics, the job opening rate is just 2.2 percent.

samuelson-btp-6-2011

Source: Bureau of Labor Statistics.

Since there will always be some time involved in replacing new workers, this rate can never fall to zero. If the rate were to fall to 1.7 percent, its low for this downturn, this would imply that another 650,000 of the 14 million unemployed would have jobs. It is also worth noting that it would be reasonable to expect that employers would be more choosy about their hires, therefore taking longer, in a period in which they face weak demand (and therefore have little urgency for new workers) and have many good workers to choose from.

In a context where the economy is strong and relatively few people are looking for work, employers would be expected to try to hire quickly since there will be little benefit to waiting for a better job candidate. However, in the current labor market, there is a strong likelihood that an employer can find a better candidate if they wait longer to hire. This fact would be expected to raise the number of job openings even if there is no reduction in the quality of the workforce.

It is also important to note that if there really is a serious problem of structural unemployment (firms are unable to find qualified workers for vacant positions) then there should be substantial sectors of the economy where wages are rising rapidly. It is difficult to identify any major sector where this is the case. Wages for workers at all education levels are at best just keeping pace with the rate of inflation.

This implies that if employers are really having trouble finding qualified workers then it is likely because they are offering wages that are below the market rate. The problem then is a lack of qualified employers, not a lack of qualified workers.

Add a comment

That's what readers must be thinking of an NYT piece on the changes Greece needs to make in order to restore economic growth. The piece never mentions the European Central Bank (ECB). 

The ECB is an incredibly important force, either promoting or constraining growth. It is currently doing the latter. It set its overnight interest rate at 1.25 percent. This is higher than the 1.0 percent rate set by the Fed from 2002 to 2004 when the U.S. economy was trying to recover from the stock market crash. It is generally expected to raise its rate further over the course of the year.

By contrast, if the ECB was interested in promoting growth in Greece and elsewhere in the euro zone, it could push its short-term rate to zero, like the Fed. It could also target a 3-4 percent inflation rate to reduce real interest rates further and lesson the debt burden on governments and households across the euro zone.

This path has been advocated in various contexts by Olivier Blanchard, the IMF's chief economist, Federal Reserve Board Chairman Ben Bernanke, and Nobel prize winning economist and NYT columnist Paul Krugman. Reporters who write about what is necessary for Greece to grow should be familiar with this argument.

Add a comment
That's what NYT readers must have been asking when they heard the Wall Street-backed group described by the NYT as a "unlikely ally" of business efforts to get a special tax concession that would allow them repatriate foreign profits at a near-zero tax rate. What is "unlikely" about a business-funded group supporting a tax break for business? Add a comment

The Post had a major front page article on the growth in inequality in the United States over the last three decades. While it is good to see the Post taking note of this enormously important development, the piece does manage to misrepresent some key points.

First, there has been new research that sheds additional light on the identity of the top earners, but we have long had a pretty good idea of who the big earners were. There are regular reports from Fortune and other sources on the pay of top executives at the major corporations. The growing gap between this pay and the pay of ordinary workers has long been noted in reports by my friends at the Economic Policy Institute and Institute for Policy Research and elsewhere. So telling us that many of the big earners are CEOs at major companies is not exactly news.

Neither is it news that many of the top earners are Wall Street types. There are news articles every year on the bonuses paid out at Goldman, Citigroup and the rest. We already knew that the financial sector accounted for a hugely disproportionate chunk of the top earners.

The other major flaw in this piece is its seeming willingness to accept the explanation that higher pay is explained by the growth of companies. First, this does not appear to have been the case in the 50s and 60s when the economy and many companies grew very rapidly, with no comparable explosion in pay at the top.

Second, the rise in pay for top executives far exceeds the growth of companies. While there has been some increase in concentration over the last three decades, it has not been nearly large enough to explain the rise in pay of top earners. Many of the huge companies of the 60s and 70s, for example General Motors and AT&T, have been seriously downsized relative to the size of the economy.

The increased size of companies could at best explain a small portion of the rise in executive pay and would not explain at all the huge gap between the pay for top executives at U.S. companies and the pay for top executives for large foreign corporations like Toyota or Volkswagon. These gaps are likely explained by the corruption of the corporate governance process in the United States where the CEOs get to largely decide the people who determine their pay. Stockholders are likely to exert more control elsewhere and thereby keep pay for top executives more in line with the market.

Add a comment

Readers of the Washington Post article on a meeting between a group of business leaders and President Obama's chief of staff William Daley must be wondering how the Post knew that the executives were "exasperated," as the Post told readers in the third paragraph. 

The Post told readers that the executives had complaints over environmental regulations and stalled "free-trade deals." (What the Post describes as a "free-trade deal" would be described as a "trade deal" by neutral reporters rather than advocates. These deals have little to do with creating free trade between the countries involved.)

Of course businesses will always want more profit and if they looking "exasperated" helps them get their way with a weak president and a gullible media, they will look as exasperated as possible. In reality, the profit share of income is at record highs, so environmental regulations of the Obama administration and the stalled trade deals are not having too much of a negative impact on the bottom line.

The article also described the May jobs report as "surprisingly glum." While it was glum, there was nothing surprising about it to people who follow the economy. There was considerable evidence of weakness in the economy and the labor market prior to the release of the report, most importantly a jump in the number of weekly unemployment claims to averages well above 400,000. This number of claims is inconsistent with strong job growth.

Add a comment

That is what readers of his column will undoubtedly conclude when they see him say that if President Obama agrees to a deal with large reductions in spending:

"Credit markets would find it reassuring that the federal government is not completely paralyzed."

Those who have access to information about credit markets know that they are already very reassured as demonstrated by their willingness to hold U.S. government debt at extremely low interest rates. The interest rate on 10-year Treasury bonds has been hovering near 3.0 percent. It is unlikely that any deal on the budget will lower this significantly or that any further reduction in rates would have a noticeable impact on the economy.

Add a comment

"Night is day," "slavery is freedom," okay David Brooks edited those lines out of his column on Fannie Mae today, but this is pretty much how the rest of it reads. He tells us that the economic crisis was the result of Fannie Mae pushing bad mortgages and buying off everyone who tried to stand in their way.

There's a small problem in this story. The worst junk mortgages that inflated the housing bubble to extraordinary levels were not bought and securitized by Fannie and Freddie, they were securitized by Citigroup, Merrill Lynch, Goldman Sachs, Lehman and the other private investment banks. These investment banks gobbled up the worst subprime and Alt-A garbage that sleaze operations like Ameriquest and Countrywide pushed on homebuyers.

The trillions of dollars that the geniuses at the private investment banks funneled into the housing market were the force that inflated the bubble to its 2006 peaks. Fannie and Freddie were followers in this story, jumping into the subprime and Alt-A market in 2005 to try to maintain market share. They were not the leaders.

Just to be clear, Fannie and Freddie were serious bad actors. They are both huge companies that do nothing else but deal with housing. It is incredible that they did not recognize the housing bubble and take steps to try to deflate it, and protect themselves, before it grew to such dangerous levels.

Suppose that Fannie and Freddie started demanding appraisals of rental values and refused to buy any mortgage where the ratio of sale price to annual rent was higher than 20. This action by itself likely would have shaken some sense into the housing market. I said this back in 2002, when I first warned of the housing bubble and predicted the collapse of Fannie and Freddie. I also frequently criticized Fannie and Freddie in public forums, including debates with their chief economists. Unlike Brooks, I wasn't worried about non-issues as economic disaster loomed on the horizon.

As much as Fannie and Freddie deserve blame for incompetence and corruption, no serious person can make them the main culprits in this story. The Wall Street crew made hundreds of billions on pushing fraudulent mortgages. Furthermore, if we had competent economists running the Fed, they would have been shooting at the housing bubble as early as 2002 also. This does not mean raising interest rates in an economy that was struggling to recover from the collapse of the stock bubble. (I'll say that again, since people have a hard time understanding "do not raise interest rates." The Fed should not have raised interest rates.)

If Greenspan had paid attention to the economy he would have had the Fed's staff devoted full-time to documenting the evidence for the housing bubble and he would have used every public appearance (e.g. congressional testimonies, public speeches, international forums) to warn of the risks posed by the housing bubble. He also would have used the Fed's full regulatory authority to police the mortgage issuing practices of the banks under its supervision. He also would have prodded other regulators to use increased scrutiny for the institutions under their control. (Greenspan was never shy about making suggestions to others.)

My guess is that these actions would have by themselves crashed the bubble and done so long before it grew to such dangerous levels. They would be essentially costless, so it is difficult to see why a vigilant Fed chair would not have followed this route.

It is difficult to believe that these actions would not have been sufficient to deflate the bubble. After all, the David Brooks of the world can ignore Dean Baker warning of the housing bubble, they cannot ignore the Fed chair issuing such warnings, backed up by endless Fed papers documenting the case.

It is incredible, that even after the collapse of the housing bubble has wrecked the economy and wiped out the life's savings of tens of millions of middle class and moderate income families (this loss of wealth is why people are not spending, it has little to do with "pessimism"), there is still so little effort to re-examine the fixation on homeownership in this country.

Why on earth is President Obama looking to push a renewed Fannie and Freddie type system? Does the public really need to subsidize mortgage interest rates through a government guarantee system, in addition to the mortgage interest deduction?

Brooks might devote some of his fire to these loonie schemes. He might also shoot at the whiners who think no one will issue a mortgage if they have to maintain a 5 percent stake in it. And, he might also call for some criminal investigations of the banks that pushed and securitized fraudulent mortgages. But none of this seems to fit Brooks' agenda.

 

Addendum:

I had occasion to quote from this 2006 Moody's assessment of Freddie Mac. It does a great job of putting Fannie and Freddie's subprime dealings in context:

Freddie Mac has long played a central role (shared with Fannie Mae) in the secondary mortgage market. In recent years, both housing GSEs have been losing share within the overall market due to the shifting nature of consumer preferences towards adjustable-rate loans and other hybrid products. For the first half of 2006, Fannie Mae and Freddie Mac captured about 44 percent of total origination volume -- up from a 41 percent share in 2005, but down from a 59 percent share in 2003. Moody’s would be concerned if Freddie Mac’s market share (i.e., mortgage portfolio plus securities as a percentage of conforming and non-conforming origination), which ranged between 18 and 23 percent between 1999 and the first half of 2006, declined below 15 percent. To buttress its market share, Freddie Mac has increased its purchases of private label securities. Moody’s notes that these purchases contribute to profitability, affordable housing goals, and market share in the short-term, but offer minimal benefit from a franchise building perspective. (p 6)

Add a comment