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The tenth anniversary of the collapse of Lehman brought a flood of news stories on the financial crisis. The housing bubble, whose collapse precipitated the crisis, was only mentioned in the background if at all.

In keeping with the general tenor of the commentary, Brookings brought in former Fed chair Ben Bernanke to present a paper saying the story of the Great Recession really was the financial crisis. To my knowledge, they did not have anyone making the case for the bubble.

I won’t go through the whole story here since I just did a paper on the topic. (I’m happy to say Paul Krugman largely agrees with me.) Rather I will say why I think there is such an aversion to acknowledging the importance of the housing bubble to the Great Recession.

The first reason to discount the bubble is that acknowledging its importance in the Great Recession highlights the immense failure of public policy that led to this disaster. The point is that the bubbles, and especially bubbles that drive the economy, are easy to see.

After largely tracking the overall rate of inflation for 100 years, house prices began to hugely outstrip inflation in 1996. This run-up in house prices should have been hard to miss. It was reported in government data that were published quarterly. The fact that there was no corresponding increase in rents and that vacancy rates were rising through the bubble years should have been a serious warning that something wasn’t right in the housing market. The deterioration of mortgage quality in the later years of the bubble was a widespread joke among people in the real estate business.

It should also have been easy to see that the bubble was driving the economy. Residential investment went from an average of less than 4.5 percent of GDP in the prior two decades to a peak of 6.8 percent of GDP in 2005. This is the GDP data that are published quarterly. How does an economist not notice this?

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Paul Krugman is on the money in his analysis of Trump's trade policy. The issue is not just that he is using tariffs. Tariffs can sometimes be useful tools, either to pressure a trading partner to change their practices or, in some cases, to support an industry in need of breathing space.

But no such logic can be applied to Trump's tariffs. He is angry at Canada and China for reasons that have never been clearly stated and seem to change daily.

He also doesn't seem to understand the most basic logic of tariffs. He is not imposing taxes on Canada and China, he is imposing taxes on US consumers. If he carries through with all his threatened tariffs, the bill for a typical household will be in the neighborhood of $600 a year. That is a pretty good size tax increase. 

But it gets worse. As several news articles have pointed out, Trump is exempting his friends from the tariffs that are being applied to their competitors. This is pretty much the dictionary definition of crony capitalism. Trump is using the government's trade policy to punish people he doesn't like, both foreign and domestic, and benefit the people who support him politically.

The amazing part of this story is that Trump doesn't even seem to see anything wrong with this practice. Having been brought up a spoiled rich kid, he never had to pay any attention to rules or think about the consequences of his actions.

He pretty much said exactly this in his complaint about not having an attorney general. While Attorney General Jeff Sessions has followed Trump's policies in a wide range of areas, such as not enforcing civil rights laws and arresting immigrants applying for asylum, he is not doing what Trump wants his attorney general to do.

Based on his tweets, Trump considers it the attorney general's job to protect him and his friends from criminal prosecution and to use the Justice Department to harass his political enemies. Sessions has instead allowed the professional staff in the Justice Department, including the special prosecutor, to determine who should be investigated and which charges should be filed.

There is no reason to think Trump views trade policy any differently than he does the Justice Department. When someone gets him angry, he wants to be able to slap a tariff on them. If he wants to help his political backers, he gives them special exemptions.

There is no policy here, that would require far more thought than we have ever seen from this president. It's just a spoiled child punishing his enemies and helping his friends.

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The Washington Post had a piece on how Trump's tariffs on goods produced in China is promoting unauthorized copies of many fashion items. The reason is that his 10 percent tariff is hitting the brand products, but the unauthorized copies are often smuggled in and escape the tariff. This increases the price differential by 10 percent of the brand product price, giving people more incentive to buy the unauthorized copy. Since these companies depend on brand loyalty, the impact could be lasting if many buyers decide that they are just as happy with an unauthorized product that may cost a small fraction of the price of the brand product.

This piece is sloppy in repeatedly referring to the unauthorized copies as "counterfeits." If the product is a true counterfeit than it is being sold as the brand product. In that case, the customer is being deceived and paying a higher price to get something they are not getting.

That does not seem to be the case with these products. People buy them knowing that they are not the brand product, but they willingly do so to save the money.

This is not just a semantic distinction. Since the customer is being deceived by an actual counterfeit, they would be allies in cracking down on sellers. On the other hand, they benefit from being able to buy an unauthorized copy since they pay considerably less than they would for the brand product.

This is a simple distinction which reporters should be able to make in covering issues like this. 

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The NYT erred badly with an article that told readers, "China Once Looked Tough on Trade: Now Its Options Are Dwindling." The article claims that China is running out of ways to retaliate against Trump's tariffs because it imports so much less from the United States than the United States imports from China. In fact, China has many other ways to retaliate.

The most effective would probably be to stop paying attention to patent and copyright claims of US corporations. It can encourage domestic Chinese companies to make millions of copies of Windows-based computers, without paying a penny to Microsoft. It can do the same with iPhones and Apple. In fact, it can encourage Chinese companies to export these unauthorized copies all over the world, destroying Microsoft's and Apple's markets in third countries.

It can do the same with fertilizers and pesticides, making Monsanto and other chemical giants unhappy. And, it can do this with Pfizer and Merck's drugs, flooding the world with low-cost generic drugs. Even a short period of generic availability may do permanent damage to these companies' markets.

There are many other things that China's government can do to harm US corporate interests, such as making it difficult for companies like General Motors to sell in the Chinese market. US companies would be extremely unhappy about being locked out of the biggest market in the world.

In short, the NYT really missed the boat on this one. China has many, many options that it can pursue in its trade war which would have devastating consequences for US corporations.

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I usually have a policy of not using this blog to comment on pieces that cite me or someone else at CEPR, but I will make a brief exception in the case of this Heather Long piece on deficits and debt in the Washington Post. The point I had hoped to make, which is a view shared by left-Keynesians, is that debt or deficits are a problem when they generate too much demand in the economy. In that situation, we either have a problem with inflation or alternatively, the Federal Reserve Board has to jack up interest rates to head off inflation. The latter leads to the classic crowding out story, where we see less public and private investment, as well as a rising trade deficit due to a higher valued dollar.

This is clearly not a problem today, as inflation remains below the Fed's 2.0 percent target by its measure of the core personal consumption expenditure deflator. While it could get to be a problem in the future, inflation had consistently run well below its projected rates. Until we start to see inflationary pressures in the economy, it is hard to see how deficits can be a problem.

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Former New England Journal of Medicine editor Marcia Angell had an op-ed in the NYT explaining how efforts to increase transparency had not ended the corrupting influence of money on medical research. Her piece describes various ways in which the researchers who get money from drug companies bend research to favor their benefactors.

While Dr. Angell suggests some reforms, there is an obvious one that is overlooked: take the money out. Drug companies have incentives to bend research findings because patent monopolies allow them to sell their drugs at prices that are several thousand percent above the free market price.

As every good economist knows, when the government puts in an artificial barrier that raises prices above the free market price it is creating an incentive for corruption. However, they are usually thinking about gaps like those created by Trump's 10 or 25 percent tariffs that are supposed to punish our trading partners.

They usually don't think about the corruption from patent monopolies that allow drug companies to sell drugs for tens of thousands of dollars that would sell for a few hundred dollars as a generic. But the same principle applies, with the incentives for corruption being proportionately larger.

The economist's remedy would be the same in both cases: get rid of the artificial barrier. We could do this by paying for drug research upfront and make all findings fully public and place all patents in the public domain (discussed here and in Rigged Chapter 5). This would allow all new drugs to be sold at generic prices. There would then be no more incentive to make payoffs to doctors to help promote drugs.

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Robert Samuelson gets it wrong yet again. In talking about the economic downturn following the collapse of the housing bubble, Samuelson tells readers:

"Home buyers had paid too much on the (false) assumption that prices would rise indefinitely. As real estate valuations crested in 2006, homeowners had to divert more of their income to repaying their mortgages and home-equity loans. Other consumer spending suffered."

Folks who have access to the data on the Commerce Department's website know that the problem was not that spending fell below normal in the crash, the problem is that spending was way above normal in the bubble years. The Fed somehow failed to notice the consumption boom that accompanied the construction boom, both of which were destined to end when the bubble deflated.

One other point that makes this assertion by Samuelson even more obviously wrong is that the massive wave of defaults that began in 2006 and picked up speed in 2007, 2008, and 2009 freed up hundreds of billions of dollars that would have otherwise gone to mortgage payments.

It is also worth correcting a couple of points on the bank bailouts. First, the Federal Deposit Insurance Corporation, which did not exist at the start of the Great Depression, could have kept the banks operating and ensured that the ATMs were working even if there had not been a bailout.

The second point is that, contrary to what was claimed at the time, the government held all the cards in setting the terms of the bailout. It could have, for example, required that any banks receiving money have a plan to downsize themselves over a five-year horizon so that none of their components were too big to fail. It could have made a condition of receiving bailout money that no bank employee will earn more than $500,000 a year in total compensation.

Since the banks were bankrupt, as Bernanke now argues, the executives would have had no legal option except to agree to these terms. (They have to act in the interest of their shareholders.) The bailout crew wanted to give the money with no conditions.

In terms of the hostility prompted by the bailout, if Timothy Geithner ever reads his autobiography, he will discover that he dismisses demands to help underwater homeowners by saying that many bought bigger homes than they could afford. By contrast, he dismisses critics of the bank bailouts as "old testament types." It is perhaps worth noting in this context that Mr. Geithner now works as a top executive of a private equity company where he almost certainly earns several million dollars a year, and quite possibly more than $10 million.

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This NYT piece is so confused it is difficult to know where to begin. It starts with student debt. Student debt is a serious burden for many recent grads and even more so for people who did not graduate. But how does it lead to a financial crisis? As the piece notes, most of the debt is owed to the government. Also, defaults won't lead to the value of the underlying asset (earnings) spiraling downward.

Then we get corporate debt. Yes, this is high, but debt service as a share of corporate profits is low. That is the relevant variable. Yes, this can rise as interest rates rise, but not very rapidly. Many companies took advantage of extraordinarily low interest rates to borrow long-term. Also, even when companies find themselves in trouble meeting their obligations, they can sell off stock or assets. It's rare that investors take a complete bath on corporate debt.

Then we have junk bonds. Yes, investors are probably underpricing risk. Will this lead to a financial crisis? See the previous paragraph.

The piece then goes to emerging market debt. Here also investors likely underpriced risk. Could be bad news for many investors and people living in places like Turkey and Argentina. It's not a financial crisis.

Finally, we get to the growing share of mortgages being issued by non-bank institutions. This should raise concerns about lending behavior and possible abusive practices by less-regulated lenders. Absent a bubble, it is not the basis for a financial crisis.

I talk about these issues briefly in my paper on the 10th anniversary of the collapse of Lehman.

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Well, they couldn't see the housing bubble in 2007, why should they be able to see it today? It's sort of like reporting on the rain in North Carolina without mentioning Hurricane Florence. I guess the stories about the problems in getting qualified workers are accurate.

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According to the Washington Post, Donald Trump thinks he is winning his trade war with China because of the decline in its stock market. Its stock market has declined 23 percent this year. If Trump thinks he is hurting China's economy because of this decline in its stock market he is even more ill-informed than is generally believed.

People often err in thinking that the stock market is a gauge of US economic performance. In principle, it is a measure of the future profits of US corporations. A shift of income from wages to profits, or a cut in corporate taxes (like what the Republicans passed), would be expected to boost the stock market even though this is just a redistribution from the rest of the country to US corporations. In addition, the stock market is highly erratic, as investors can get carried away by irrational exuberance as happened in the 1990s bubble.

The Chinese stock market is even more erratic. For example, it lost almost 50 percent of its value from June of 2015 to February of 2016. This was a period when its economy was growing at almost a 7.0 percent annual rate. While China's growth data should be viewed with some skepticism, there is little doubt that the country maintained healthy growth through this period. 

If Trump is using relative stock market performance as the gauge of his success in the trade war with China, he is even more deluded than usual.

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