Beat the Press is Dean Baker's commentary on economic reporting. He is a Senior Economist at the Center for Economic and Policy Research (CEPR). To never miss a post, subscribe to a weekly email roundup of Beat the Press.

Please also consider supporting the blog on Patreon.

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

ProPublica has a good piece on the dealings of Magnetar, one of the hedge funds that shorted the housing market, while at the same time taking a long position that it used to finance its short position. While the piece involves solid investigative reporting, it is more than a little oversold. The piece begins:

"In late 2005, the booming U.S. housing market seemed to be slowing. The Federal Reserve had begun raising interest rates. Subprime mortgage company shares were falling. Investors began to balk at buying complex mortgage securities. The housing bubble, which had propelled a historic growth in home prices, seemed poised to deflate. And if it had, the great financial crisis of 2008, which produced the Great Recession of 2008-09, might have come sooner and been less severe."

According to the article, Magnetar raised a total of $40 billion. This is equal to roughly 0.2 percent of the $20 trillion value of the housing market at the time. Did Magnetar's long investments help to prop up the market? Probably a bit, but it's hard to see it going too far. Furthermore, by last 2005 the bubble was already pretty close to its peak (that came in the summer of 2006), so it's unlikely that they could have pushed prices much higher than they would have otherwise gone, although it may have slowed the process of the air leaving the bubble. (Actually, a full assessment of its impact would have to factor in its short positions, which would have gone the other way.)

As a purely practical matter, business reporters like to focus on the financial crisis and blame it for the severity of the current downturn, but this really makes little sense. The financial crisis clearly sped things along, but is there any reason to believe that house prices would be higher today in the absence of the crisis. (I'm betting they will fall another 15-20 percent in real terms.) If house prices would be at current levels, is there any reason to believe that consumers would be spending more absent the crisis, that businesses would be investing more, that builders would be putting up more homes or malls? I see zero evidence on any of these fronts, hence I don't attribute the severity of the downturn to the financial crisis. But, I'm open to persuasion.

 

 

Add a comment
It seems that they don't. The Labor Department reported that there were 456,000 new claims for unemployment insurance benefits last week. The 4-week moving average was 460,250. Generally the economy will not be generating jobs if claims exceed 400,000. In the first 8 months of 2008, when the recession had already begun but before the financial crisis, claims averaged around 370,000 a week. Add a comment
It would have been reasonable to include some discussion of the economic impact of Senator Kent Conrad's plans to cut the budget deficit below the levels targeted by President Obama. The Post reports on the political implications of the budget committee's vote on a package that reduces the defiicit below the levels in President Obama's budget with additional cuts beginning in October, at point at which the unemployment rate is still likely to be close to 10.0 percent. Add a comment

That's what readers of a Washington Post article on the possibility of a default by Greece might be wondering. The Post told readers that:

"Other large nations, including the United States, that carry increasing levels of debt have worried that the Greek crisis could be a small-scale sketch of their own future. Sovereign debt is coming under increasing scrutiny by global markets, and many analysts fear that U.S. government bonds are not as attractive as they once were?

Of course "nations" cannot worry, only individuals within nations can worry, but the Post doesn't identify any who do. Nor does it identify the "analysts" who are finding U.S. government bonds less attractive. These analsysts are apparently offset by analysts who continue to view U.S. government debt as a very attractive asset since the yields on U.S. government bonds remain extremely low.

If there was an interest in making comparisons to Greece it would have been useful to remind readers that the United States government, unlike the Greek government, can print as much money as it wants to finance its debt during a period of economic weakness like the present. It also has a large diversified economy which is still largely self-sufficient, unlike Greece.

These differences make the comparisons to Greece highly inappropriate. While there may be people who make these comparisons as the Post claims, these unnamed individuals probably have little knowledge of economics.

Add a comment
The NYT reported on how the Senate's Permanent Subcommittee on Investigations was struggling to find ways to remove the inherent conflict of interest that arises when a bond rating agency is paid by the company for whom it is doing the rating. Actually, there is no need for much struggle here. If the selection of the rating agency was assigned to a neutral party, like the Securities and Exchange Commission or the stock exchange on which the company is listed, then the agency would have no incentive to tilt its report in favor of the company. It would have been appropriate to point out that there is a simple and obvious solution to this problem, but that that the Senate for some reason is not interested in pursuing it.
Add a comment

The Washington Post ran a news article complaining that value added taxes are not being taken more seriously in debates over the budget. (A value added tax is effectively a national sales tax that would impose taxes in proportion to consumption.) The first sentence complained that the lack of interest in this tax stemmed from the "hyperpartisan political atmosphere" in Washington.

"Hyperpartisan" is a peculiar term to use in the context of the deficit debate since it actually does not divide people closely along partisan lines. There are both people on the left and right who argue that concerns on the deficit have been hugely overblown. There are also many deficit hawks in both political parties. "Hyperpartisan" is a favorite term of the people connected with the Peter G. Peterson Foundation, but apart from this association, there is no obvious reason that it should appear in the budget debate.

Add a comment
The Washington Post reported on the restart of the Hamilton Project, a policy-oriented research project that is financed in large part by Robert Rubin. Mr. Rubin made $110 million in his decade as a top Citigroup executive. During his tenure Citigroup went from one of the largest and most profitable financial companies in the world to the edge of bankruptcy. It was only saved from bankruptcy in the fall of 2008 by tens of billions of taxpayer dollars and hundreds of billions of dollars of government guarantees. It would have been worth noting the questionable source of the project's funding in this piece. If a similar project had been launched by a coalition of labor unions, there is no doubt that the source of the funding would have been clearly noted in the piece. Add a comment

Okay, I don't know Paulson's exact role in the Goldman deal. If he helped to deliberately mislead investors about his own role, pretending to be long on a deal that he was actually betting against, then the SEC should hang him. But there was nothing at all wrong or anti-social about betting against the housing market near the peak of the bubble, as Tina Brown implied on this Morning Edition segment.

By that point, house prices had grown hugely out of line with the fundamentals of the housing market. This priced them out of the reach of millions of middle income people. The temporary run-up in prices also led tens of millions of homeowners to spend based on bubble wealth that would disappear when prices returned to more normal levels.

Betting against the bubble was not "ghoulish," as Tina Brown asserts, it was a public service. It was helping to return house prices to more normal levels. Of course this was not Paulson's motive, but it was a side effect of his bet.

Add a comment
To Toyota, it would be a big difference. The NYT told readers that: "Toyota also agreed to pay a $16.4 billion fine, one of the heaviest fines imposed on a car manufacturer in the United States, for concealing information related to the recall." The actual fine was $16.4 million. This is equal to approximately 0.1 percent of Toyota's profits in a normal year.
Add a comment

The NYT reports on the Fed handing $47.4 billion in profits to the Treasury. This event should have gotten more attention. The $47.4 billion in profits from the Fed affects the budget in the same way that raising $47.4 billion from taxes or saving $47.4 billion with spending cuts would affect the budget. However, the Fed neither raised taxes nor cut spending. It printed money.

The reason why this is important is that the Fed is now printing large amounts of money and can print more to support the government's deficit during this downturn. The government does not need to raise taxes or cut spending to pay for programs like unemployment benefits or aid to state to and local education. It can simply print money.

While in principle there is a limit to its ability to print money, that would only come after the economy was back near full employment and further increases in demand threatened to cause inflation. However, the economy is nowhere near this point today. Vincent Reinhart, an economist at the American Enterprise Institute, is quoted in the article as saying: "If it [the Fed] tried to increase its balance sheet tenfold, say, the public would be unwilling to hold those reserves. You’d get dollar depreciation and inflation."

A tenfold increase in the Fed's balance sheet would raise it by more than $20 trillion. As Reinhart's quote implies, there is no reason to fear moderate increases in the Fed's balance sheet -- say by another $1-2 trillion over the next few years. It is important to note that the portion of the debt financed by the Fed printing money imposes no burden on future generations. The interest paid on this debt goes to the Fed, which in turn is refunded to taxpayers, just like the $47.4 billion noted in this article.

The Peter Peterson/Robert Rubin deficit hawk gang is deceiving the public on this issue by implying that the deficits run up to support the economy through this downturn will burden our children. In fact, insofar as the spending provides their parents with jobs and income, it directly helps our children. Insofar as it goes to support education or maintain and improve the infrastructure, it will also help our children.

The idea that today's deficits are hurting our children is simply not true. Anyone who says otherwise should read this article as many times as necessary until they understand why.

Add a comment