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 highlighting the latest Beat the Press posts.

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A front page Washington Post article told readers that: "The basic problem in Greece, and in the other struggling European countries, is that the government debts have grown as large, or nearly as large, as the gross domestic product, making the government's repayment difficult, if not impossible. The countries' imperiled finances, meanwhile, push up the rates at which they can borrow. (emphasis added)"

This is the sort of assertion that belongs on the editorial pages, not in a news story. There have been and are many countries with considerably higher ratios of debt to GDP than Greece than manage to borrow in financial markets without major problems. The more obvious problem with Greece is that it is in the euro.

This means that when it make budget cutbacks to reduce its deficit, it leads to large falls in domestic output. It has no ability to counteract these declines with expansionary monetary policy or a devaluation that will increase its net exports by making Greece more competitive. Greece's budget austerity therefore risks putting it in a downward spiral, where budget cutbacks further depress GDP, leading to a larger budget shortfall, requiring further cutbacks. Washington Post reporters should understand this situation.

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That is what readers of this election eve article must assume. The bubble and its collapse are not mentioned once in an article that tells readers how the citizens of the UK will have to sacrifice in the years ahead. Remarkably, one of the people who is cited as an authority on this topic is Mervyn King. Mr. King, as the head of the Bank of England is the person who is most responsible for the country's economic devastation. Like Alan Greenspan in the United States, King just sat back as the housing bubble in the UK grew to ever more dangerous levels. While the collapse and the resulting economic damage were totally predictable, Mr. King chose to do nothing to prevent this catastrophe.

The economic collapse following in the wake of the housing crash is the main source of the country's current fiscal problems, not profligate spending, as the piece implies.

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The NYT told readers that the White House is opposed to an amendment to the financial reform bill by Senator Bernie Sanders that calls for an audit of the Federal Reserve Board because they: " view it as an encroachment on the central bank’s traditional independence." While this may be the real reason that the White House opposes the bill, there may also be other motives. For example, it is possible that the Fed disbursed funds from its emergency facilities in ways that would be embarrassing if more widely known.

The NYT only knows that the White House says. It does not know its true motives. It should have simply told readers that the White House "claims" that it views an audit as interfering with the Fed's independence.

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Casey Mulligan is on the loose again. The notorious University of Chicago economist is arguing that there was no housing bubble in the NYT Economix section. The centerpiece of his argument is that inflation-adjusted house prices have not returned to their pre-bubble level. This means that the price rise must be driven by the fundamentals of the housing market rather than an irrational bubble.

It's hard to know where to begin on this one. I guess the first point would be that he is using the wrong series to find anything about the bubble. He is using the new house price series from the Census Bureau. This series controls for neither quality nor location. If the price of all homes doubled, but the price of new homes built further from city centers remained the same, this index would show no increase in prices. This is why almost everyone in this debate uses one of the repeat sales indices, such as the FHFA House Price Index or the Case Shiller national housing index.

Of course the good part of the story is that Mulligan's case would hold even more strongly with these indices (they are further above their pre-bubble level), but it is important that we at least look at the right picture. The NY Fed put out a paper back in 2004 claiming that there was no bubble, the only problem was that people like me were using the wrong price index.

But, let's get back to the issue at hand. House prices have certainly not deflated to their pre-bubble level. They are about 15-20 percent higher in real terms. Why is this the case?

I would point out three factors that may have escaped Professor Mulligan's attention. First, until last Friday the government had an $8,000 first time homebuyers tax credit. This is a bit less than 5 percent of the median house price. Even at the University of Chicago an $8,000 tax credit would be expected to have an upward effect on house prices.

The second factor is that we have had extraordinarily low mortgage interest rates. The weakness of the economy and the Fed's policy of buying $1.25 trillion in mortgage-backed securities pushed the 30-year mortgage rate below 5.0 percent. Interest rates are at their lowest levels since the early 50s. Again, even at the University of Chicago, low interest rates would be expected to have a positive effect on house prices. We might see a different picture if interest rates creep up to near 6.0 percent over the next year, as they are widely expected to do.

The third factor unusual affecting house prices in the last year was the expanded role of the Federal Housing Authority (FHA). The FHA guaranteed almost 30 percent of purchase mortgages in 2009. Many of these homebuyers would not have been able to get a mortgage without the government's support. Again, even at the University of Chicago they probably think that government guarantees for mortgages will have a positive effect on house prices. It is worth noting that the FHA is rapidly cutting back its role because it lost lots of money and is now below its minimum capital requirement.

Finally, real house prices are falling -- currently at a rate of between 0.5-1.0 percent a month. Economists generally do not expect to see instantaneous price adjustments, so it should not be surprising if it takes another year or two for house prices to get to a stable level, once the bubble has fully deflated. (Over-correction is a real risk.)

So, if anyone thought that the housing bubble would immediately deflate and bring prices back to their fundamental level -- in spite of massive efforts by the government to prop up prices -- then Professor Mulligan has the evidence to show that they were wrong. But for everyone else, this piece is probably not very enlightening.

 

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And they said it was impossible. The Post followed the NYT in calling for an independent agent to pick which credit rating agency will rate a company's issues. This is the obvious and simple way to fix the basic conflict of interest involved when the company pays the rater. If the company has no control over who gets hired, then the rating agency has no incentive to lie in its assessment.

Congress was running around in circles genuflecting over various non-solutions to this problem. However, in the last couple of weeks there seems to have been an outbreak of commonsense, no doubt fueled by a Krugman column pushing the idea. I also have been pushing this one for a while, although my megaphone is not as big.

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That is a question that the Post should have asked in an article that reported on the Obama administration's plan to set aside $5 billion to help cover the cost of employer provided health care benefits for retirees who are not yet 65 and eligible for Medicare. The article tells readers that there are 2 million retirees under age 65 who are currently receiving benefits from their employer.

Since this $5 billion is the total amount available for the three years from 2011 until 2014, it means that there will be just under $1.7 billion available per year, or less than $900 per retiree per year. Health care costs for people in this age group average well over $10,000 a year, which means that this money will cover on average less than 9 percent of costs.

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The NYT somehow thinks that when President Obama insists that he is going to “keep our boot on the throat of BP” that he is going against free market principles. This is 180 degrees at odds with reality. BP caused damage to hundreds of thousands of people, possibly millions, living in the gulf states. Under free market principles, they are supposed to compensate people for the damage that they have caused by their irresponsible conduct.

However, the "socialists" in Congress passed legislation that limited BP's damages to $75 million. This means that they ignored market principles and had the government step in and seize property from individuals and hand it to BP.

It would be good if the NYT and the rest of the media got the issues straight here. No one is arguing about a free market. We are arguing about whether a huge oil company can wreck people's lives with impunity. Conservatives are claiming that they can, but this reflects their belief that the government exists to redistribute wealth income upward, not out of any commitment to the free market.

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It is painful to see the ongoing coverage of the bank bailouts and the extent to which the government is being reimbursed. It is true that the banks have repaid the vast majority of the money that was lent. However, this is almost irrelevant to anything.

At the time the government made money available to the banks through TARP and even more so through the Fed, liquidity carried an enormous premium. The major banks charged each other 5 percent interest on 90 day loans because they did not have confidence in their ability to survive.

In this environment, the government stepped in and providing banks with huge amounts of money (we don't know exactly who got how much because the Fed refuses to tell us what it did with our money), at a cost far below what they would have been forced to pay in private markets. The banks could lend this money at enormous premiums or use it to just buy government bonds and pocket the difference in interest rates. As a result, most banks have been able to get back on their feet.

As a bookkeeping matter we can say that the government "profited" from these deals in the sense that it got interest on its loans. (It also received warrants from banks that it sold at a profit.) However, as a practical matter, these profits no more benefit the government's accounts than if the Federal Reserve Board just printed the same amount of money and handed it to the Treasury by purchasing government bonds. Unfortunately, few reporters covering the economy and the bailout understand this point, so they end up writing pieces that imply the country was somehow benefited by the fact that the banks repaid their loans with interest.

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The Washington Post devoted a major article to telling readers that banking industry lobbyists, most of whom are unnamed, are not happy with the financial reform bills being debated in Congress. At one point it tells readers they describe aspects of the legislation as "Draconian," "Crazy," and "Insanely unproductive," although it provides no information as to which lobbyists describe which components with these terms.

One unnamed lobbyist told readers that: "I think the worry is the stuff coming out of left field, the whack-job amendments,... It's limited only to the imagination of the senators." Again, it would have been helpful to have examples of what is considered a whack job amendment and by whom. It's good to know that at least some industry lobbyists are at unhappy with at least some parts of these bills, but without some specific content, this article really is not giving readers much information.

 

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The NYT reports on the difficulties that Spain is facing in the wake of the collapse of its housing bubble. Its unemployment rate has crossed 20 percent and is likely to head higher. Its budget deficit exceeds 8 percent of GDP and its credit rating has recently been downgraded by Standard & Poor's.

It would have been worth noting that the credit rating agencies and the speculators who now believe that Spain is facing severe financial stress thought that Spain's economy was in solid shape as its housing bubble was growing ever more out of line with fundamentals. It is also would have been worth mentioning that Spain was running budget surpluses prior to the collapse of its housing bubble. At the time, it was often held up as a success story by the people now criticizing its institutional structure.

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