Robert Samuelson takes on the collapse of Lehman a decade ago and assesses the argument of Larry Ball that the Fed could have bailed out Lehman. He ends up siding with Bernanke–Paulson and says the Fed would have taken big losses if it bailed out Lehman. He also says we would have seen the financial crisis anyhow.
There are three points worth making here. First, the claim that the Fed lacked the legal authority to bail out Lehman is absurd on its face. The Fed was doing lots of things at that point on questionable legal authority. It was operating in uncharted grounds.
But, whether or not a bailout out of Lehman would have been fully lawful, the more practical question is: Who would have stopped them? Who would have filed a suit to prevent the Fed from bailing out Lehman? Is it plausible that a court would grant standing and then tell the Fed that it had to let Lehman go bankrupt? That one is absurd on its face. Letting Lehman go bankrupt was a choice.
The second point is that the Fed need not have taken losses on a bailout. Regardless of the value of Lehman’s assets at the time, there is a simple logic that the bailouts should have taught everyone. If you make massive loans to banks at below-market rates for a long enough period of time, and also give them a Timothy Geithner “no more Lehmans” guarantee, so that others will also make loans, any bank will eventually return to solvency.
This was the story of Citigroup, AIG, and Bank of America, all of whom were effectively bankrupt in the fall of 2008. In each case, the Fed set up special lending facilities to bring them back to life. Do the arithmetic. If banks get $500 billion in loans at 4–5 percentage points below the market rate (that’s being generous, since the market rate for an effectively bankrupt bank in the middle of a financial crisis is going to be very high), then they can make $20 to $25 billion a year in profit lending at the market rate. Given two or three years, you can patch up a pretty big hole.
Certainly, the Fed could have done this with Lehman, say a Maiden Lane 4. Then Lehman would repay the loan, including the below market rate interest, and Timothy Geithner would have another success story where he could boast about how we actually made money on the bailout. And, the vast majority of the media would agree with him.
The third point is that we would have had the economic crisis anyhow, even if Lehman had been bailed out. Nationwide house prices were falling at a rate of close to 2.0 percent a month, even before Lehman. The bubble was deflating and there was nothing to stop it. This meant that the bubble-driven construction boom was going to end, costing more than 2.0 percentage points ($400 billion a year in today’s economy) in lost demand.
We also were losing the consumption boom driven by the housing wealth effect. This would cost us another 2 percentage points of GDP or so in lost demand. A loss of 4 percentage points of GDP in annual demand ($800 billion) is going to lead to a bad recession even if the financial system is operating perfectly.
Robert Samuelson takes on the collapse of Lehman a decade ago and assesses the argument of Larry Ball that the Fed could have bailed out Lehman. He ends up siding with Bernanke–Paulson and says the Fed would have taken big losses if it bailed out Lehman. He also says we would have seen the financial crisis anyhow.
There are three points worth making here. First, the claim that the Fed lacked the legal authority to bail out Lehman is absurd on its face. The Fed was doing lots of things at that point on questionable legal authority. It was operating in uncharted grounds.
But, whether or not a bailout out of Lehman would have been fully lawful, the more practical question is: Who would have stopped them? Who would have filed a suit to prevent the Fed from bailing out Lehman? Is it plausible that a court would grant standing and then tell the Fed that it had to let Lehman go bankrupt? That one is absurd on its face. Letting Lehman go bankrupt was a choice.
The second point is that the Fed need not have taken losses on a bailout. Regardless of the value of Lehman’s assets at the time, there is a simple logic that the bailouts should have taught everyone. If you make massive loans to banks at below-market rates for a long enough period of time, and also give them a Timothy Geithner “no more Lehmans” guarantee, so that others will also make loans, any bank will eventually return to solvency.
This was the story of Citigroup, AIG, and Bank of America, all of whom were effectively bankrupt in the fall of 2008. In each case, the Fed set up special lending facilities to bring them back to life. Do the arithmetic. If banks get $500 billion in loans at 4–5 percentage points below the market rate (that’s being generous, since the market rate for an effectively bankrupt bank in the middle of a financial crisis is going to be very high), then they can make $20 to $25 billion a year in profit lending at the market rate. Given two or three years, you can patch up a pretty big hole.
Certainly, the Fed could have done this with Lehman, say a Maiden Lane 4. Then Lehman would repay the loan, including the below market rate interest, and Timothy Geithner would have another success story where he could boast about how we actually made money on the bailout. And, the vast majority of the media would agree with him.
The third point is that we would have had the economic crisis anyhow, even if Lehman had been bailed out. Nationwide house prices were falling at a rate of close to 2.0 percent a month, even before Lehman. The bubble was deflating and there was nothing to stop it. This meant that the bubble-driven construction boom was going to end, costing more than 2.0 percentage points ($400 billion a year in today’s economy) in lost demand.
We also were losing the consumption boom driven by the housing wealth effect. This would cost us another 2 percentage points of GDP or so in lost demand. A loss of 4 percentage points of GDP in annual demand ($800 billion) is going to lead to a bad recession even if the financial system is operating perfectly.
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This is a truly incredible story. The Chicago police cooperated with Norfolk Southern Railroad in putting a truck filled with Nike shoes in a low-income largely black neighborhood. When kids from the neighborhood saw the truck and came to take shoes they were arrested for burglary.
In a city with a sky-high murder rate, this is a great use of the police’s resources. It is also a great way to establish good relations with the community.
Since baiting people is apparently in style with law enforcement these days, how about putting together some clearly fraudulent securities, like the subprime mortgage-backed securities marketed by the investment banks in the housing bubble years, and see how many of the Wall Street folks will look to sell them? We can get them on camera and put them away for a long time.
I wonder why no one ever tries anything like this…
This is a truly incredible story. The Chicago police cooperated with Norfolk Southern Railroad in putting a truck filled with Nike shoes in a low-income largely black neighborhood. When kids from the neighborhood saw the truck and came to take shoes they were arrested for burglary.
In a city with a sky-high murder rate, this is a great use of the police’s resources. It is also a great way to establish good relations with the community.
Since baiting people is apparently in style with law enforcement these days, how about putting together some clearly fraudulent securities, like the subprime mortgage-backed securities marketed by the investment banks in the housing bubble years, and see how many of the Wall Street folks will look to sell them? We can get them on camera and put them away for a long time.
I wonder why no one ever tries anything like this…
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The NYT had a major editorial arguing against the rush by Republicans (and some Democrats) to selectively deregulate the financial sector. (It is important to note that the industry doesn’t want to eliminate government protections that benefit it, like deposit insurance or the Fed’s support in a crisis.) The gist of the piece is that we are lurching towards another 2008–09 financial crisis. (It is titled “inviting the next financial crisis.”)
The highlight of this argument is the high value of the stock market:
“Consider the stock market, which has shot up after the tax cut was enacted; the S.&P. 500 stock index closed at a new high on Friday. Many analysts argue that the market is not overvalued and has room to run — comments eerily similar to what Wall Street’s salesmen were saying in 2007 and 2008. Yet, the market appears to be more overvalued now than it was before the crisis, according to an indicator created by Robert Shiller, the Yale economist who won a Nobel Prize for his work on bubbles in the stock and real estate markets. His data show that the S.&.P 500 stock index has an adjusted price-to-earnings ratio of 32.29, which indicates that investors are willing to pay $32.29 for $1 of corporate profits. In 2007 and 2008, that ratio never reached 28.”
There are two big problems with this story. The first is that Shiller “adjusted price-to-earnings” ratio is probably not a good guide right now. The 10-year look back period includes the very low profit years of the recession. It also doesn’t pick up the fact that profits have jumped around 15 percent this year because of the tax cut.
It would be great news if Congress were to repeal the tax cut, it is not leading to the promised boom in investment, but that doesn’t seem likely any time soon. It also would be great if profits were eroded due to wage gains. This has been happening to some extent over the last four years, but very slowly. The ratio of stock prices to current earnings is less than 19. That is somewhat above the historic average, which is less than 15, but not hugely out of line, especially in a low interest rate environment.
The other problem with this scare story is that nothing terrible happens if the stock market falls 20–30 percent. We got a recession in 2001 from the bubble bursting because it had led to an investment boom and a consumption boom. That is not true today as both investment and consumption are at very moderate levels. There would likely be little economic fallout from even a large decline in the stock market and it would drastically reduce wealth inequality.
This doesn’t mean the NYT is wrong about the Republicans’ regulatory changes. They will increase economic waste and redistribute income upward. The financial sector is providing an intermediate good. It allocates capital. It is not a good like education or housing where we, in principle, want more. We would like the financial sector to be as small as possible to serve its economic purpose. The Republican agenda will lead to a more bloated financial sector.
However, the idea of the next crisis being around the corner shows that the NYT still has not learned the lesson of the last crisis. A major crisis like the crash in 2008–09 does not just sneak up on us. It was the result of policymakers at the Fed and elsewhere ignoring evidence that was almost impossible to miss about the growth of the housing bubble and the impact it was having on the economy.
It is convenient for many people to act as though this was difficult to see at the time. It is not true.
The NYT had a major editorial arguing against the rush by Republicans (and some Democrats) to selectively deregulate the financial sector. (It is important to note that the industry doesn’t want to eliminate government protections that benefit it, like deposit insurance or the Fed’s support in a crisis.) The gist of the piece is that we are lurching towards another 2008–09 financial crisis. (It is titled “inviting the next financial crisis.”)
The highlight of this argument is the high value of the stock market:
“Consider the stock market, which has shot up after the tax cut was enacted; the S.&P. 500 stock index closed at a new high on Friday. Many analysts argue that the market is not overvalued and has room to run — comments eerily similar to what Wall Street’s salesmen were saying in 2007 and 2008. Yet, the market appears to be more overvalued now than it was before the crisis, according to an indicator created by Robert Shiller, the Yale economist who won a Nobel Prize for his work on bubbles in the stock and real estate markets. His data show that the S.&.P 500 stock index has an adjusted price-to-earnings ratio of 32.29, which indicates that investors are willing to pay $32.29 for $1 of corporate profits. In 2007 and 2008, that ratio never reached 28.”
There are two big problems with this story. The first is that Shiller “adjusted price-to-earnings” ratio is probably not a good guide right now. The 10-year look back period includes the very low profit years of the recession. It also doesn’t pick up the fact that profits have jumped around 15 percent this year because of the tax cut.
It would be great news if Congress were to repeal the tax cut, it is not leading to the promised boom in investment, but that doesn’t seem likely any time soon. It also would be great if profits were eroded due to wage gains. This has been happening to some extent over the last four years, but very slowly. The ratio of stock prices to current earnings is less than 19. That is somewhat above the historic average, which is less than 15, but not hugely out of line, especially in a low interest rate environment.
The other problem with this scare story is that nothing terrible happens if the stock market falls 20–30 percent. We got a recession in 2001 from the bubble bursting because it had led to an investment boom and a consumption boom. That is not true today as both investment and consumption are at very moderate levels. There would likely be little economic fallout from even a large decline in the stock market and it would drastically reduce wealth inequality.
This doesn’t mean the NYT is wrong about the Republicans’ regulatory changes. They will increase economic waste and redistribute income upward. The financial sector is providing an intermediate good. It allocates capital. It is not a good like education or housing where we, in principle, want more. We would like the financial sector to be as small as possible to serve its economic purpose. The Republican agenda will lead to a more bloated financial sector.
However, the idea of the next crisis being around the corner shows that the NYT still has not learned the lesson of the last crisis. A major crisis like the crash in 2008–09 does not just sneak up on us. It was the result of policymakers at the Fed and elsewhere ignoring evidence that was almost impossible to miss about the growth of the housing bubble and the impact it was having on the economy.
It is convenient for many people to act as though this was difficult to see at the time. It is not true.
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The headline of an NYT article on the Trump administration’s plan to overhaul the Jobs Corps program told readers that the program cost $1.7 billion. Since almost none of the NYT’s readers has any idea of the size of the federal budget, this headline was really providing no information whatsoever.
In fact, since $1.7 billion is a very large amount of money to people who are not Bill Gates or Jeff Bezos, it likely misled many readers into believing that this program is a major expenditure for the federal government. In fact, the program comes to roughly 0.04 percent of total federal spending. The fact that it is not a large share of the budget is not a reason to support a program that is wasteful or to not try to have it run better, but it is wrong to think that the federal government has a major commitment to job training or that such spending is a big part of people’s tax bills.
Addendum:
As was pointed out to me, this piece also includes some serious mind reading. We are told, “Progressives see it as an enduring commitment to the poor rooted in a golden age of liberalism. Conservative lawmakers support Job Corps because it encourages low-income young people to work hard.” It would be simple enough to say that the program enjoys support across the political spectrum, noting that progressives “say” they value the commitment to the poor, while conservatives “say” they like the fact that it encourages hard work.
As the piece points out, the actual payments are made to contractors, many of whom are politically connected. This is a plausible alternative explanation for support.
The headline of an NYT article on the Trump administration’s plan to overhaul the Jobs Corps program told readers that the program cost $1.7 billion. Since almost none of the NYT’s readers has any idea of the size of the federal budget, this headline was really providing no information whatsoever.
In fact, since $1.7 billion is a very large amount of money to people who are not Bill Gates or Jeff Bezos, it likely misled many readers into believing that this program is a major expenditure for the federal government. In fact, the program comes to roughly 0.04 percent of total federal spending. The fact that it is not a large share of the budget is not a reason to support a program that is wasteful or to not try to have it run better, but it is wrong to think that the federal government has a major commitment to job training or that such spending is a big part of people’s tax bills.
Addendum:
As was pointed out to me, this piece also includes some serious mind reading. We are told, “Progressives see it as an enduring commitment to the poor rooted in a golden age of liberalism. Conservative lawmakers support Job Corps because it encourages low-income young people to work hard.” It would be simple enough to say that the program enjoys support across the political spectrum, noting that progressives “say” they value the commitment to the poor, while conservatives “say” they like the fact that it encourages hard work.
As the piece points out, the actual payments are made to contractors, many of whom are politically connected. This is a plausible alternative explanation for support.
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As we know, Donald Trump is not very good with numbers. He gave more evidence of this fact when he told a campaign rally in West Virginia:
“When I came, we were heading in a certain direction that was going to allow China to be bigger than us in a very short period of time …That’s not going to happen anymore.”
Actually, China’s economy is already considerably bigger than the US economy. Using the purchasing power parity measure, which is recommended by most economists and the CIA World Factbook, China’s economy is already more than 25 percent larger than the US economy. It is also worth noting that there are no growth projections from any remotely reputable source that show the US economy growing more rapidly than China’s economy.
As we know, Donald Trump is not very good with numbers. He gave more evidence of this fact when he told a campaign rally in West Virginia:
“When I came, we were heading in a certain direction that was going to allow China to be bigger than us in a very short period of time …That’s not going to happen anymore.”
Actually, China’s economy is already considerably bigger than the US economy. Using the purchasing power parity measure, which is recommended by most economists and the CIA World Factbook, China’s economy is already more than 25 percent larger than the US economy. It is also worth noting that there are no growth projections from any remotely reputable source that show the US economy growing more rapidly than China’s economy.
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That’s apparently a big concern of the Chinese government, at least according to this NYT article. An inadequate supply of housing has also led to high rents, according to the article. This is yet another reason for the government to be concerned about a declining population.
That’s apparently a big concern of the Chinese government, at least according to this NYT article. An inadequate supply of housing has also led to high rents, according to the article. This is yet another reason for the government to be concerned about a declining population.
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This is one of the main items in a Washington Post article on the Maryland crab industry. While the gist of the piece is that many of the crab packagers on Maryland’s eastern shore are struggling because they can’t get enough workers as a result of a reduction in the number H2-B visas available, the piece says that the crabbers have increased wages in order to attract more workers.
If the point of the limiting immigration in this sector was to raise wages, then the limits seem to have been successful, according to the evidence presented in the piece. It is entirely possible that some crabbers will go out of business as a result. That is the way capitalism works. Businesses that can’t make a profit paying the prevailing wage go under. This is the reason that the country has only a tiny fraction of the number of family farms that it did a century ago.
This is one of the main items in a Washington Post article on the Maryland crab industry. While the gist of the piece is that many of the crab packagers on Maryland’s eastern shore are struggling because they can’t get enough workers as a result of a reduction in the number H2-B visas available, the piece says that the crabbers have increased wages in order to attract more workers.
If the point of the limiting immigration in this sector was to raise wages, then the limits seem to have been successful, according to the evidence presented in the piece. It is entirely possible that some crabbers will go out of business as a result. That is the way capitalism works. Businesses that can’t make a profit paying the prevailing wage go under. This is the reason that the country has only a tiny fraction of the number of family farms that it did a century ago.
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A Washington Post article on Republican politicians’ apparent willingness to accept Donald Trump’s racist comments told readers:
“Trump and his allies frequently counter by offering economic data that they say is favorable to minorities, seeking to separate Trump’s harsh rhetoric from his policy agenda.”
This comment implies that Trump’s policy agenda has somehow been helpful to blacks and other minorities. It is true that the economy has continued to grow during the Trump administration. It has also generated jobs and had a falling unemployment rate, although at a somewhat less rapid pace than at the end of the Obama administration. And a tight labor market does disproportionately benefit blacks and other minorities.
But it doesn’t follow that these gains have anything to do with Trump’s policies. Unless he deliberately tried to derail the economy it would have continued to create jobs in the last year and a half. Furthermore, almost all his economic policies, starting with his tax cuts, have disproportionately benefited the rich, who are overwhelmingly white. In his policy agenda, Trump has pushed proposals that will make it harder for minorities to get into college, to buy homes, and to get non-predatory loans.
For this reason, it is highly inaccurate for the Post to imply that minorities have benefited from the Trump policy agenda. They have benefited from a strong economy in spite of Trump’s policy agenda.
A Washington Post article on Republican politicians’ apparent willingness to accept Donald Trump’s racist comments told readers:
“Trump and his allies frequently counter by offering economic data that they say is favorable to minorities, seeking to separate Trump’s harsh rhetoric from his policy agenda.”
This comment implies that Trump’s policy agenda has somehow been helpful to blacks and other minorities. It is true that the economy has continued to grow during the Trump administration. It has also generated jobs and had a falling unemployment rate, although at a somewhat less rapid pace than at the end of the Obama administration. And a tight labor market does disproportionately benefit blacks and other minorities.
But it doesn’t follow that these gains have anything to do with Trump’s policies. Unless he deliberately tried to derail the economy it would have continued to create jobs in the last year and a half. Furthermore, almost all his economic policies, starting with his tax cuts, have disproportionately benefited the rich, who are overwhelmingly white. In his policy agenda, Trump has pushed proposals that will make it harder for minorities to get into college, to buy homes, and to get non-predatory loans.
For this reason, it is highly inaccurate for the Post to imply that minorities have benefited from the Trump policy agenda. They have benefited from a strong economy in spite of Trump’s policy agenda.
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The textbook story of why the Trump tax cut would be bad for the economy is that it would lead to higher interest rates, which would discourage investment and construction. (It should also lead to a rise in the dollar against foreign currency, which increases the size of the trade deficit.)
Given the textbook story, it would have been reasonable to expect that the weak housing start data reported by the Commerce Department on Thursday would get some attention. While the Wall Street Journal was on the job, both The New York Times and The Washington Post seem to have ignored the numbers.
The basic story is that July starts were up slightly from June, but still 1.4 percent below year-ago levels. The monthly data are erratic, but over the last three months, starts have averaged 1,215,000 at an annual rate. That compares to an annual rate of 1,317,000 in the first three months of the year.
While this drop is not a disastrous falloff, it does mean that folks who were hoping that increased supply would put downward pressure on housing costs are likely to be disappointed. I know it’s summer, but it would have been worth finding someone to take a few minutes to write up the July data.
The textbook story of why the Trump tax cut would be bad for the economy is that it would lead to higher interest rates, which would discourage investment and construction. (It should also lead to a rise in the dollar against foreign currency, which increases the size of the trade deficit.)
Given the textbook story, it would have been reasonable to expect that the weak housing start data reported by the Commerce Department on Thursday would get some attention. While the Wall Street Journal was on the job, both The New York Times and The Washington Post seem to have ignored the numbers.
The basic story is that July starts were up slightly from June, but still 1.4 percent below year-ago levels. The monthly data are erratic, but over the last three months, starts have averaged 1,215,000 at an annual rate. That compares to an annual rate of 1,317,000 in the first three months of the year.
While this drop is not a disastrous falloff, it does mean that folks who were hoping that increased supply would put downward pressure on housing costs are likely to be disappointed. I know it’s summer, but it would have been worth finding someone to take a few minutes to write up the July data.
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