It’s great that the folks at the Washington Post are capable of mind reading. If we just looked at the substance of the Johnson-Crapo bill for replacing Fannie Mae and Freddie Mac by a system in which private companies would be able to issue mortgage backed securities that carried a government guarantee, we might think that the motive was to increase the profits of the financial industry. After all, the industry would be able to earn tens of billions in additional profits each year by getting this business.
However the Post told readers:
“To avoid a repeat of the bailout, the Obama administration is pushing to dismantle Fannie and Freddie and shift the risks of mortgage lending away from taxpayers to the private sector.”
Since the bill doesn’t actually avoid a repeat of the bailout, most readers would probably not realize that this is the motive of the Obama administration in privatizing Fannie and Freddie. Under the Johnson-Crapo bill, the government would be on the hook for 90 percent of the face value of mortgage backed securities (MBS). As was the case in the housing bubble years, private issuers would have incentive to issue MBS of dubious quality, since they make money on the issuance. The big difference between the Johnson-Crapo system and the one in place during the bubble years is that the issuers would be able to tell buyers that the government is covering 90 percent of their investment. In the bubble years, investors understood that if the MBS went bad they could in principle lose their whole investment.
It’s great that the folks at the Washington Post are capable of mind reading. If we just looked at the substance of the Johnson-Crapo bill for replacing Fannie Mae and Freddie Mac by a system in which private companies would be able to issue mortgage backed securities that carried a government guarantee, we might think that the motive was to increase the profits of the financial industry. After all, the industry would be able to earn tens of billions in additional profits each year by getting this business.
However the Post told readers:
“To avoid a repeat of the bailout, the Obama administration is pushing to dismantle Fannie and Freddie and shift the risks of mortgage lending away from taxpayers to the private sector.”
Since the bill doesn’t actually avoid a repeat of the bailout, most readers would probably not realize that this is the motive of the Obama administration in privatizing Fannie and Freddie. Under the Johnson-Crapo bill, the government would be on the hook for 90 percent of the face value of mortgage backed securities (MBS). As was the case in the housing bubble years, private issuers would have incentive to issue MBS of dubious quality, since they make money on the issuance. The big difference between the Johnson-Crapo system and the one in place during the bubble years is that the issuers would be able to tell buyers that the government is covering 90 percent of their investment. In the bubble years, investors understood that if the MBS went bad they could in principle lose their whole investment.
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Students learn in introductory economic that Y = C+I+G +(X-m), which means that GDP is equal to the sum of consumption, investment, government spending and net exports. Those who remember their intro econ are not surprised to see that Italy has slid back into recession for the third time since the 2008 crisis.
Unfortunately simple economic logic does not find its way into the NYT article on the weakness of Italy’s economy and much of the rest of the euro zone. The basic story is straightforward. Since 2010 the European Union has been demanding that countries in the euro zone reduce their budget deficits. This means cutting government spending and/or raising taxes. Lower government spending directly reduces demand in the economy. Raising taxes indirectly reduces demand by reducing disposable income, and thereby reducing consumption. (There is a supply-side effect from the change in incentives, but this is in almost all cases much smaller.)
In short, the European Union has been requiring that many of the countries in the Euro zone reduce demand in their economy. There is no obvious mechanism to replace this lost demand. If Italy, Spain, and other countries flirting with recessions had freely floating exchange rates it would be possible that the decline in the value of their currencies would lead to an increase in net exports (a lower valued currency would make their exports cheaper and imports more expensive), but since they are in the euro zone this route is not possible, except insofar as the euro falls against other currencies.
The high unemployment caused by the European Union’s polices can have a modest stimulatory effect insofar as they push down wages in these countries. This can improve their competitive position relative to Germany and other countries with stronger economies, but this process is likely to be very slow, especially with inflation running at a very low rate in Germany.
In short, there is no plausible story whereby the countries of southern Europe can expect to replace the demand lost from the deficit reduction demanded by the European Union. The article should have at some point mentioned that the recession in Italy is pretty much exactly what most economists would expect from the European Union’s austerity policies, just as physicists expect that when we drop a hammer it falls.
Students learn in introductory economic that Y = C+I+G +(X-m), which means that GDP is equal to the sum of consumption, investment, government spending and net exports. Those who remember their intro econ are not surprised to see that Italy has slid back into recession for the third time since the 2008 crisis.
Unfortunately simple economic logic does not find its way into the NYT article on the weakness of Italy’s economy and much of the rest of the euro zone. The basic story is straightforward. Since 2010 the European Union has been demanding that countries in the euro zone reduce their budget deficits. This means cutting government spending and/or raising taxes. Lower government spending directly reduces demand in the economy. Raising taxes indirectly reduces demand by reducing disposable income, and thereby reducing consumption. (There is a supply-side effect from the change in incentives, but this is in almost all cases much smaller.)
In short, the European Union has been requiring that many of the countries in the Euro zone reduce demand in their economy. There is no obvious mechanism to replace this lost demand. If Italy, Spain, and other countries flirting with recessions had freely floating exchange rates it would be possible that the decline in the value of their currencies would lead to an increase in net exports (a lower valued currency would make their exports cheaper and imports more expensive), but since they are in the euro zone this route is not possible, except insofar as the euro falls against other currencies.
The high unemployment caused by the European Union’s polices can have a modest stimulatory effect insofar as they push down wages in these countries. This can improve their competitive position relative to Germany and other countries with stronger economies, but this process is likely to be very slow, especially with inflation running at a very low rate in Germany.
In short, there is no plausible story whereby the countries of southern Europe can expect to replace the demand lost from the deficit reduction demanded by the European Union. The article should have at some point mentioned that the recession in Italy is pretty much exactly what most economists would expect from the European Union’s austerity policies, just as physicists expect that when we drop a hammer it falls.
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There is a widely believed, but largely silly, view that rising inequality is the result of technology and globalization. NPR gave us an illustration of how silly this view is in a segment on plans in California to reduce the duration of medical school from four years to three years.
The ostensible motivation was to help address a shortage of primary care physicians. The reason why the piece is relevant to the larger issue of inequality is that it never once mentioned the possibility of bringing in more doctors from other countries. Doctors in the United States earn on average twice what their counterparts do in other wealthy countries. Since we have no notable differences in health outcomes, the implication would be that our doctors are of no better quality on average than those in Europe and Canada.
This would suggest that there is a vast pool of doctors who could benefit from coming to the United States and working for more money than they would receive in their home country. The pool of potential doctors is even larger if we include doctors from developing countries who could be required to train to U.S. standards. To ensure that developing countries benefit as well, we could repatriate tax revenue from expatriate doctors so they can train two or three doctors for everyone that comes here. (If you plan to complain that this policy hurts developing countries read the last sentence as many times as necessary to understand it.)
What is striking is that the issue of bringing in more doctors from other countries never got mentioned in this piece or in other new stories that raise the question of doctor shortages. Bringing in immigrant workers is raised all the time in other contexts such as alleged shortages of nurses, STEM workers, and farm workers.
The fact that immigration is not discussed in the context of a doctor shortage has nothing to do with inevitable processes of globalization or technology. It has to do with the power of doctors relative to other workers. Doctors are able to prevent their wages from being driven down by foreign competition; other workers have less power. It really is that simple.
Addendum: The above comment is not entirely fair to NPR. Planet Money once had a segment in which I discussed the possibility of bringing in more foreign doctors as a way of saving money on health care.
Second Addendum:
I see from comments that folks have noted the number of residency slots as the source of the limit on the supply of doctors. There are two points to be made on this. First, this rule is a textbook protectionist restriction. The requirement that people have to do a residency in the United States did not come down from the heavens, it was imposed as a way to restrict the number of doctors.
This gets us to the second point. The number of slots was cut back in 1997 at the insistence of the A.M.A. and other doctors’ organizations because they said there were too many doctors and it was driving down their pay. So the pieces of the puzzle all fit together easily.
There is a widely believed, but largely silly, view that rising inequality is the result of technology and globalization. NPR gave us an illustration of how silly this view is in a segment on plans in California to reduce the duration of medical school from four years to three years.
The ostensible motivation was to help address a shortage of primary care physicians. The reason why the piece is relevant to the larger issue of inequality is that it never once mentioned the possibility of bringing in more doctors from other countries. Doctors in the United States earn on average twice what their counterparts do in other wealthy countries. Since we have no notable differences in health outcomes, the implication would be that our doctors are of no better quality on average than those in Europe and Canada.
This would suggest that there is a vast pool of doctors who could benefit from coming to the United States and working for more money than they would receive in their home country. The pool of potential doctors is even larger if we include doctors from developing countries who could be required to train to U.S. standards. To ensure that developing countries benefit as well, we could repatriate tax revenue from expatriate doctors so they can train two or three doctors for everyone that comes here. (If you plan to complain that this policy hurts developing countries read the last sentence as many times as necessary to understand it.)
What is striking is that the issue of bringing in more doctors from other countries never got mentioned in this piece or in other new stories that raise the question of doctor shortages. Bringing in immigrant workers is raised all the time in other contexts such as alleged shortages of nurses, STEM workers, and farm workers.
The fact that immigration is not discussed in the context of a doctor shortage has nothing to do with inevitable processes of globalization or technology. It has to do with the power of doctors relative to other workers. Doctors are able to prevent their wages from being driven down by foreign competition; other workers have less power. It really is that simple.
Addendum: The above comment is not entirely fair to NPR. Planet Money once had a segment in which I discussed the possibility of bringing in more foreign doctors as a way of saving money on health care.
Second Addendum:
I see from comments that folks have noted the number of residency slots as the source of the limit on the supply of doctors. There are two points to be made on this. First, this rule is a textbook protectionist restriction. The requirement that people have to do a residency in the United States did not come down from the heavens, it was imposed as a way to restrict the number of doctors.
This gets us to the second point. The number of slots was cut back in 1997 at the insistence of the A.M.A. and other doctors’ organizations because they said there were too many doctors and it was driving down their pay. So the pieces of the puzzle all fit together easily.
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Involuntary part-time employment has fallen by 670,000 over the last year, however it’s still up by almost 3 million from its pre-recession level. While there would seem to be a very simple and obvious explanation for this one — weak demand in the economy — you can’t employ many people saying the obvious. Hence we see a lot of nonsense in the media on the topic.
The latest installment comes to us from McClatchy News Service. The story is that the problem is skills and employer sanctions in Obamacare.
“One reason is a gap in the kinds of skills needed to find work in an increasingly technological workplace. Many employers also remain uncertain about the economy and hesitant about deeper financial commitments.
“And hiring part-time instead full-time employees is one way that some businesses are getting around the costs of a mandate in the health care law that requires employers with 50 or more full-time workers to provide insurance coverage beginning in January.”
Let’s see, the problem is a gap in skills. So employers have those full-time jobs out there, the problem is that workers just don’t have the skills needed to fill them.
Let’s assume this is true. Imagine you’re one of those frustrated employers. You have all this demand for your service or product, but the dolts coming through your door just don’t have the skills needed for your increasingly technological workplace. What might you do to solve this problem?
That’s right, you could raise wages. This way you would pull away the workers who have these skills from your slow moving competitors.
There is a problem here. We don’t have any major sector of the economy with rapidly rising wages. (Yes, North Dakota has rapidly rising wages and it employs about 0.3 percent of the workforce.) This indicates that we either don’t have a skills gap or if we do it exists primarily among employers who don’t understand how labor markets work.
A piece of data that doesn’t fit well with the skills gap story is that the sector with the most rapid growth since the downturn has been the leisure and hospitality sector, which has added 1,120,000 jobs (total employment in all other sectors together is still below the pre-recession level). This sector is not generally considered to be at the center of the technological revolution. It also has an averagework week of 25.1 hours.
The Obamacare part of the story also doesn’t fit the data. Employers would have thought that the employer sanctions applied for the first half of 2013 until the Obama administration announced a waiver in July of that year. During this period there was a modest increase in the share of the workforce working 25-29 hours, just under the 30 hour cutoff for the sanction. However this increase was totally at the expense of the share working less than 25 hours. The portion of the workforce putting in more than 30 hours a week actually increased.
In short, there is zero reason to believe that the increase in involuntary part-time employment has anything to do with either a skills gap or Obamacare. There is a simple explanation based on inadequate demand since we haven’t filled the gap created by the collapse of the housing bubble. Unlike the more complicated explanations, this one fits the data.
Involuntary part-time employment has fallen by 670,000 over the last year, however it’s still up by almost 3 million from its pre-recession level. While there would seem to be a very simple and obvious explanation for this one — weak demand in the economy — you can’t employ many people saying the obvious. Hence we see a lot of nonsense in the media on the topic.
The latest installment comes to us from McClatchy News Service. The story is that the problem is skills and employer sanctions in Obamacare.
“One reason is a gap in the kinds of skills needed to find work in an increasingly technological workplace. Many employers also remain uncertain about the economy and hesitant about deeper financial commitments.
“And hiring part-time instead full-time employees is one way that some businesses are getting around the costs of a mandate in the health care law that requires employers with 50 or more full-time workers to provide insurance coverage beginning in January.”
Let’s see, the problem is a gap in skills. So employers have those full-time jobs out there, the problem is that workers just don’t have the skills needed to fill them.
Let’s assume this is true. Imagine you’re one of those frustrated employers. You have all this demand for your service or product, but the dolts coming through your door just don’t have the skills needed for your increasingly technological workplace. What might you do to solve this problem?
That’s right, you could raise wages. This way you would pull away the workers who have these skills from your slow moving competitors.
There is a problem here. We don’t have any major sector of the economy with rapidly rising wages. (Yes, North Dakota has rapidly rising wages and it employs about 0.3 percent of the workforce.) This indicates that we either don’t have a skills gap or if we do it exists primarily among employers who don’t understand how labor markets work.
A piece of data that doesn’t fit well with the skills gap story is that the sector with the most rapid growth since the downturn has been the leisure and hospitality sector, which has added 1,120,000 jobs (total employment in all other sectors together is still below the pre-recession level). This sector is not generally considered to be at the center of the technological revolution. It also has an averagework week of 25.1 hours.
The Obamacare part of the story also doesn’t fit the data. Employers would have thought that the employer sanctions applied for the first half of 2013 until the Obama administration announced a waiver in July of that year. During this period there was a modest increase in the share of the workforce working 25-29 hours, just under the 30 hour cutoff for the sanction. However this increase was totally at the expense of the share working less than 25 hours. The portion of the workforce putting in more than 30 hours a week actually increased.
In short, there is zero reason to believe that the increase in involuntary part-time employment has anything to do with either a skills gap or Obamacare. There is a simple explanation based on inadequate demand since we haven’t filled the gap created by the collapse of the housing bubble. Unlike the more complicated explanations, this one fits the data.
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The NYT had an interesting piece on the progress of high-speed rail under President Obama. As the headline tells it, we’ve spent $11 billion without all that much to show.
Just in case readers didn’t know offhand, the federal government has spent roughly $550 billion on transportation over the last six years, so spending on high speed rail would be roughly 2.0 percent of total transportation spending. If you think this spending has been driving up your tax bill, this comes to roughly 0.05 percent of total federal spending over the last six years.While it would require a careful analysis to make a full assessment of whether the money devoted to high-speed rail has produced good results compared to alternative uses it would have been helpful to express this spending in a way that would be meaningful to most readers.
The NYT had an interesting piece on the progress of high-speed rail under President Obama. As the headline tells it, we’ve spent $11 billion without all that much to show.
Just in case readers didn’t know offhand, the federal government has spent roughly $550 billion on transportation over the last six years, so spending on high speed rail would be roughly 2.0 percent of total transportation spending. If you think this spending has been driving up your tax bill, this comes to roughly 0.05 percent of total federal spending over the last six years.While it would require a careful analysis to make a full assessment of whether the money devoted to high-speed rail has produced good results compared to alternative uses it would have been helpful to express this spending in a way that would be meaningful to most readers.
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In an article on corporate inversions (relocating their official headquarters to another country) the Washington Post told readers:
“the potential costs to the U.S. treasury are enormous. One measure, by the congressional Joint Committee on Taxation (JCT), suggests that the nation stands to lose nearly $20 billion in tax revenue over the next decade. Former JCT director Edward Kleinbard said he thinks the potential loss is much higher.”
For those wondering how big a deal $20 billion over the next decade is, the Congressional Budget Office (CBO) projects total revenue over this period of $40.6 trillion, which means that the JCT estimate would imply a lose of revenue of 0.05 percent. To make another comparison, Medicare spending has been coming in far lower than projected in recent years. The most recent projections for net spending in 2015 is $524 billion. By comparison, in 2008 CBO projected that we would spend $609 billion in 2015, implying a saving of $85 billion in 2015 alone. Carrying through the differences in projected growth rates in the most recent projections with the growth rate projected in 2008, the savings from lower Medicare spending would exceed $1 trillion, making them more than 50 times “enormous.”
This does not mean that the Congress and the president should not try to stop a practice that serves no economic purpose and will needlessly cost the government a substantial amount of revenue. It is also important to note that this gaming of the tax code imposes real costs on the economy. There are financial firms that will earn lots of money from this sort of financial engineering. The resources used by these firms (e.g. the labor of the accountants and lawyers engineering the switch) could instead be used productively. In effect. some people are getting very rich being paid to dig holes and fill them up again, in other words, doing work of no economic value.
This is a problem with all economic transactions that become profitable wholly or partly because of quirks in the tax code. For example, much of the wealth of private equity fund managers can be attributed to their exploitation of the deduction for interest payments. This deduction effectively subsidizes heavy corporate leverage, which is undesirable from an economic standpoint since it increases the risk of bankruptcy.
The economic waste associated with tax loopholes, which almost always makes the rich richer, is at least as important a reason to be concerned about corporate tax loopholes as the lost revenue to the government.
In an article on corporate inversions (relocating their official headquarters to another country) the Washington Post told readers:
“the potential costs to the U.S. treasury are enormous. One measure, by the congressional Joint Committee on Taxation (JCT), suggests that the nation stands to lose nearly $20 billion in tax revenue over the next decade. Former JCT director Edward Kleinbard said he thinks the potential loss is much higher.”
For those wondering how big a deal $20 billion over the next decade is, the Congressional Budget Office (CBO) projects total revenue over this period of $40.6 trillion, which means that the JCT estimate would imply a lose of revenue of 0.05 percent. To make another comparison, Medicare spending has been coming in far lower than projected in recent years. The most recent projections for net spending in 2015 is $524 billion. By comparison, in 2008 CBO projected that we would spend $609 billion in 2015, implying a saving of $85 billion in 2015 alone. Carrying through the differences in projected growth rates in the most recent projections with the growth rate projected in 2008, the savings from lower Medicare spending would exceed $1 trillion, making them more than 50 times “enormous.”
This does not mean that the Congress and the president should not try to stop a practice that serves no economic purpose and will needlessly cost the government a substantial amount of revenue. It is also important to note that this gaming of the tax code imposes real costs on the economy. There are financial firms that will earn lots of money from this sort of financial engineering. The resources used by these firms (e.g. the labor of the accountants and lawyers engineering the switch) could instead be used productively. In effect. some people are getting very rich being paid to dig holes and fill them up again, in other words, doing work of no economic value.
This is a problem with all economic transactions that become profitable wholly or partly because of quirks in the tax code. For example, much of the wealth of private equity fund managers can be attributed to their exploitation of the deduction for interest payments. This deduction effectively subsidizes heavy corporate leverage, which is undesirable from an economic standpoint since it increases the risk of bankruptcy.
The economic waste associated with tax loopholes, which almost always makes the rich richer, is at least as important a reason to be concerned about corporate tax loopholes as the lost revenue to the government.
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That one should be obvious, but for some reason almost no one ever says it. This is why it is very nice to see Eduardo Porter’s piece making the point in the NYT today.
The basic point is probably too simple for economists to understand, but if we have 20 percent fewer people in 2050 than in a baseline scenario, then they all can emit 20 percent more greenhouse gas (GHG) emissions in that year and have the same amount of total emissions. Alternatively, if we have the same amount of per capita emissions, we will have 20 percent less total emissions.Restraining population growth is not going to solve the problem. We have to sharply reduce the amount of GHG emissions per person, but reaching whatever targets we set will be much easier with a smaller population.
It is remarkable how frequently news stories decry evidence of slowing population growth or shrinking populations as implying some sort of catastrophe. This is nonsense. It simply implies a tighter labor market with a rising ratio of capital to labor. In this scenario, workers switch from low productivity jobs (e.g. restaurant work, house cleaning, and retail clerks) to higher productivity jobs. This is a problem for the people who want to hire cheap labor, but will likely be seen as good news by almost everyone else.
That one should be obvious, but for some reason almost no one ever says it. This is why it is very nice to see Eduardo Porter’s piece making the point in the NYT today.
The basic point is probably too simple for economists to understand, but if we have 20 percent fewer people in 2050 than in a baseline scenario, then they all can emit 20 percent more greenhouse gas (GHG) emissions in that year and have the same amount of total emissions. Alternatively, if we have the same amount of per capita emissions, we will have 20 percent less total emissions.Restraining population growth is not going to solve the problem. We have to sharply reduce the amount of GHG emissions per person, but reaching whatever targets we set will be much easier with a smaller population.
It is remarkable how frequently news stories decry evidence of slowing population growth or shrinking populations as implying some sort of catastrophe. This is nonsense. It simply implies a tighter labor market with a rising ratio of capital to labor. In this scenario, workers switch from low productivity jobs (e.g. restaurant work, house cleaning, and retail clerks) to higher productivity jobs. This is a problem for the people who want to hire cheap labor, but will likely be seen as good news by almost everyone else.
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Yes, that is what he said according to the Washington Post. The context was a business summit involving U.S. and African business people and African heads of state. Immelt was complaining that the reauthorization of the Export-Import Bank is being seriously debated Washington.
The Bank makes or guarantees around $35 billion in loans, with the vast majority of the money going to large companies like GE, which Immelt heads. The Bank effectively is allowing these companies to get loans at below market interest rates, adding billions of dollars to their profits each year.
According to the piece Immelt complained:
“There’s a lot of things to be critical about big businesses, and there’s a lot of things that don’t work in government, but exporting is not one of them and the Ex-Im Bank is not one of them, … And the fact that we have to sit here and argue for it I think is just wrong.”
It is also worth noting that article misled readers by saying:
“some Republicans and conservative groups say the bank should be allowed to die, claiming that it doles out corporate welfare and engages in crony capitalism.”
There are also many people who are neither Republicans nor conservatives who do not think it is an important role of government to make people like Jeffrey Immelt even richer.
Yes, that is what he said according to the Washington Post. The context was a business summit involving U.S. and African business people and African heads of state. Immelt was complaining that the reauthorization of the Export-Import Bank is being seriously debated Washington.
The Bank makes or guarantees around $35 billion in loans, with the vast majority of the money going to large companies like GE, which Immelt heads. The Bank effectively is allowing these companies to get loans at below market interest rates, adding billions of dollars to their profits each year.
According to the piece Immelt complained:
“There’s a lot of things to be critical about big businesses, and there’s a lot of things that don’t work in government, but exporting is not one of them and the Ex-Im Bank is not one of them, … And the fact that we have to sit here and argue for it I think is just wrong.”
It is also worth noting that article misled readers by saying:
“some Republicans and conservative groups say the bank should be allowed to die, claiming that it doles out corporate welfare and engages in crony capitalism.”
There are also many people who are neither Republicans nor conservatives who do not think it is an important role of government to make people like Jeffrey Immelt even richer.
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Knowingly issuing a fraudulent mortgage (e.g. a mortgage based on false information) is fraud. It is the sort of thing that you can go to jail for, especially when it is done on a mass scale, as was the case in the financial crisis. Knowingly passing along fraudulent mortgages in mortgage backed securities is also fraud.
No important figure at any major bank was prosecuted for these activities by the Justice Department. As a result, virtually all of them benefited from their actions in the housing bubble years. They were better off as a result of having committed fraud than if they had obeyed the law. Economic theory tells us that we should expect that this would lead other executives in similar positions to act the same way. In other words, they will break the law, since the consequences of getting caught are essentially zero.
In spite of this reality, in an article on a Justice Department investigation of loan practice in the subprime auto loan market the NYT told readers:
“For the Justice Department, buffeted by criticism for not indicting a Wall Street executive, the mortgage investigations have helped polish the agency’s image as a tough enforcer as they have yielded a string of multibillion dollar penalties.”
The article doesn’t tell readers in whose mind the Justice Department’s image has been polished. The recent settlements against banks can be seen as taking actions against a mob run company after the mob has sold it off, while all the mobsters continue to go free and live off the proceeds of their illegal dealings. That may seem tough to some people, but probably not anyone who has given the issue much attention.
Note: Typo corrected.
Knowingly issuing a fraudulent mortgage (e.g. a mortgage based on false information) is fraud. It is the sort of thing that you can go to jail for, especially when it is done on a mass scale, as was the case in the financial crisis. Knowingly passing along fraudulent mortgages in mortgage backed securities is also fraud.
No important figure at any major bank was prosecuted for these activities by the Justice Department. As a result, virtually all of them benefited from their actions in the housing bubble years. They were better off as a result of having committed fraud than if they had obeyed the law. Economic theory tells us that we should expect that this would lead other executives in similar positions to act the same way. In other words, they will break the law, since the consequences of getting caught are essentially zero.
In spite of this reality, in an article on a Justice Department investigation of loan practice in the subprime auto loan market the NYT told readers:
“For the Justice Department, buffeted by criticism for not indicting a Wall Street executive, the mortgage investigations have helped polish the agency’s image as a tough enforcer as they have yielded a string of multibillion dollar penalties.”
The article doesn’t tell readers in whose mind the Justice Department’s image has been polished. The recent settlements against banks can be seen as taking actions against a mob run company after the mob has sold it off, while all the mobsters continue to go free and live off the proceeds of their illegal dealings. That may seem tough to some people, but probably not anyone who has given the issue much attention.
Note: Typo corrected.
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