It sure seems that way as he implies that greater patent and copyright protection are the wave of the future. He tells readers:
“The growing commitment of the American political system to intellectual-property protection and enforcement, like that in trade treaties, also hasn’t gained much explicit notice. This shift of priorities is likely to become more important as economies move toward creative production and information technology.”
Already we lose close to $270 billion in patent rents on pharmaceuticals alone. This is roughly 1.6 percent of GDP or more than three times what the government spends on food stamps each year. This is money that is wasted paying more than free market price for drugs, which would almost invariably be cheap ($5-$10 per prescription) absent these government granted monopolies.
Even worse, patents monopolies give huge incentives to drug companies to lie to the public about the safety and effectiveness of their drugs. They routinely conceal or misrepresent information, just as economic theory predicts. There are more efficient ways to finance the development of drugs, but apparently Cowen thinks the drug industry will be sufficiently powerful from having them be considered in public policy debates. (Thus far he has been right.)
Government granted patent monopolies also likely slow innovation in other areas as well, most notably in the high tech sector where companies like Apple and Samsung compete at least as much in the courtroom over patent suits as in the marketplace.
It sure seems that way as he implies that greater patent and copyright protection are the wave of the future. He tells readers:
“The growing commitment of the American political system to intellectual-property protection and enforcement, like that in trade treaties, also hasn’t gained much explicit notice. This shift of priorities is likely to become more important as economies move toward creative production and information technology.”
Already we lose close to $270 billion in patent rents on pharmaceuticals alone. This is roughly 1.6 percent of GDP or more than three times what the government spends on food stamps each year. This is money that is wasted paying more than free market price for drugs, which would almost invariably be cheap ($5-$10 per prescription) absent these government granted monopolies.
Even worse, patents monopolies give huge incentives to drug companies to lie to the public about the safety and effectiveness of their drugs. They routinely conceal or misrepresent information, just as economic theory predicts. There are more efficient ways to finance the development of drugs, but apparently Cowen thinks the drug industry will be sufficiently powerful from having them be considered in public policy debates. (Thus far he has been right.)
Government granted patent monopolies also likely slow innovation in other areas as well, most notably in the high tech sector where companies like Apple and Samsung compete at least as much in the courtroom over patent suits as in the marketplace.
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Sorry, for family reasons I am seeing the Sunday morning shows. It’s amazing these things exist. David Gregory is interviewing Yuval Levin about his book Tyranny of Reason, Imagining the Future, The Great Debate: Edmund Burke, Thomas Paine, and the Birth of Left and Right.
The book sounds like collection of painful cliches, the left likes activist government, the right believes in leaving civil society to work things out for itself. Really? So the patents and copyrights that shift far more money to the wealthy than food stamps and TANF shift to the poor are just civil society, not activist government. Trade policies that put downward pressure on the wages of most workers, while largely protecting doctors and other highly paid professionals are also just civil society, not activist government. Bank bailouts and no cost too big to fail insurance for the big banks are just civil society, not activist government.
There is a much longer list of such policies in my book The End of Loser Liberalism: Making Markets Progressive (free download available). There is zero evidence that either Levin or Gregory has ever heard of any of these arguments. They are determined to just repeat tired cliches that have nothing to do with actual politics.
The cliches of course do help to advance a right-wing agenda. It sounds much better to say that the rich got really rich by the natural workings of the market rather than by paying off the ref to write the rules to benefit themselves. The reality might be much closer to the latter, but Gregory and Levin apparently don’t even want anyone to think about such possibilities.
Sorry, for family reasons I am seeing the Sunday morning shows. It’s amazing these things exist. David Gregory is interviewing Yuval Levin about his book Tyranny of Reason, Imagining the Future, The Great Debate: Edmund Burke, Thomas Paine, and the Birth of Left and Right.
The book sounds like collection of painful cliches, the left likes activist government, the right believes in leaving civil society to work things out for itself. Really? So the patents and copyrights that shift far more money to the wealthy than food stamps and TANF shift to the poor are just civil society, not activist government. Trade policies that put downward pressure on the wages of most workers, while largely protecting doctors and other highly paid professionals are also just civil society, not activist government. Bank bailouts and no cost too big to fail insurance for the big banks are just civil society, not activist government.
There is a much longer list of such policies in my book The End of Loser Liberalism: Making Markets Progressive (free download available). There is zero evidence that either Levin or Gregory has ever heard of any of these arguments. They are determined to just repeat tired cliches that have nothing to do with actual politics.
The cliches of course do help to advance a right-wing agenda. It sounds much better to say that the rich got really rich by the natural workings of the market rather than by paying off the ref to write the rules to benefit themselves. The reality might be much closer to the latter, but Gregory and Levin apparently don’t even want anyone to think about such possibilities.
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The Commerce Department released its second revision to the third quarter GDP numbers on Friday. It showed the economy growing 4.1 percent, which was better than the earlier reports and more than most analysts had expected. However, the Post got more than a bit carried away on this one, telling readers in the second sentence of its article on the report:
“The Commerce Department reported that the nation’s gross domestic product grew at a 4.1 percent annual rate during the third quarter — the best showing since 1992.”
Really? How about the 4.9 percent growth rate in the fourth quarter of 2011, less than two years ago? Then we had a 4.9 percent growth rate in the first quarter of 2006 and a 4.5 percent growth rate in the first quarter of 2005. In total I find 17 quarters since 1992 with growth rates higher than 4.1 percent. So that one seems a bit off.
Furthermore, as the article notes in passing, most of the better than expected performance was due to inventory accumulations which added 1.7 percentage points to the growth reported for the quarter. The economy reportedly accumulated inventories at annual rate of $115.7 billion in the third quarter, an absolute pace exceeded only by the $116.2 billion rate in the third quarter of 2011. In the fourth quarter, if the economy adds inventories at the same rate as it did in the prior two years, and the rest of the economy grows at the same pace as it did in the third quarter, then the growth rate will be less than 1.0 percent.
The Commerce Department released its second revision to the third quarter GDP numbers on Friday. It showed the economy growing 4.1 percent, which was better than the earlier reports and more than most analysts had expected. However, the Post got more than a bit carried away on this one, telling readers in the second sentence of its article on the report:
“The Commerce Department reported that the nation’s gross domestic product grew at a 4.1 percent annual rate during the third quarter — the best showing since 1992.”
Really? How about the 4.9 percent growth rate in the fourth quarter of 2011, less than two years ago? Then we had a 4.9 percent growth rate in the first quarter of 2006 and a 4.5 percent growth rate in the first quarter of 2005. In total I find 17 quarters since 1992 with growth rates higher than 4.1 percent. So that one seems a bit off.
Furthermore, as the article notes in passing, most of the better than expected performance was due to inventory accumulations which added 1.7 percentage points to the growth reported for the quarter. The economy reportedly accumulated inventories at annual rate of $115.7 billion in the third quarter, an absolute pace exceeded only by the $116.2 billion rate in the third quarter of 2011. In the fourth quarter, if the economy adds inventories at the same rate as it did in the prior two years, and the rest of the economy grows at the same pace as it did in the third quarter, then the growth rate will be less than 1.0 percent.
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Many of us are happy to see that Larry Summers, who served as President Clinton’s Treasury Secretary and head of President Obama’s National Economic Council, had a column talking about secular stagnation in the Washington Post. As they say here in Washington, if you repeat something that is true long enough, Larry Summers will eventually write about it in the Washington Post.
Unfortunately, Summers still only has part of the story. He notes the possibility that investment demand may have shifted downward because of slower population growth. He also notes that upward redistribution of income may have reduced consumption, since the rich tend to save a larger share of their income than the poor and middle class. It is great to see these points being made by a distinguished economist, however Summers continues to miss the most obvious drain on demand: the trade deficit.
The trade deficit is running at a $500 billion annual pace, more than 3.0 percent of GDP. This is demand that is going to other countries, not the United States. If we snapped our fingers and made the trade deficit zero tomorrow it would translate into roughly 4.2 million jobs directly and another 2.1 million indirectly through multiplier effects for a total of 6.3 million jobs. In other words, this is a big deal.
By comparison, the shift in income from everyone else to the one percent was equal to roughly 10 percentage points of personal income. If we assume that the rich spend 75 percent of this increment and everyone else would have spent roughly 95 percent, then the difference is 2 percentage points of personal income or around 1.6 percentage points of GDP. That is a bit more than half as much as the contribution of the trade deficit.
Summers should know about the trade deficit since he is one of the people most responsible for the deficits we face today. It was his engineering of the IMF bailout of countries from the East Asian financial crisis (with Alan Greenspan and Robert Rubin as accomplices, and Stanley Fisher at the IMF playing a supporting role) that led to the sharp over-valuation of the dollar that gave us large trade deficits.
In standard textbook economics, capital is supposed to flow from rich countries like the United States to poor countries in the developing world which can better use the capital. This implies that rich countries would have trade surpluses, not deficits. This actually was more or less happening in the years prior to the crisis in 1997. Developing countries were on net borrowers.
However the terms of the bailout were viewed as so onerous that countries throughout the developing world decided that they had to accumulate as many reserves as possible in order to avoid ever being in the same situation with the IMF. This meant deliberately keeping the value of their currencies down against the dollar and running large trade surpluses. This corresponds to the large trade deficit run by the United States.
In short, Larry Summers certainly should know about the trade deficit, he helped give it to us. If we want to reverse secular stagnation a very good place to look would be a smaller trade deficit brought about by a lower valued dollar. (We can also cope with a chronic shortfall in aggregate demand by shortening work hours, as Germany has done. Summers apparently opposes this route because he has decided that this is not the American Way.)
Many of us are happy to see that Larry Summers, who served as President Clinton’s Treasury Secretary and head of President Obama’s National Economic Council, had a column talking about secular stagnation in the Washington Post. As they say here in Washington, if you repeat something that is true long enough, Larry Summers will eventually write about it in the Washington Post.
Unfortunately, Summers still only has part of the story. He notes the possibility that investment demand may have shifted downward because of slower population growth. He also notes that upward redistribution of income may have reduced consumption, since the rich tend to save a larger share of their income than the poor and middle class. It is great to see these points being made by a distinguished economist, however Summers continues to miss the most obvious drain on demand: the trade deficit.
The trade deficit is running at a $500 billion annual pace, more than 3.0 percent of GDP. This is demand that is going to other countries, not the United States. If we snapped our fingers and made the trade deficit zero tomorrow it would translate into roughly 4.2 million jobs directly and another 2.1 million indirectly through multiplier effects for a total of 6.3 million jobs. In other words, this is a big deal.
By comparison, the shift in income from everyone else to the one percent was equal to roughly 10 percentage points of personal income. If we assume that the rich spend 75 percent of this increment and everyone else would have spent roughly 95 percent, then the difference is 2 percentage points of personal income or around 1.6 percentage points of GDP. That is a bit more than half as much as the contribution of the trade deficit.
Summers should know about the trade deficit since he is one of the people most responsible for the deficits we face today. It was his engineering of the IMF bailout of countries from the East Asian financial crisis (with Alan Greenspan and Robert Rubin as accomplices, and Stanley Fisher at the IMF playing a supporting role) that led to the sharp over-valuation of the dollar that gave us large trade deficits.
In standard textbook economics, capital is supposed to flow from rich countries like the United States to poor countries in the developing world which can better use the capital. This implies that rich countries would have trade surpluses, not deficits. This actually was more or less happening in the years prior to the crisis in 1997. Developing countries were on net borrowers.
However the terms of the bailout were viewed as so onerous that countries throughout the developing world decided that they had to accumulate as many reserves as possible in order to avoid ever being in the same situation with the IMF. This meant deliberately keeping the value of their currencies down against the dollar and running large trade surpluses. This corresponds to the large trade deficit run by the United States.
In short, Larry Summers certainly should know about the trade deficit, he helped give it to us. If we want to reverse secular stagnation a very good place to look would be a smaller trade deficit brought about by a lower valued dollar. (We can also cope with a chronic shortfall in aggregate demand by shortening work hours, as Germany has done. Summers apparently opposes this route because he has decided that this is not the American Way.)
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Yes folks, the NYT is trying to dislodge Fox News. What they may lack in outrageousness they make up in credibility. Here they are with a front page story telling us about the tragic situation of the Chapmans, a New Hampshire couple making $100,000 a year who will have to spend $1,000 a month for insurance with Obamacare. This would come to 12 percent of their income. The piece tells readers:
“Experts consider health insurance unaffordable once it exceeds 10 percent of annual income.”
That’s interesting. If we go to the Kaiser Family Foundation website we find that the average employee contribution for an employer provided family plan is $4,240. The average employer contribution is $11,240. That gives us a total of $15,470. Most economists would say that we should treat the employers payment as a cost to the worker since in general employers are no more happy to pay money to health insurance companies than to their workers. If they didn’t pay this money as health insurance then they would be paying it to their workers in wages.
If we say that this family has a $70,000 annual income (roughly the median for two earner couples), then the cost of the health care policy would be close to 20 percent of their income, even adding in the $11,240 employer contribution to their income. This would mean the experts consulted by the NYT would think that most of the families with insurance have unaffordable insurance.
In this respect, the $1,000 a month that the Chapmans are paying under Obamacare looks pretty damn good. It is more than 20 percent less expensive than the average policy in the Kaiser survey. Of course a lot depends on what is covered and the extent of the deductibles, but based on the information given in the NYT article there is no reason that anyone should be shedding tears for the Chapmans.
Yes folks, the NYT is trying to dislodge Fox News. What they may lack in outrageousness they make up in credibility. Here they are with a front page story telling us about the tragic situation of the Chapmans, a New Hampshire couple making $100,000 a year who will have to spend $1,000 a month for insurance with Obamacare. This would come to 12 percent of their income. The piece tells readers:
“Experts consider health insurance unaffordable once it exceeds 10 percent of annual income.”
That’s interesting. If we go to the Kaiser Family Foundation website we find that the average employee contribution for an employer provided family plan is $4,240. The average employer contribution is $11,240. That gives us a total of $15,470. Most economists would say that we should treat the employers payment as a cost to the worker since in general employers are no more happy to pay money to health insurance companies than to their workers. If they didn’t pay this money as health insurance then they would be paying it to their workers in wages.
If we say that this family has a $70,000 annual income (roughly the median for two earner couples), then the cost of the health care policy would be close to 20 percent of their income, even adding in the $11,240 employer contribution to their income. This would mean the experts consulted by the NYT would think that most of the families with insurance have unaffordable insurance.
In this respect, the $1,000 a month that the Chapmans are paying under Obamacare looks pretty damn good. It is more than 20 percent less expensive than the average policy in the Kaiser survey. Of course a lot depends on what is covered and the extent of the deductibles, but based on the information given in the NYT article there is no reason that anyone should be shedding tears for the Chapmans.
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The NYT apparently hasn’t gotten the word. Kaiser Family Foundation did an analysis showing that the age composition of the insurance pool in the exchanges will have little impact on costs. The issue is the health mix. If the exchanges fail to attract older healthy people it will cause as much of a problem as if it fails to attract young healthy people. (On a per person basis the loss is larger, since healthy old people pay three times as much for insurance.)
Unfortunately the NYT has not gotten the word. It again told readers that:
“That requirement, often called an individual mandate, is needed to guarantee that insurers attract young healthy people to help offset the costs of covering older Americans who require more medical care, insurers say.”
The relevant adjective is “healthy,” young really doesn’t matter.
The NYT apparently hasn’t gotten the word. Kaiser Family Foundation did an analysis showing that the age composition of the insurance pool in the exchanges will have little impact on costs. The issue is the health mix. If the exchanges fail to attract older healthy people it will cause as much of a problem as if it fails to attract young healthy people. (On a per person basis the loss is larger, since healthy old people pay three times as much for insurance.)
Unfortunately the NYT has not gotten the word. It again told readers that:
“That requirement, often called an individual mandate, is needed to guarantee that insurers attract young healthy people to help offset the costs of covering older Americans who require more medical care, insurers say.”
The relevant adjective is “healthy,” young really doesn’t matter.
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Fareed Zakaria misses the story big-time when he tells readers that the super rich have gotten richer in the United States because, “globalization and technology help superstars.” This is not inherently true, it is only true when the government rigs the deck to accomplish this result.
For example, globalization could be used to promote competition in the CEO market so that U.S. corporations take advantage of the much lower paid CEOs in Europe and Asia to save tens of millions of dollars a year in wasted CEO pay. However because the corporate governance structure in the United States essentially allows CEOs to pick the corporate boards that decide their fate, corporations do not take advantage of this opportunity provided by globalization.
As another example, many huge fortunes earned in drugs and the high tech sector depend on strong government patent monopolies. It would be easy to devise systems that produced as much or more technological progress that did not redistribute so much income upward to those at the top. Many of the huge fortunes in the financial sector are attributable to the under-taxation of this sector and the large number of regulatory and tax loopholes that the government leaves in place to allow for fortunes to be made by the very rich.
It is very convenient for the wealthy to have the public believe that their riches came about through forces like globalization, as opposed to government rigging. It leads to views like those expressed by Zakaria:
“We don’t have all the answers, but if you’re looking for the policy that would likely have the biggest effect on increasing social mobility and reducing inequality, let’s shift the attention from the rich and the middle class and focus on the forgotten poor.”
This is known as “Loser Liberalism.”
Note: linked added.
Fareed Zakaria misses the story big-time when he tells readers that the super rich have gotten richer in the United States because, “globalization and technology help superstars.” This is not inherently true, it is only true when the government rigs the deck to accomplish this result.
For example, globalization could be used to promote competition in the CEO market so that U.S. corporations take advantage of the much lower paid CEOs in Europe and Asia to save tens of millions of dollars a year in wasted CEO pay. However because the corporate governance structure in the United States essentially allows CEOs to pick the corporate boards that decide their fate, corporations do not take advantage of this opportunity provided by globalization.
As another example, many huge fortunes earned in drugs and the high tech sector depend on strong government patent monopolies. It would be easy to devise systems that produced as much or more technological progress that did not redistribute so much income upward to those at the top. Many of the huge fortunes in the financial sector are attributable to the under-taxation of this sector and the large number of regulatory and tax loopholes that the government leaves in place to allow for fortunes to be made by the very rich.
It is very convenient for the wealthy to have the public believe that their riches came about through forces like globalization, as opposed to government rigging. It leads to views like those expressed by Zakaria:
“We don’t have all the answers, but if you’re looking for the policy that would likely have the biggest effect on increasing social mobility and reducing inequality, let’s shift the attention from the rich and the middle class and focus on the forgotten poor.”
This is known as “Loser Liberalism.”
Note: linked added.
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According to the Congressional Budget Office the economy is currently operating at a level of output that is 6 percent (@ $1 trillion) below its potential. This lost output represents income that would primarily go to currently unemployed or underemployed workers, a disproportionate share of whom are young. If the economy were near full employment, lower paid workers, who are also disproportionately young, could expect to see higher wages.
If Congress was prepared to spend more money on infrastructure, education and other areas it could return the economy to full employment. Many people might think that the decision to maintain high levels of unemployment, with the enormous cost implied, is the biggest budget problem facing the country. But the Post told them otherwise, using a front page news article to tell readers:
“The deal makes no effort to solve the nation’s biggest budget problem: a social safety net strained by an aging population.”
Most newspapers might reserve such editorializing for the opinion pages, but not Jeff Bezos’ Washington Post.
According to the Congressional Budget Office the economy is currently operating at a level of output that is 6 percent (@ $1 trillion) below its potential. This lost output represents income that would primarily go to currently unemployed or underemployed workers, a disproportionate share of whom are young. If the economy were near full employment, lower paid workers, who are also disproportionately young, could expect to see higher wages.
If Congress was prepared to spend more money on infrastructure, education and other areas it could return the economy to full employment. Many people might think that the decision to maintain high levels of unemployment, with the enormous cost implied, is the biggest budget problem facing the country. But the Post told them otherwise, using a front page news article to tell readers:
“The deal makes no effort to solve the nation’s biggest budget problem: a social safety net strained by an aging population.”
Most newspapers might reserve such editorializing for the opinion pages, but not Jeff Bezos’ Washington Post.
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The NYT had a great piece about how drug manufacturers contribute money to charities that help people meet co-payments on drugs. The way the deal works is that a drug company will charge a very high price, let’s say $50,000 a year, for a drug that may be of limited value compared to lower cost competitors. To discourage its use insurers require a 20 percent co-payment, which would mean patients have to cough up $10,00 a year.
This sort of co-payment would keep most people from using the drug. In order to prevent this outcome, the drug company gives money to its favored charities, which in turn make the patient’s co-payment. This gives the patient no reason to go with a cheaper drug. The drug company in this story nets $40,000 instead of $50,000, but they still come out way ahead on a drug that probably costs less than 1 percent of this amount to produce.This is exactly the sort of arrangement that one would expect when the government grants patent monopolies and other forms of protection that prevent market competition.
Addendum:
Some comments noted that the drug highlighted in the piece, H.P. Acthar Gel is not protected by a patent. This is true, it has a different form of government monopoly, data exclusivity. This will last into 2017, hence the ridiculously high price.
The NYT had a great piece about how drug manufacturers contribute money to charities that help people meet co-payments on drugs. The way the deal works is that a drug company will charge a very high price, let’s say $50,000 a year, for a drug that may be of limited value compared to lower cost competitors. To discourage its use insurers require a 20 percent co-payment, which would mean patients have to cough up $10,00 a year.
This sort of co-payment would keep most people from using the drug. In order to prevent this outcome, the drug company gives money to its favored charities, which in turn make the patient’s co-payment. This gives the patient no reason to go with a cheaper drug. The drug company in this story nets $40,000 instead of $50,000, but they still come out way ahead on a drug that probably costs less than 1 percent of this amount to produce.This is exactly the sort of arrangement that one would expect when the government grants patent monopolies and other forms of protection that prevent market competition.
Addendum:
Some comments noted that the drug highlighted in the piece, H.P. Acthar Gel is not protected by a patent. This is true, it has a different form of government monopoly, data exclusivity. This will last into 2017, hence the ridiculously high price.
Read More Leer más Join the discussion Participa en la discusión
Ben Bernanke has definitely done some things right in dealing with the downturn, most importantly having the Fed act more aggressively than many other central banks in trying to boost the economy. However his record has far more blemishes than Neil Irwin notes in his ‘how history will judge‘ piece.
First of all, Ben Bernanke was less of an innocent bystander than Irwin implies. While he had been a Princeton academic before becoming Fed chair, that was not immediately before becoming Fed chair. He had been a member of the board of governors of the Federal Reserve from 2002 to 2005. In 2005 he became the head of President Bush’s Council of Economic Advisers. It was during this period that the housing bubble was growing to ever more dangerous levels, fueled by mass produced junk mortgages. The latter were being packaged in mortgage-backed securities and sold around the world. Bernanke was right there in the middle of this and apparently thought everything was just fine.
Irwin also downplays the extent to which Bernanke failed to appreciate the disaster even as it was unfolding. Bernanke apparently failed to recognize that the loss of more than $1 trillion in annual demand from the collapse of the housing bubble could not be easily replaced from other sources. He also totally missed the depths of the financial crisis.
For example, after Bear Stearns collapsed in March of 2008, he testified to Congress that he didn’t see another Bear Stearns out there. Of course there were plenty more Bear Stearns out there with names like Lehman, AIG, Fannie Mae, Freddie Mac, Goldman Sachs etc. The whole gang would have gone belly up by the end of the year were it not for massive intervention by the government. (At the time of the Bear Stearns comment, the media were too polite to note that Bernanke had not seen the last Bear Stearns.)
The claim that Bernanke could not have rescued Lehman because they lacked the legal authority is also dubious. Bernanke did many things in the crisis with questionable legal authority. Suppose that the Fed and Treasury had rescued Lehman, who would have taken them to court? This one might fool little kids and Washington Post reporters, it is not the sort of thing that adults need to take seriously.
Irwin also glosses over the basic story of the Fed/Treasury bailouts of Wall Street. The bailouts were designed to keep the Wall Street boys living high at the expense of the rest of the country. While it was desirable to prevent a full scale collapse, this could have been done by imposing strict conditions on bailout money that would have ensured the financial system would be fundamentally restructured. This would have meant telling Goldman Sachs, Morgan Stanley, and the rest that if they want to stay alive they will have to agree to become fundamentally different institutions (e.g. smaller, more narrowly focused on normal banking activities etc.). Since these banks were on their death bed, they would have little choice. (Btw, the idea that we risked a second Great Depression from a complete collapse is also a fairy tale for the kids. We know how to get out of a depression: spend money.)
Instead of trying to ensure that bailout money came with strict conditions, for example by calling Congress’ attention to the fact that he was keeping banks on life support and that Congress could impose conditions on these handouts, Bernanke did the opposite. He helped sell the TARP as an emergency no questions asked bailout. He hyped the case by warning Congress that the commercial paper market (a cash lifeline for even healthy businesses) was shutting down. He didn’t bother to mention that the Fed had the power to single-handedly keep the commercial paper market in business. He waited until the weekend after the TARP passed to announce the creation of a special lending facility for this purpose. This act of deception should feature prominently in any discussion of Bernanke’s tenure.
Bizarrely, Irwin comments on the evidence of bubble’s developing in the QE low interest rate environment:
“some markets — for farmland in middle America, emerging market bonds — have even flirted with bubble territory, helped along by Bernanke’s money printing.”
He left housing off the list for some reason. In the spring of this year house prices were roughly 10 percent about their trend levels. While this is not terribly frightening, they were rising at a double digit annual rate. Furthermore, in many markets prices were rising at 20-30 percent annual rates. There were serious grounds for concern about a new housing bubble.
Interestingly, Bernanke’s June taper talk appears to have taken the air out of this bubble. It sent mortgage interest rates up by more than a percentage point. That caused many investors to flee the market, leading to a sharp deceleration in the rate of price appreciation. This may not have been Bernanke’s intention, but it was an important and desirable outcome of the taper talk. Of course it would have been hoped by now that the Fed would be prepared to use other tools than interest rates to try to stem the growth of asset bubbles.
These are all important features of Bernanke’s tenure that readers should know. Let’s hope history does a better job than Irwin.
Ben Bernanke has definitely done some things right in dealing with the downturn, most importantly having the Fed act more aggressively than many other central banks in trying to boost the economy. However his record has far more blemishes than Neil Irwin notes in his ‘how history will judge‘ piece.
First of all, Ben Bernanke was less of an innocent bystander than Irwin implies. While he had been a Princeton academic before becoming Fed chair, that was not immediately before becoming Fed chair. He had been a member of the board of governors of the Federal Reserve from 2002 to 2005. In 2005 he became the head of President Bush’s Council of Economic Advisers. It was during this period that the housing bubble was growing to ever more dangerous levels, fueled by mass produced junk mortgages. The latter were being packaged in mortgage-backed securities and sold around the world. Bernanke was right there in the middle of this and apparently thought everything was just fine.
Irwin also downplays the extent to which Bernanke failed to appreciate the disaster even as it was unfolding. Bernanke apparently failed to recognize that the loss of more than $1 trillion in annual demand from the collapse of the housing bubble could not be easily replaced from other sources. He also totally missed the depths of the financial crisis.
For example, after Bear Stearns collapsed in March of 2008, he testified to Congress that he didn’t see another Bear Stearns out there. Of course there were plenty more Bear Stearns out there with names like Lehman, AIG, Fannie Mae, Freddie Mac, Goldman Sachs etc. The whole gang would have gone belly up by the end of the year were it not for massive intervention by the government. (At the time of the Bear Stearns comment, the media were too polite to note that Bernanke had not seen the last Bear Stearns.)
The claim that Bernanke could not have rescued Lehman because they lacked the legal authority is also dubious. Bernanke did many things in the crisis with questionable legal authority. Suppose that the Fed and Treasury had rescued Lehman, who would have taken them to court? This one might fool little kids and Washington Post reporters, it is not the sort of thing that adults need to take seriously.
Irwin also glosses over the basic story of the Fed/Treasury bailouts of Wall Street. The bailouts were designed to keep the Wall Street boys living high at the expense of the rest of the country. While it was desirable to prevent a full scale collapse, this could have been done by imposing strict conditions on bailout money that would have ensured the financial system would be fundamentally restructured. This would have meant telling Goldman Sachs, Morgan Stanley, and the rest that if they want to stay alive they will have to agree to become fundamentally different institutions (e.g. smaller, more narrowly focused on normal banking activities etc.). Since these banks were on their death bed, they would have little choice. (Btw, the idea that we risked a second Great Depression from a complete collapse is also a fairy tale for the kids. We know how to get out of a depression: spend money.)
Instead of trying to ensure that bailout money came with strict conditions, for example by calling Congress’ attention to the fact that he was keeping banks on life support and that Congress could impose conditions on these handouts, Bernanke did the opposite. He helped sell the TARP as an emergency no questions asked bailout. He hyped the case by warning Congress that the commercial paper market (a cash lifeline for even healthy businesses) was shutting down. He didn’t bother to mention that the Fed had the power to single-handedly keep the commercial paper market in business. He waited until the weekend after the TARP passed to announce the creation of a special lending facility for this purpose. This act of deception should feature prominently in any discussion of Bernanke’s tenure.
Bizarrely, Irwin comments on the evidence of bubble’s developing in the QE low interest rate environment:
“some markets — for farmland in middle America, emerging market bonds — have even flirted with bubble territory, helped along by Bernanke’s money printing.”
He left housing off the list for some reason. In the spring of this year house prices were roughly 10 percent about their trend levels. While this is not terribly frightening, they were rising at a double digit annual rate. Furthermore, in many markets prices were rising at 20-30 percent annual rates. There were serious grounds for concern about a new housing bubble.
Interestingly, Bernanke’s June taper talk appears to have taken the air out of this bubble. It sent mortgage interest rates up by more than a percentage point. That caused many investors to flee the market, leading to a sharp deceleration in the rate of price appreciation. This may not have been Bernanke’s intention, but it was an important and desirable outcome of the taper talk. Of course it would have been hoped by now that the Fed would be prepared to use other tools than interest rates to try to stem the growth of asset bubbles.
These are all important features of Bernanke’s tenure that readers should know. Let’s hope history does a better job than Irwin.
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