A front page Washington Post article discussed the choice that people in Greece must consider, of either staying in the euro and facing perhaps a decade or more of double-digit unemployment, or leaving the euro and facing the uncertainty of going back to its own currency. The Post misrepresented the tradeoffs involved when it presented the views of Nikas Niakaros, an exporter of feta cheese:
“But instead, Niakaros is sweating bullets. Like many Greek exporters, he depends on a supply chain of imported goods — from specially enriched feed for his sheep to the natural gas used to power his factory — that would spike in price if Greece left the euro. Business loans, meanwhile, would be far more expensive and harder to get. Add unpredictable jumps in inflation as happened during the era of the drachma, and, Niakaros said, the cost benefits of a cheaper currency would disappear.”
While this may accurately present Mr. Niakaros’ assessment, he happens to be wrong. If the Greek currency falls by 20 percent relative to the euro, this could mean that the price that Mr. Niakaros pays for his imported inputs will rise by 20 percent. It should also mean that the price he can sell his feta will rise by roughly 20 percent measured in the new Greek currency. However, the amount that he pays in wages to Greek workers and rent for his property will almost certainly not rise by 20 percent. This should mean that he will hugely increase his profits on the portion of his output that he exports.
While it is interesting to get the views of the people of Greece on how they would be affected by an exit from the euro, the Post should be careful not to present inaccurate information unchallenged. Most of its readers probably will not know that Mr. Niakoros’s assessment of the situation is wrong.
A front page Washington Post article discussed the choice that people in Greece must consider, of either staying in the euro and facing perhaps a decade or more of double-digit unemployment, or leaving the euro and facing the uncertainty of going back to its own currency. The Post misrepresented the tradeoffs involved when it presented the views of Nikas Niakaros, an exporter of feta cheese:
“But instead, Niakaros is sweating bullets. Like many Greek exporters, he depends on a supply chain of imported goods — from specially enriched feed for his sheep to the natural gas used to power his factory — that would spike in price if Greece left the euro. Business loans, meanwhile, would be far more expensive and harder to get. Add unpredictable jumps in inflation as happened during the era of the drachma, and, Niakaros said, the cost benefits of a cheaper currency would disappear.”
While this may accurately present Mr. Niakaros’ assessment, he happens to be wrong. If the Greek currency falls by 20 percent relative to the euro, this could mean that the price that Mr. Niakaros pays for his imported inputs will rise by 20 percent. It should also mean that the price he can sell his feta will rise by roughly 20 percent measured in the new Greek currency. However, the amount that he pays in wages to Greek workers and rent for his property will almost certainly not rise by 20 percent. This should mean that he will hugely increase his profits on the portion of his output that he exports.
While it is interesting to get the views of the people of Greece on how they would be affected by an exit from the euro, the Post should be careful not to present inaccurate information unchallenged. Most of its readers probably will not know that Mr. Niakoros’s assessment of the situation is wrong.
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The methodology that the Treasury Department is using when claiming that we made money on the TARP would imply that the government could make money by issuing a 30-year mortgage at 1.0 percent interest to every homeowners in the country. The vast majority of these mortgages would of course be paid off with interest, therefore the taxpayers would come out ahead.
This is ridiculous accounting, as Gretchen Morgenson points out in her column today. There is an opportunity cost to this money and if that is not taken into account, there is no way to say whether this lending is profitable. In the case of the TARP and related Fed lending programs, financial institutions were able to borrow trillions of dollars at far below market interest rates.
These programs may have been justified given the situation in financial markets at the time, however it is ridiculous to say that we made a profit on the lending based on the fact that most of the money was repaid with interest just as it would be ridiculous to claim a profit on 1.0 percent 30-year fixed rate mortgages issued by the government.
In the FWIW category, anyone saying that we would have had a second Great Depression absent this lending should be immediately ignored. The first Great Depression was caused by 10 years of inadequate policy response, not just the mistakes made at the onset. There was nothing that we did or did not do in 2008-2009 that would have necessitated a decade of incompetent policy.
Argentina was able to recover from a full-fledged financial collapse in less than 18 months. There is no reason to believe that Ben Bernanke and other leading policy makers are very much less competent than the people determining economic policy in Argentina.
The methodology that the Treasury Department is using when claiming that we made money on the TARP would imply that the government could make money by issuing a 30-year mortgage at 1.0 percent interest to every homeowners in the country. The vast majority of these mortgages would of course be paid off with interest, therefore the taxpayers would come out ahead.
This is ridiculous accounting, as Gretchen Morgenson points out in her column today. There is an opportunity cost to this money and if that is not taken into account, there is no way to say whether this lending is profitable. In the case of the TARP and related Fed lending programs, financial institutions were able to borrow trillions of dollars at far below market interest rates.
These programs may have been justified given the situation in financial markets at the time, however it is ridiculous to say that we made a profit on the lending based on the fact that most of the money was repaid with interest just as it would be ridiculous to claim a profit on 1.0 percent 30-year fixed rate mortgages issued by the government.
In the FWIW category, anyone saying that we would have had a second Great Depression absent this lending should be immediately ignored. The first Great Depression was caused by 10 years of inadequate policy response, not just the mistakes made at the onset. There was nothing that we did or did not do in 2008-2009 that would have necessitated a decade of incompetent policy.
Argentina was able to recover from a full-fledged financial collapse in less than 18 months. There is no reason to believe that Ben Bernanke and other leading policy makers are very much less competent than the people determining economic policy in Argentina.
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David Brooks lectures us this morning on the need to have a balance between self-doubt and self-confidence.
“Western democratic systems were based on a balance between self-doubt and self-confidence. They worked because there were structures that protected the voters from themselves and the rulers from themselves. Once people lost a sense of their own weakness, the self-doubt went away and the chastening structures were overwhelmed.”
According to Brooks:
“In Europe, workers across the Continent want great lifestyles without long work hours. They want dynamic capitalism but also personal security. European welfare states go broke trying to deliver these impossibilities.”
The problem of course is that these are not impossibilities. Like the United States, Europe’s economies increase their productivity every year. Higher productivity growth means that people can enjoy higher living standards. There is absolutely nothing impossible about having dynamic capitalism along with security and shorter work hours. In fact, the latter is arguably the purpose of the former. In the European welfare states the economies were structured in a way that led more of the gains from this growth to be broadly shared as opposed to the United States, where the economy was structured to distribute most of the gains to those at the top.
And the European welfare states were not going broke. Until the crisis the most generous welfare states in northern Europe were either running budget surpluses or relatively small sustainable deficits. (Yes, these are surpluses — positive is larger.) Unlike the United States these countries also had trade surpluses or small deficits.
Source: International Monetary Fund.
In short, the underlying claim of Brooks’ eloquent homily on self-doubt and self-confidence is not true. If Brooks had a bit more self-doubt perhaps he would have bothered to look at the data or consult someone who knew the data before devoting valuable space on the NYT oped page to making a point that is not valid.
David Brooks lectures us this morning on the need to have a balance between self-doubt and self-confidence.
“Western democratic systems were based on a balance between self-doubt and self-confidence. They worked because there were structures that protected the voters from themselves and the rulers from themselves. Once people lost a sense of their own weakness, the self-doubt went away and the chastening structures were overwhelmed.”
According to Brooks:
“In Europe, workers across the Continent want great lifestyles without long work hours. They want dynamic capitalism but also personal security. European welfare states go broke trying to deliver these impossibilities.”
The problem of course is that these are not impossibilities. Like the United States, Europe’s economies increase their productivity every year. Higher productivity growth means that people can enjoy higher living standards. There is absolutely nothing impossible about having dynamic capitalism along with security and shorter work hours. In fact, the latter is arguably the purpose of the former. In the European welfare states the economies were structured in a way that led more of the gains from this growth to be broadly shared as opposed to the United States, where the economy was structured to distribute most of the gains to those at the top.
And the European welfare states were not going broke. Until the crisis the most generous welfare states in northern Europe were either running budget surpluses or relatively small sustainable deficits. (Yes, these are surpluses — positive is larger.) Unlike the United States these countries also had trade surpluses or small deficits.
Source: International Monetary Fund.
In short, the underlying claim of Brooks’ eloquent homily on self-doubt and self-confidence is not true. If Brooks had a bit more self-doubt perhaps he would have bothered to look at the data or consult someone who knew the data before devoting valuable space on the NYT oped page to making a point that is not valid.
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The NYT had an article reporting the fact that whites did not constitute a majority of births in the United States for the first time in the 12 months from July 2010 to July 2011. While this is interesting, it is important to note that the concept of “white” is not well-defined. In the late 19th century, many people of northern European ancestry would not have considered people from the southern Europe and eastern Europe to be of the same racial group. This hostility was put into law in immigration acts passed in 1921 and 1924 that were consciously designed to restrict immigration from these regions.
It is virtually certain that many of the people from groups not currently viewed as “white” will be in subsequent decades. This is especially likely as intermarriage between these groups increase.
The piece also bizarrely tells readers that:
“A more diverse young population forms the basis of a generational divide with the country’s elderly, a group that is largely white and grew up in a world that was too.
The contrast raises important policy questions. The United States has a spotty record educating minority youth; will older Americans balk at paying to educate a younger generation that looks less like themselves?”
While it is true that the older population is much more white than the younger population, the wealthy are also much more white than the younger population. Since the wealthy have a hugely disproportionate share of political power and do pay a disproportionate share of taxes, it is likely to matter much more to the non-white young whether wealthy whites as a group care about their future rather than if elderly whites do.
The NYT had an article reporting the fact that whites did not constitute a majority of births in the United States for the first time in the 12 months from July 2010 to July 2011. While this is interesting, it is important to note that the concept of “white” is not well-defined. In the late 19th century, many people of northern European ancestry would not have considered people from the southern Europe and eastern Europe to be of the same racial group. This hostility was put into law in immigration acts passed in 1921 and 1924 that were consciously designed to restrict immigration from these regions.
It is virtually certain that many of the people from groups not currently viewed as “white” will be in subsequent decades. This is especially likely as intermarriage between these groups increase.
The piece also bizarrely tells readers that:
“A more diverse young population forms the basis of a generational divide with the country’s elderly, a group that is largely white and grew up in a world that was too.
The contrast raises important policy questions. The United States has a spotty record educating minority youth; will older Americans balk at paying to educate a younger generation that looks less like themselves?”
While it is true that the older population is much more white than the younger population, the wealthy are also much more white than the younger population. Since the wealthy have a hugely disproportionate share of political power and do pay a disproportionate share of taxes, it is likely to matter much more to the non-white young whether wealthy whites as a group care about their future rather than if elderly whites do.
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When you hear the passive voice, as in “mistakes were made,” it’s a good idea to get out the ammunition. The Post gave us a great example in a piece that discussed the meeting of G-8 leaders and plans to deal with the euro zone crisis. The piece told readers that:
“Italian Prime Minister Mario Monti took office in November and, while given credit for taking a tougher line on government spending, has yet to win parliamentary approval for broader labor and regulatory policy changes considered central to boosting growth.”
Hmmm, these measures are “considered central to boosting growth.” Do we have any idea who has done this considering? Could the Post possibly share this with readers?
The folks I know consider boosts to demand, such as increased stimulus or a commitment to higher wage growth and inflation in northern Europe as being central to boosting growth. They point to research that suggests that the proposed changes in labor regulatory policy will have at best a modest impact on growth and even this will only be felt in the long-term, not over the next 2-3 years.
It would be useful if the Post could assign names to the folks who claim to believe otherwise so that they can be held accountable for their mistake when it becomes more obvious.
When you hear the passive voice, as in “mistakes were made,” it’s a good idea to get out the ammunition. The Post gave us a great example in a piece that discussed the meeting of G-8 leaders and plans to deal with the euro zone crisis. The piece told readers that:
“Italian Prime Minister Mario Monti took office in November and, while given credit for taking a tougher line on government spending, has yet to win parliamentary approval for broader labor and regulatory policy changes considered central to boosting growth.”
Hmmm, these measures are “considered central to boosting growth.” Do we have any idea who has done this considering? Could the Post possibly share this with readers?
The folks I know consider boosts to demand, such as increased stimulus or a commitment to higher wage growth and inflation in northern Europe as being central to boosting growth. They point to research that suggests that the proposed changes in labor regulatory policy will have at best a modest impact on growth and even this will only be felt in the long-term, not over the next 2-3 years.
It would be useful if the Post could assign names to the folks who claim to believe otherwise so that they can be held accountable for their mistake when it becomes more obvious.
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I think what we have here is a failure to communicate. All the critics I know, like Paul Krugman, Brad DeLong, Mark Thoma and myself, have been very specific that the European Central Bank (ECB) will have to provide some form of guarantee for the debt of the crisis countries. It will also have to promote higher inflation in the euro zone as a whole and particularly in Germany and other core countries. The former step would allow countries to borrow, while the latter would provide the basis for regaining competitiveness in the long-run.
In my case, I have been regularly ridiculing the ECB’s obsession with fortifying its Maginot Line of keeping inflation under 2.0 percent. That accomplishment will be long remembered after the collapse of the euro.
Anyhow a Post editorial told readers that:
“In their demand for growth, however, the critics fail to explain how to fund it.”
This raises the question of what critics the Post is referring to. Is the Post referring to the most prominent economists who have been arguing against European austerity and somehow cannot figure out what they are saying, or is there a whole different group of people who the Post turns to as the major critics of austerity? Inquiring minds want to know.
I think what we have here is a failure to communicate. All the critics I know, like Paul Krugman, Brad DeLong, Mark Thoma and myself, have been very specific that the European Central Bank (ECB) will have to provide some form of guarantee for the debt of the crisis countries. It will also have to promote higher inflation in the euro zone as a whole and particularly in Germany and other core countries. The former step would allow countries to borrow, while the latter would provide the basis for regaining competitiveness in the long-run.
In my case, I have been regularly ridiculing the ECB’s obsession with fortifying its Maginot Line of keeping inflation under 2.0 percent. That accomplishment will be long remembered after the collapse of the euro.
Anyhow a Post editorial told readers that:
“In their demand for growth, however, the critics fail to explain how to fund it.”
This raises the question of what critics the Post is referring to. Is the Post referring to the most prominent economists who have been arguing against European austerity and somehow cannot figure out what they are saying, or is there a whole different group of people who the Post turns to as the major critics of austerity? Inquiring minds want to know.
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Robert Samuelson says that people are taking away the wrong lessons from JPMorgan’s $2 billion loss on a proprietary trade gone bad. He has some legitimate points but carries his case too far.
First, he notes that this bet did not threaten either the banking system or JPMorgan. He points out that JPMorgan is a huge and highly profitable bank. Its books look to be in reasonably good shape. A $2 billion loss will be felt, but this is less than the normal profit in a quarter. It does not come close to threatening the bank’s survival and certainly poses no risk to the financial system.
This is all true, but it misses the point that even in the post Dodd-Frank era, a large financial institution is still effectively able to take big risks with the taxpayers’ money. If this bet, or a bigger one, had gone bad when the bank’s balance sheets were more questionable (suppose Bank of America or Citigroup had done the same deal — especially in 2009), it could well have pushed them off the cliff. At the least, this would mean a government payout to cover insured depositors. Since JPMorgan is certainly in the “too big to fail category,” it almost certainly would have meant payments to non-insured creditors as well.
Samuelson then tells us that the banks’ biggest losses usually come from old-fashioned lending, not proprietary trading. This is right. The huge losses in 2007-2009 were on mortgage loans, but this does not preclude the fact that individual banks can, and often do, put their survival in jeopardy by making big proprietary bets. Again, the point is to not have the banks take big bets with the taxpayers’ money.
Samuelson’s third point is the most problematic. He tells readers that:
“Government regulation can’t prevent banking or financial crises. …. But regulators’ practical power is limited, because they are no smarter than the bankers they regulate. Sharing similar assumptions, regulators and bankers may recognize a true crisis only when it’s become unavoidable.”
This one really gets to the crux of the problem. The housing bubble was easy to see and those of us who are fans of arithmetic absolutely did see it. House prices had risen hugely out of line with their long-term trend with no remotely plausible explanation in the fundamentals of the housing market.
There were people in the financial sector and the regulatory agencies who did recognize that things had gone awry. These people were told keep their mouths shut and in some cases were fired. With few exceptions, nothing bad happened to the people who got things wrong in a really big way. Alan Greenspan and Robert Rubin are both really rich and still feted as wise men who have great pearls of wisdom to share with the rest of us.
As long as this structure of incentive is not changed, then Samuelson will be right, regulators will not be able to prevent financial crisis. However the key point is to change the structure of incentives. There should be no blanket “who could have known?” amnesties.
The people on top should have known. The information was all there. Anyone in a top policy position in the bubble years (2002-2007) who was not screaming warnings at the top of their lungs should be sent packing. They obviously are not qualified for their jobs.
Shareholders in financial institutions should treat their top management the same way, although the corruption of corporate governance makes this sort of accountability almost impossible. At the least, the financial institutions most caught up in pushing and securitizing bad packages should be scrutinized for criminal conduct. Issuing and securitizing a mortgage that is known to be fraudulent is fraud.
Of course none of this has happened. Given the current incentive structure, Samuelson is absolutely right. There is no reason to believe that regulation will prevent a financial crisis. After all, why should a civil servant go out of their way to pick a fight with Lloyd Blankfein or Jamie Dimon? It will always be easier to look the other way when they see dangerous practices and then take advantage of the “who could have known?” amnesty. Unless we change the structure of incentives, we have done nothing to reduce the risk of another crisis.
Robert Samuelson says that people are taking away the wrong lessons from JPMorgan’s $2 billion loss on a proprietary trade gone bad. He has some legitimate points but carries his case too far.
First, he notes that this bet did not threaten either the banking system or JPMorgan. He points out that JPMorgan is a huge and highly profitable bank. Its books look to be in reasonably good shape. A $2 billion loss will be felt, but this is less than the normal profit in a quarter. It does not come close to threatening the bank’s survival and certainly poses no risk to the financial system.
This is all true, but it misses the point that even in the post Dodd-Frank era, a large financial institution is still effectively able to take big risks with the taxpayers’ money. If this bet, or a bigger one, had gone bad when the bank’s balance sheets were more questionable (suppose Bank of America or Citigroup had done the same deal — especially in 2009), it could well have pushed them off the cliff. At the least, this would mean a government payout to cover insured depositors. Since JPMorgan is certainly in the “too big to fail category,” it almost certainly would have meant payments to non-insured creditors as well.
Samuelson then tells us that the banks’ biggest losses usually come from old-fashioned lending, not proprietary trading. This is right. The huge losses in 2007-2009 were on mortgage loans, but this does not preclude the fact that individual banks can, and often do, put their survival in jeopardy by making big proprietary bets. Again, the point is to not have the banks take big bets with the taxpayers’ money.
Samuelson’s third point is the most problematic. He tells readers that:
“Government regulation can’t prevent banking or financial crises. …. But regulators’ practical power is limited, because they are no smarter than the bankers they regulate. Sharing similar assumptions, regulators and bankers may recognize a true crisis only when it’s become unavoidable.”
This one really gets to the crux of the problem. The housing bubble was easy to see and those of us who are fans of arithmetic absolutely did see it. House prices had risen hugely out of line with their long-term trend with no remotely plausible explanation in the fundamentals of the housing market.
There were people in the financial sector and the regulatory agencies who did recognize that things had gone awry. These people were told keep their mouths shut and in some cases were fired. With few exceptions, nothing bad happened to the people who got things wrong in a really big way. Alan Greenspan and Robert Rubin are both really rich and still feted as wise men who have great pearls of wisdom to share with the rest of us.
As long as this structure of incentive is not changed, then Samuelson will be right, regulators will not be able to prevent financial crisis. However the key point is to change the structure of incentives. There should be no blanket “who could have known?” amnesties.
The people on top should have known. The information was all there. Anyone in a top policy position in the bubble years (2002-2007) who was not screaming warnings at the top of their lungs should be sent packing. They obviously are not qualified for their jobs.
Shareholders in financial institutions should treat their top management the same way, although the corruption of corporate governance makes this sort of accountability almost impossible. At the least, the financial institutions most caught up in pushing and securitizing bad packages should be scrutinized for criminal conduct. Issuing and securitizing a mortgage that is known to be fraudulent is fraud.
Of course none of this has happened. Given the current incentive structure, Samuelson is absolutely right. There is no reason to believe that regulation will prevent a financial crisis. After all, why should a civil servant go out of their way to pick a fight with Lloyd Blankfein or Jamie Dimon? It will always be easier to look the other way when they see dangerous practices and then take advantage of the “who could have known?” amnesty. Unless we change the structure of incentives, we have done nothing to reduce the risk of another crisis.
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As President Reagan used to say, “there you go again.” Yes, the Washington Post is once again telling its readers that the problem in Europe is profligate spending by the crisis countries. The fact that this is not true apparently does not concern the paper.
At one point a front page article on the governmental crisis in Greece tells readers:
“Governments have dramatically cut spending in Greece and other euro-zone members — including Spain, Italy and Ireland — to try to restore investor confidence in nations that drastically overborrowed and overspent during the past decade.”
Fans of arithmetic know that Italy’s debt to GDP ratio, although high, was actually declining in the years just before the crisis. Spain and Ireland were both running budget surpluses. So this story does not fit the facts.
What did happen was that these countries, especially Spain and Ireland, had unsustainable housing bubbles that were fueled by foolish bankers in Germany and elsewhere in northern Europe. The bubble is the story of the crisis in these countries, not profligate government spending.
As President Reagan used to say, “there you go again.” Yes, the Washington Post is once again telling its readers that the problem in Europe is profligate spending by the crisis countries. The fact that this is not true apparently does not concern the paper.
At one point a front page article on the governmental crisis in Greece tells readers:
“Governments have dramatically cut spending in Greece and other euro-zone members — including Spain, Italy and Ireland — to try to restore investor confidence in nations that drastically overborrowed and overspent during the past decade.”
Fans of arithmetic know that Italy’s debt to GDP ratio, although high, was actually declining in the years just before the crisis. Spain and Ireland were both running budget surpluses. So this story does not fit the facts.
What did happen was that these countries, especially Spain and Ireland, had unsustainable housing bubbles that were fueled by foolish bankers in Germany and elsewhere in northern Europe. The bubble is the story of the crisis in these countries, not profligate government spending.
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The Wall Street Journal gave considerable play to a new report by Credit Suisse that warns about the condition of multi-employer pension plan. The article tells readers that the Department of Labor:
“uses an ‘actuarial’ reading of the numbers, which envisions an average (and hefty) 7.5% rate of return on investments, smoothed over five years.”
Actually, given the current price to earning ratio in the stock market, a 7.5 percent nominal return assumption is perfectly reasonable for funds that are 60-70 percent invested in stocks. (Fans of arithmetic can try playing with the numbers themselves with CEPR’s pension return calculator.)
It would have been helpful if Credit Suisse and the Wall Street Journal made similar warnings about excessive return assumptions back in the late 90s when the price to earning ratio in the stock market was crossing 30 to 1. At that time, the 7.5 percent return assumptions of pension funds really were “hefty.” In fact, they were ridiculous, but there was no interest in listening to those of us who were issuing such warnings.
[Addendum: CEPR’s pension calculator shows the future price to earnings ratios (value of all corporate equity relative to all after-tax corporate profit) under a baseline projection that assumes the same profit growth rate as the Congressional Budget Office and a 9.5 percent nominal rate of return on stocks. We allow users to vary assumptions on growth rates and rates of return to see how that would affect price to earnings ratios. Enjoy!]
The Wall Street Journal gave considerable play to a new report by Credit Suisse that warns about the condition of multi-employer pension plan. The article tells readers that the Department of Labor:
“uses an ‘actuarial’ reading of the numbers, which envisions an average (and hefty) 7.5% rate of return on investments, smoothed over five years.”
Actually, given the current price to earning ratio in the stock market, a 7.5 percent nominal return assumption is perfectly reasonable for funds that are 60-70 percent invested in stocks. (Fans of arithmetic can try playing with the numbers themselves with CEPR’s pension return calculator.)
It would have been helpful if Credit Suisse and the Wall Street Journal made similar warnings about excessive return assumptions back in the late 90s when the price to earning ratio in the stock market was crossing 30 to 1. At that time, the 7.5 percent return assumptions of pension funds really were “hefty.” In fact, they were ridiculous, but there was no interest in listening to those of us who were issuing such warnings.
[Addendum: CEPR’s pension calculator shows the future price to earnings ratios (value of all corporate equity relative to all after-tax corporate profit) under a baseline projection that assumes the same profit growth rate as the Congressional Budget Office and a 9.5 percent nominal rate of return on stocks. We allow users to vary assumptions on growth rates and rates of return to see how that would affect price to earnings ratios. Enjoy!]
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