The people who have been working for more than a decade to have states use their public employee pension systems to provide pensions to workers in the private sector will undoubtedly be happy to see the NYT’s piece on the topic this morning. However they will be surprised to have the idea referred to as “new.”
At the top of this list would be the Economic Opportunity Institute in Seattle, Washington, which has been promoting “Washington Voluntary Accounts” since 2000. They even got legislation approved a few years back, but the fiscal crisis resulting from the recession nixed the start-up funding.
There was a similar effort in California in 2007 to piggy back pensions on its CALPERS system. Connecticut and Maryland’s legislatures were also close to approving comparable measures. Anyhow, it’s great to see the NYT finally take notice now that some efforts are being made in New York on this issue, but it would be good if it did its homework.
(Here‘s one of my papers on the topic.)
The people who have been working for more than a decade to have states use their public employee pension systems to provide pensions to workers in the private sector will undoubtedly be happy to see the NYT’s piece on the topic this morning. However they will be surprised to have the idea referred to as “new.”
At the top of this list would be the Economic Opportunity Institute in Seattle, Washington, which has been promoting “Washington Voluntary Accounts” since 2000. They even got legislation approved a few years back, but the fiscal crisis resulting from the recession nixed the start-up funding.
There was a similar effort in California in 2007 to piggy back pensions on its CALPERS system. Connecticut and Maryland’s legislatures were also close to approving comparable measures. Anyhow, it’s great to see the NYT finally take notice now that some efforts are being made in New York on this issue, but it would be good if it did its homework.
(Here‘s one of my papers on the topic.)
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The NYT had a story about an uptick in confidence among German retailers, suggesting that German consumers will increase their spending. The piece noted that Germans save more than people in the U.S. then told readers:
“Germany’s economy has traditionally been driven by exports of cars and machinery, while domestic demand has been comparatively weak. In fact, the country has been something of a graveyard for retailers. Wal-Mart gave up trying to crack the German market in 2006. Karstadt, the nation’s largest chain of department stores, filed for insolvency in 2010, although it has since restructured and become profitable.”
In Germany consumption accounts for 57 percent of GDP compared to around 70 percent in the U.S.. This difference is not the reason that retailers fail in Germany, because the gap is not new.
Retailers fail in Germany for the same reason that K-Mart and Borders failed in the U.S.; they do a poor job of serving their customers. There are plenty of retail stores that are able to do just fine in Germany even with a smaller share of GDP going to consumption.
Addendum:
Andrew Watt at the European Trade Union Institute, offers a correction. He points out that the consumption share of GDP did in fact rise substantially in the United States from the mid-90s to the present. This would mean that the retail market had improved in the United States relative to Germany, where the consumption share remained pretty much constant over this period.
The NYT had a story about an uptick in confidence among German retailers, suggesting that German consumers will increase their spending. The piece noted that Germans save more than people in the U.S. then told readers:
“Germany’s economy has traditionally been driven by exports of cars and machinery, while domestic demand has been comparatively weak. In fact, the country has been something of a graveyard for retailers. Wal-Mart gave up trying to crack the German market in 2006. Karstadt, the nation’s largest chain of department stores, filed for insolvency in 2010, although it has since restructured and become profitable.”
In Germany consumption accounts for 57 percent of GDP compared to around 70 percent in the U.S.. This difference is not the reason that retailers fail in Germany, because the gap is not new.
Retailers fail in Germany for the same reason that K-Mart and Borders failed in the U.S.; they do a poor job of serving their customers. There are plenty of retail stores that are able to do just fine in Germany even with a smaller share of GDP going to consumption.
Addendum:
Andrew Watt at the European Trade Union Institute, offers a correction. He points out that the consumption share of GDP did in fact rise substantially in the United States from the mid-90s to the present. This would mean that the retail market had improved in the United States relative to Germany, where the consumption share remained pretty much constant over this period.
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Wow, nothing gets by Robert Samuelson. He tells us today that he has uncovered the secret as to why President Obama insisted on pushing for the Affordable Care Act (ACA). It all boils down to his big ego.
At the end of a piece titled “Obama’s Ego Trip,” Samuelson cites a section of book by Noam Scheiber on the Obama presidency:
“Obama’s advisers tell him he can be known for preventing a second Great Depression. ‘That’s not enough for me,’ Obama replies.”
There it is: President Obama’s big ego. Well, perhaps someone should share a little secret with Samuelson: all presidents have big egos. They wouldn’t end up with the job otherwise.
Also, perhaps Samuelson missed it, but President Obama campaigned on health care reform. This is a very important political issue to a large portion of his constituency. They would have been very angry, or least disappointed, if he failed to deliver.
In terms of making the case that it is a bad bill, Samuelson should do a better job of reading his own sources. He dismisses the impact of health insurance on health outcomes telling readers:
“Consider a study of Massachusetts’s universal coverage program, enacted under former governor Mitt Romney, by economists Charles J. Courtemanche of the University of Louisville and Daniela Zapata of the University of North Carolina at Greensboro. It estimated that about 1.4 percent of the state’s adult population moved into the ‘very good’ or ‘excellent’ health categories.”
Here’s part of the abstract from the study:
“Using individual-level data from the Behavioral Risk Factor Surveillance System, we provide evidence that health care reform in Massachusetts led to better overall self-assessed health. An assortment of robustness checks and placebo tests support a causal interpretation of the results. We also document improvements in several determinants of overall health, including physical health, mental health, functional limitations, joint disorders, body mass index, and moderate physical activity. The health effects were strongest among women, minorities, near-elderly adults, and those with incomes low enough to qualify for the law’s subsidies. Finally, we use the reform to instrument for health insurance and estimate a sizable impact of coverage on health. “
That doesn’t sound too shabby on its face. Samuelson is unimpressed that only 1.4 percent of the adult population moved into the “very good” or “excellent” health categories following the extension of insurance, but of course the vast majority of the adult population (over 88 percent) was already insured. This implies that close to 15 percent of the people who gained coverage as a result of the reform (coverage is now around 96 percent) saw a marked improvement in their health status.
There have been many other studies done over the years, such as this one on breast cancer and this one on the health of newborns, showing the health benefits of insurance coverage. Samuelson is fighting a losing battle if he is trying to argue that increased coverage rates will not lead to better health outcomes.
It is also arguable that extending coverage is the less important effect of the ACA. The law also effectively ensures the people have genuine insurance. As it stands now, most people are insured through their job. If a person develops a serious illness that causes them to lose their job (e.g. cancer), they will also lose their insurance. Then they are forced to seek in the individual market.
Because they have a pre-existing condition, insurers will typically charge exorbitant fees that will make insurance unaffordable to all but the wealthiest people. One of the key provisions of the ACA is a ban on charging higher fees for pre-existing conditions, ensuring that people in this situation will be able to purchase affordable coverage.
Next we have Samuelson complaining about the $1.5 trillion cost over ten years. This is supposed to be a big scary number. Let’s put in a little context. GDP over this period will be roughly $200 trillion, which means that the tab will be roughly 0.8 percent of GDP.
Furthermore, Samuelson is just flat out wrong when he says that the revenue raised to cover this cost could have been used for other purposes. Much of this projected revenue is specific to health care, as in the fines that large companies will pay for not insuring their workers. In principle we could fine companies for not insuring their workers to pay for a tax cut for rich people or another war, but that might be a hard sell politically.
Samuelson also gets the economics wrong on the burden of this cost. He says that it will increase the cost of labor, making firms less willing to hire. Economists across the political spectrum agree that non-wage compensation costs (like health insurance premiums or penalties) come out of wages. This means that some workers may see lower take-home pay as a result of the ACA, but there should be little impact on employers’ willingness to hire.
Samuelson also ignores the cost control measures in the bill. The Republicans in Congress have been yelling about “rationing” and “death panels” based on the ACA’s Independent Payment Advisory Board (IPAB), which is supposed to limit increases in the cost of Medicare.
We can’t know how effective this and other measures will be in containing costs, but it is worth pointing out that you can’t have it both ways. Either the Republicans are off on another planet in claiming that IPAB will limit care or Samuelson is wrong in saying that ACA does nothing to contain costs.
There is one final point worth noting in reference to the quote from Scheiber’s book. President Obama cannot honestly take credit for saving the United States from a second Great Depression. The first Great Depression came about because of a decade of inadequate responses to the downturn, not just from mistakes in the initial crisis.
We now know how to get out of a depression, we just have to spend money. Even if we had seen a full-fledged financial collapse in the fall-winter of 2008-2009, this would not have condemned us to a decade of double-digit unemployment.
This point can be seen clearly in the case of Argentina, which did have a full-fledged financial meltdown following its default in December of 2001. It took the country 1.5 years to make up the ground lost in the crisis after which it sustained strong growth until the world economic crisis led to a downturn in 2009.
Source: International Monetary Fund.
Even if we assume that the economic policymakers in the United States are less competent than Argentina’s, so that it takes twice as long to recover lost ground, that would imply it would only take 3 years to recover the ground lost in a financial crisis. That is well short of what would be considered a second Great Depression.
Wow, nothing gets by Robert Samuelson. He tells us today that he has uncovered the secret as to why President Obama insisted on pushing for the Affordable Care Act (ACA). It all boils down to his big ego.
At the end of a piece titled “Obama’s Ego Trip,” Samuelson cites a section of book by Noam Scheiber on the Obama presidency:
“Obama’s advisers tell him he can be known for preventing a second Great Depression. ‘That’s not enough for me,’ Obama replies.”
There it is: President Obama’s big ego. Well, perhaps someone should share a little secret with Samuelson: all presidents have big egos. They wouldn’t end up with the job otherwise.
Also, perhaps Samuelson missed it, but President Obama campaigned on health care reform. This is a very important political issue to a large portion of his constituency. They would have been very angry, or least disappointed, if he failed to deliver.
In terms of making the case that it is a bad bill, Samuelson should do a better job of reading his own sources. He dismisses the impact of health insurance on health outcomes telling readers:
“Consider a study of Massachusetts’s universal coverage program, enacted under former governor Mitt Romney, by economists Charles J. Courtemanche of the University of Louisville and Daniela Zapata of the University of North Carolina at Greensboro. It estimated that about 1.4 percent of the state’s adult population moved into the ‘very good’ or ‘excellent’ health categories.”
Here’s part of the abstract from the study:
“Using individual-level data from the Behavioral Risk Factor Surveillance System, we provide evidence that health care reform in Massachusetts led to better overall self-assessed health. An assortment of robustness checks and placebo tests support a causal interpretation of the results. We also document improvements in several determinants of overall health, including physical health, mental health, functional limitations, joint disorders, body mass index, and moderate physical activity. The health effects were strongest among women, minorities, near-elderly adults, and those with incomes low enough to qualify for the law’s subsidies. Finally, we use the reform to instrument for health insurance and estimate a sizable impact of coverage on health. “
That doesn’t sound too shabby on its face. Samuelson is unimpressed that only 1.4 percent of the adult population moved into the “very good” or “excellent” health categories following the extension of insurance, but of course the vast majority of the adult population (over 88 percent) was already insured. This implies that close to 15 percent of the people who gained coverage as a result of the reform (coverage is now around 96 percent) saw a marked improvement in their health status.
There have been many other studies done over the years, such as this one on breast cancer and this one on the health of newborns, showing the health benefits of insurance coverage. Samuelson is fighting a losing battle if he is trying to argue that increased coverage rates will not lead to better health outcomes.
It is also arguable that extending coverage is the less important effect of the ACA. The law also effectively ensures the people have genuine insurance. As it stands now, most people are insured through their job. If a person develops a serious illness that causes them to lose their job (e.g. cancer), they will also lose their insurance. Then they are forced to seek in the individual market.
Because they have a pre-existing condition, insurers will typically charge exorbitant fees that will make insurance unaffordable to all but the wealthiest people. One of the key provisions of the ACA is a ban on charging higher fees for pre-existing conditions, ensuring that people in this situation will be able to purchase affordable coverage.
Next we have Samuelson complaining about the $1.5 trillion cost over ten years. This is supposed to be a big scary number. Let’s put in a little context. GDP over this period will be roughly $200 trillion, which means that the tab will be roughly 0.8 percent of GDP.
Furthermore, Samuelson is just flat out wrong when he says that the revenue raised to cover this cost could have been used for other purposes. Much of this projected revenue is specific to health care, as in the fines that large companies will pay for not insuring their workers. In principle we could fine companies for not insuring their workers to pay for a tax cut for rich people or another war, but that might be a hard sell politically.
Samuelson also gets the economics wrong on the burden of this cost. He says that it will increase the cost of labor, making firms less willing to hire. Economists across the political spectrum agree that non-wage compensation costs (like health insurance premiums or penalties) come out of wages. This means that some workers may see lower take-home pay as a result of the ACA, but there should be little impact on employers’ willingness to hire.
Samuelson also ignores the cost control measures in the bill. The Republicans in Congress have been yelling about “rationing” and “death panels” based on the ACA’s Independent Payment Advisory Board (IPAB), which is supposed to limit increases in the cost of Medicare.
We can’t know how effective this and other measures will be in containing costs, but it is worth pointing out that you can’t have it both ways. Either the Republicans are off on another planet in claiming that IPAB will limit care or Samuelson is wrong in saying that ACA does nothing to contain costs.
There is one final point worth noting in reference to the quote from Scheiber’s book. President Obama cannot honestly take credit for saving the United States from a second Great Depression. The first Great Depression came about because of a decade of inadequate responses to the downturn, not just from mistakes in the initial crisis.
We now know how to get out of a depression, we just have to spend money. Even if we had seen a full-fledged financial collapse in the fall-winter of 2008-2009, this would not have condemned us to a decade of double-digit unemployment.
This point can be seen clearly in the case of Argentina, which did have a full-fledged financial meltdown following its default in December of 2001. It took the country 1.5 years to make up the ground lost in the crisis after which it sustained strong growth until the world economic crisis led to a downturn in 2009.
Source: International Monetary Fund.
Even if we assume that the economic policymakers in the United States are less competent than Argentina’s, so that it takes twice as long to recover lost ground, that would imply it would only take 3 years to recover the ground lost in a financial crisis. That is well short of what would be considered a second Great Depression.
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Steve Rattner seems to have found a new career in getting things wrong in the NYT. He was last seen ranting against those who say that “debt doesn’t matter.” Today the topic is inequality.
While Rattner is right to call attention to the growth of inequality, he is way off on the facts. Starting with a small one, he tells readers that:
“Pay for college graduates has risen by 15.7 percent over the past 32 years (after adjustment for inflation) while the income of a worker without a high school diploma has plummeted by 25.7 percent over the same period.”
A source on that one would have been great. The data sources I know generally have wages for workers without high school degrees as being roughly stagnant over this period. A decline of 5 percent or even 10 percent would be plausible, but 25.7 percent?
However the more important issue is a substantive one. He tells readers:
“Government has also played a role, particularly the George W. Bush tax cuts, which, among other things, gave the wealthy a 15 percent tax on capital gains and dividends. That’s the provision that caused Warren E. Buffett’s secretary to have a higher tax rate than he does.
“As a result, the top 1 percent has done progressively better in each economic recovery of the past two decades.”
Yes, government has played a role, but the tax cuts for the wealthy has been the less important part of the story. Most of the increase in inequality has been in before-tax income. The government has affected income distribution by changing the rules of the game in ways that allowed the wealthy to benefit at the expense of everyone else.
For example, maintaining government guarantees for the banking system (remember the bailouts?) while relaxing Glass-Steagall and other restrictions amounted to a massive subsidy to the financial sector. Many of the top 1 percent get their money here.
There has also been a tightening and extending of patent monopolies. One result of this has been to hugely increase the amount of money being paid in patent rents, much of which goes to the 1 percent. We currently spend close to $300 billion a year for prescription drugs. We would spend close to $30 billion a year if drugs were sold in a free market without patent protection.
The difference of $270 billion annually is roughly 5 times as much money as is at stake with the Bush tax cuts. We would need alternative methods of financing drug research, but the 1 percent so completely dominate debate that alternatives to patent monopolies are not even considered in policy circles even though they would almost certainly be far more efficient and lead to better health outcomes.
The government has also taken steps to directly drive down the wages of less educated workers. Trade policy has deliberately placed U.S. manufacturing workers in direct competition with low paid workers in the developing world. By contrast, the barriers that make it difficult for foreign professionals, like doctors and lawyers, from working in the United States have largely been maintained or even increased.
The predicted and actual result of this policy is to depress the wages of less educated workers relative to the most highly educated workers. This effect is amplified by the high dollar policy that the United States began pursuing under Robert Rubin and used the muscle of the IMF to advance following the East Asian financial crisis.
There are many other ways in which government policy has redistributed income upward over the last three decades. Rattner misdirects attention when he focuses on tax policy as a major cause of inequality.
Steve Rattner seems to have found a new career in getting things wrong in the NYT. He was last seen ranting against those who say that “debt doesn’t matter.” Today the topic is inequality.
While Rattner is right to call attention to the growth of inequality, he is way off on the facts. Starting with a small one, he tells readers that:
“Pay for college graduates has risen by 15.7 percent over the past 32 years (after adjustment for inflation) while the income of a worker without a high school diploma has plummeted by 25.7 percent over the same period.”
A source on that one would have been great. The data sources I know generally have wages for workers without high school degrees as being roughly stagnant over this period. A decline of 5 percent or even 10 percent would be plausible, but 25.7 percent?
However the more important issue is a substantive one. He tells readers:
“Government has also played a role, particularly the George W. Bush tax cuts, which, among other things, gave the wealthy a 15 percent tax on capital gains and dividends. That’s the provision that caused Warren E. Buffett’s secretary to have a higher tax rate than he does.
“As a result, the top 1 percent has done progressively better in each economic recovery of the past two decades.”
Yes, government has played a role, but the tax cuts for the wealthy has been the less important part of the story. Most of the increase in inequality has been in before-tax income. The government has affected income distribution by changing the rules of the game in ways that allowed the wealthy to benefit at the expense of everyone else.
For example, maintaining government guarantees for the banking system (remember the bailouts?) while relaxing Glass-Steagall and other restrictions amounted to a massive subsidy to the financial sector. Many of the top 1 percent get their money here.
There has also been a tightening and extending of patent monopolies. One result of this has been to hugely increase the amount of money being paid in patent rents, much of which goes to the 1 percent. We currently spend close to $300 billion a year for prescription drugs. We would spend close to $30 billion a year if drugs were sold in a free market without patent protection.
The difference of $270 billion annually is roughly 5 times as much money as is at stake with the Bush tax cuts. We would need alternative methods of financing drug research, but the 1 percent so completely dominate debate that alternatives to patent monopolies are not even considered in policy circles even though they would almost certainly be far more efficient and lead to better health outcomes.
The government has also taken steps to directly drive down the wages of less educated workers. Trade policy has deliberately placed U.S. manufacturing workers in direct competition with low paid workers in the developing world. By contrast, the barriers that make it difficult for foreign professionals, like doctors and lawyers, from working in the United States have largely been maintained or even increased.
The predicted and actual result of this policy is to depress the wages of less educated workers relative to the most highly educated workers. This effect is amplified by the high dollar policy that the United States began pursuing under Robert Rubin and used the muscle of the IMF to advance following the East Asian financial crisis.
There are many other ways in which government policy has redistributed income upward over the last three decades. Rattner misdirects attention when he focuses on tax policy as a major cause of inequality.
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The NYT reported on a conference of European leaders where Latvia’s approach to economic policy was held up as a major success story. The article told readers:
“The small country of Latvia, with a population of two million, was cited as a good, and rare, example for its relatively quick recovery from a 2009 bailout.”
It would have been useful to note that Latvia’s unemployment rate is still well into the double digits. It also would have been worth pointing out that close to 10 percent of Latvia’s workforce has emigrated to other countries in search of work. It is not likely that this record would be viewed as an attractive model to most other European countries.
The NYT reported on a conference of European leaders where Latvia’s approach to economic policy was held up as a major success story. The article told readers:
“The small country of Latvia, with a population of two million, was cited as a good, and rare, example for its relatively quick recovery from a 2009 bailout.”
It would have been useful to note that Latvia’s unemployment rate is still well into the double digits. It also would have been worth pointing out that close to 10 percent of Latvia’s workforce has emigrated to other countries in search of work. It is not likely that this record would be viewed as an attractive model to most other European countries.
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Get out a second Nobel for Paul Krugman. His column today is exactly on the mark in its framing of the right-wing legislative agenda of the American Legislative Exchange Council (ALEC). This is not a group that is committed to the free market.
In area after area, private prisons, private charter schools, private roads, ALEC is about allowing their members to feed off the public trough with sweetheart contracts. Calling these people “free market fundamentalists” is doing them a great favor. It implies that they are acting on a commitment to libertarian principles, as opposed to the reality where they are acting out of a commitment to stuffing their pockets.
Of course this was the point of that 2011 classic, The End of Loser Liberalism: Making Markets Progressive.
Get out a second Nobel for Paul Krugman. His column today is exactly on the mark in its framing of the right-wing legislative agenda of the American Legislative Exchange Council (ALEC). This is not a group that is committed to the free market.
In area after area, private prisons, private charter schools, private roads, ALEC is about allowing their members to feed off the public trough with sweetheart contracts. Calling these people “free market fundamentalists” is doing them a great favor. It implies that they are acting on a commitment to libertarian principles, as opposed to the reality where they are acting out of a commitment to stuffing their pockets.
Of course this was the point of that 2011 classic, The End of Loser Liberalism: Making Markets Progressive.
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Gretchen Morgenson has done a lot of outstanding reporting on the financial industry over the last decade, however today’s defense of Ed DeMarco, the head of the Federal Housing Finance Authority falls wide of the mark. DeMarco has drawn considerable heat as of late because of his refusal to allow Fannie Mae and Freddie Mac to do principal reductions to make it easier for underwater homeowners to stay in her home.
Morgenson defends this refusal by saying that DeMarco’s refusal is actually protecting taxpayers from providing yet another bailout to the banks. Her argument is that many of these underwater homeowners have second liens on their homes which are held by banks. If Fannie and Freddie do principal reductions on the first lien, then it greatly increases the likelihood that these second liens will be paid off, thereby enriching the banks at the taxpayers’ expenses. (If a home goes into foreclosure, the first lien has absolute priority. Not a penny goes to the second lien unless the first lien is paid in full. This means that second loans generally have zero value in a foreclosure.)
There are two problems with this story. The first is that a very large percent of F&F underwater mortgages do not have a second lien. Core Logic estimates that 60 percent of underwater mortgages do not have a second lien. The share is almost certainly higher with F&F loans than with mortgages more generally, since F&F did not get into the worst of the subprime loans where homebuyers put zero down. This means that for the vast majority of underwater mortgages held by F&F there is no issue of subsidizing banks indirectly through a principle write-down, since there is no second loan.
The second issue is that the holder of the first mortgage can negotiate with the holder of the second mortgage to set terms for a principal write-down. It is possible that banks would be obstinate and refuse to make serious concessions. In this case, DeMarco with have a solid reason for refusing to go ahead with write-downs. However he has never indicated publicly that F&F have tried this sort of negotiation and been rebuffed. If this is the case, then DeMarco has a responsibility to explain the problem to the public and Congress. Most likely he has not said anything because he has never attempted to go this route.
Finally, Morgenson offers up a defense of DeMarco’s conduct by noting that foreclosure rates are much lower on F&F loans than on the loans held by banks or in private issue mortgage backed securities. While this is undoubtedly true, it should be expected given that the loans issued by F&F were much higher quality than the loans that were placed in private issue mortgage backed securities.
Since F&F stayed away from the worst subprime and Alt-A mortgages they naturally would have lower default and foreclosure rates on their loans. This is not evidence that they have been especially effective in their modifications.
It is worth pointing out that the debate over this issue has become hugely overblown. It would not make a big difference to the overall economy or even the housing market if DeMarco were to allow principal reductions. The biggest effect is that perhaps another 200,000-300,000 homeowners may be able to avoid foreclosure in the next few years. This would be a good thing for these people. However the impact on the housing market and the economy would be negligible.
Gretchen Morgenson has done a lot of outstanding reporting on the financial industry over the last decade, however today’s defense of Ed DeMarco, the head of the Federal Housing Finance Authority falls wide of the mark. DeMarco has drawn considerable heat as of late because of his refusal to allow Fannie Mae and Freddie Mac to do principal reductions to make it easier for underwater homeowners to stay in her home.
Morgenson defends this refusal by saying that DeMarco’s refusal is actually protecting taxpayers from providing yet another bailout to the banks. Her argument is that many of these underwater homeowners have second liens on their homes which are held by banks. If Fannie and Freddie do principal reductions on the first lien, then it greatly increases the likelihood that these second liens will be paid off, thereby enriching the banks at the taxpayers’ expenses. (If a home goes into foreclosure, the first lien has absolute priority. Not a penny goes to the second lien unless the first lien is paid in full. This means that second loans generally have zero value in a foreclosure.)
There are two problems with this story. The first is that a very large percent of F&F underwater mortgages do not have a second lien. Core Logic estimates that 60 percent of underwater mortgages do not have a second lien. The share is almost certainly higher with F&F loans than with mortgages more generally, since F&F did not get into the worst of the subprime loans where homebuyers put zero down. This means that for the vast majority of underwater mortgages held by F&F there is no issue of subsidizing banks indirectly through a principle write-down, since there is no second loan.
The second issue is that the holder of the first mortgage can negotiate with the holder of the second mortgage to set terms for a principal write-down. It is possible that banks would be obstinate and refuse to make serious concessions. In this case, DeMarco with have a solid reason for refusing to go ahead with write-downs. However he has never indicated publicly that F&F have tried this sort of negotiation and been rebuffed. If this is the case, then DeMarco has a responsibility to explain the problem to the public and Congress. Most likely he has not said anything because he has never attempted to go this route.
Finally, Morgenson offers up a defense of DeMarco’s conduct by noting that foreclosure rates are much lower on F&F loans than on the loans held by banks or in private issue mortgage backed securities. While this is undoubtedly true, it should be expected given that the loans issued by F&F were much higher quality than the loans that were placed in private issue mortgage backed securities.
Since F&F stayed away from the worst subprime and Alt-A mortgages they naturally would have lower default and foreclosure rates on their loans. This is not evidence that they have been especially effective in their modifications.
It is worth pointing out that the debate over this issue has become hugely overblown. It would not make a big difference to the overall economy or even the housing market if DeMarco were to allow principal reductions. The biggest effect is that perhaps another 200,000-300,000 homeowners may be able to avoid foreclosure in the next few years. This would be a good thing for these people. However the impact on the housing market and the economy would be negligible.
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The Wall Street Journal let Federal Reserve Board Chairman Ben Bernanke get away with a bit of Three-card Monte in a lecture he gave to George Washington University about the Fed’s role in the housing bubble. According to the WSJ Bernanke absolved the Fed of blame for the housing bubble because of its low interest rate policy. He noted that other countries, like the UK, had housing bubbles even though they had more restrictive monetary policy.
This international comparison is very neat in the context of another issue that Bernanke raised in this lecture. The WSJ reported that Bernanke also made a pitch for the importance of central bank independence in reference to Paul Volcker’s tenure as Fed chair:
“Volcker’s tough policies successfully drove down inflation, but caused a recession that stirred the ire of construction workers who would mail two-by-four planks of wood with a nail driven in them to the Fed as a symbol of their protest, Bernanke noted. If Volcker had to face re-election, he might not have been able to sustain his policies.”
Actually, inflation rates fell sharply everywhere in the world in the early 80s. Not all central banks pursued as restrictive a monetary policy as the Fed. This suggests that the high unemployment caused by Volcker’s policies were not necessary for bringing down inflation.
In fact, this is a good argument for a central bank that is more democratically accountable. If Volcker felt as much obligation to protect against excessive unemployment — which negatively affects large segments of the non-rich population — as he did to combat inflation, perhaps he would have managed to contain inflation while inflicting less pain.
On the earlier point about the Fed’s responsibility for allowing the housing bubble to grow to such dangerous levels, some of us who complained about the policy at the time were not advocating higher interest rates. We advocated first and foremost that the Fed use its enormous bully pulpit to call attention to the bubble and to the fact that people buying homes at bubble-inflated prices stood to lose their lives savings.
These warnings could have been backed up by research by the Fed’s huge staff of economists which would have showed that there was an unprecedented run up in house prices with no basis in the fundamentals of the housing market. The Fed could have used the public appearances and congressional testimonies of Greenspan and other Fed officials to bring this evidence to the public’s attention. (Instead, Greenspan argued the opposite, claiming that there was no bubble.)
The Fed also has substantial regulatory powers over the financial industry. They could have used this power to crack down on the widespread issuance and securitization of fraudulent mortgages which was evident to anyone paying attention at the time.
The Wall Street Journal let Federal Reserve Board Chairman Ben Bernanke get away with a bit of Three-card Monte in a lecture he gave to George Washington University about the Fed’s role in the housing bubble. According to the WSJ Bernanke absolved the Fed of blame for the housing bubble because of its low interest rate policy. He noted that other countries, like the UK, had housing bubbles even though they had more restrictive monetary policy.
This international comparison is very neat in the context of another issue that Bernanke raised in this lecture. The WSJ reported that Bernanke also made a pitch for the importance of central bank independence in reference to Paul Volcker’s tenure as Fed chair:
“Volcker’s tough policies successfully drove down inflation, but caused a recession that stirred the ire of construction workers who would mail two-by-four planks of wood with a nail driven in them to the Fed as a symbol of their protest, Bernanke noted. If Volcker had to face re-election, he might not have been able to sustain his policies.”
Actually, inflation rates fell sharply everywhere in the world in the early 80s. Not all central banks pursued as restrictive a monetary policy as the Fed. This suggests that the high unemployment caused by Volcker’s policies were not necessary for bringing down inflation.
In fact, this is a good argument for a central bank that is more democratically accountable. If Volcker felt as much obligation to protect against excessive unemployment — which negatively affects large segments of the non-rich population — as he did to combat inflation, perhaps he would have managed to contain inflation while inflicting less pain.
On the earlier point about the Fed’s responsibility for allowing the housing bubble to grow to such dangerous levels, some of us who complained about the policy at the time were not advocating higher interest rates. We advocated first and foremost that the Fed use its enormous bully pulpit to call attention to the bubble and to the fact that people buying homes at bubble-inflated prices stood to lose their lives savings.
These warnings could have been backed up by research by the Fed’s huge staff of economists which would have showed that there was an unprecedented run up in house prices with no basis in the fundamentals of the housing market. The Fed could have used the public appearances and congressional testimonies of Greenspan and other Fed officials to bring this evidence to the public’s attention. (Instead, Greenspan argued the opposite, claiming that there was no bubble.)
The Fed also has substantial regulatory powers over the financial industry. They could have used this power to crack down on the widespread issuance and securitization of fraudulent mortgages which was evident to anyone paying attention at the time.
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The main thing that careful observers know from watching housing data over the years is that the monthly data should be largely ignored when assessing the housing market. The point here is that random factors have a large impact on monthly sales and price numbers, so that the noise often overwhelms the actual information about the housing market in a single month’s release.
To see the point, let’s start with existing home sales. The Realtors reported a small drop in February from an upwardly revised January number. This touched off a round of news stories about the weak state of the housing market. (The February sales number was higher than the unrevised number, meaning that it was higher than the level of sales that we had thought actually took place in January prior to the release.)
Source: National Association of Realtors.
Note that months where we see big changes in one direction are often followed and/or preceded by a big change in the opposite direction. For example, we could have been alarmed by the 3 percent falloff in sales last July, but then we would have been ecstatic over the 9 percent jump in August, only to be put in the doldrums by the 3 percent drop in September.
There is a similar story with month to month price changes.
Source: National Association of Realtors.
These data are even more erratic. The 8 percent one-month rise in prices in March must have seemed really exciting. On the other hand, the nearly 5 percent one-month drop back in January must have terrified people. Of course neither of these movements was likely real. These are just random fluctuations in the data.
The picture is no better with new home sales. Here are the monthly changes over the last year.
Source: Census Bureau.
Note the great boom showing sales growth of more than 8 percent last March and almost 4 percent in April. This was followed by four consecutive months of declining sales. In short, we see big monthly movements, but no clear patterns.
The same applies to the price of new homes.
Source: Census Bureau.
This one shows a huge 8 percent single month jump in prices last June, which was followed by two consecutive months in which prices fell by more than 4.0 percent. This series is even more erratic than the other three.
There are good reasons for expecting these series to be erratic. Factors such as the weather can play a huge role in the number of homes sold. In this case the monthly data might be telling us more about the state of the weather than the underlying market. While sales data (but not the price data) are seasonally adjusted, a milder than normal winter will have a substantial upward impact on the sales data.
The best rule of thumb is to see the monthly data as part of a longer trend. If a number is qualitatively different than the ones that proceeded it, most likely it is the result of random error, not a qualitative change in the market. This is especially true with the price data, in part because these series (unlike the Case-Shiller data) do not control for the mix of housing. This means that a reported price rise may be entirely due to the mix of houses being sold, not a higher price for each house.
Addendum: I have corrected earlier graphing problems.
The main thing that careful observers know from watching housing data over the years is that the monthly data should be largely ignored when assessing the housing market. The point here is that random factors have a large impact on monthly sales and price numbers, so that the noise often overwhelms the actual information about the housing market in a single month’s release.
To see the point, let’s start with existing home sales. The Realtors reported a small drop in February from an upwardly revised January number. This touched off a round of news stories about the weak state of the housing market. (The February sales number was higher than the unrevised number, meaning that it was higher than the level of sales that we had thought actually took place in January prior to the release.)
Source: National Association of Realtors.
Note that months where we see big changes in one direction are often followed and/or preceded by a big change in the opposite direction. For example, we could have been alarmed by the 3 percent falloff in sales last July, but then we would have been ecstatic over the 9 percent jump in August, only to be put in the doldrums by the 3 percent drop in September.
There is a similar story with month to month price changes.
Source: National Association of Realtors.
These data are even more erratic. The 8 percent one-month rise in prices in March must have seemed really exciting. On the other hand, the nearly 5 percent one-month drop back in January must have terrified people. Of course neither of these movements was likely real. These are just random fluctuations in the data.
The picture is no better with new home sales. Here are the monthly changes over the last year.
Source: Census Bureau.
Note the great boom showing sales growth of more than 8 percent last March and almost 4 percent in April. This was followed by four consecutive months of declining sales. In short, we see big monthly movements, but no clear patterns.
The same applies to the price of new homes.
Source: Census Bureau.
This one shows a huge 8 percent single month jump in prices last June, which was followed by two consecutive months in which prices fell by more than 4.0 percent. This series is even more erratic than the other three.
There are good reasons for expecting these series to be erratic. Factors such as the weather can play a huge role in the number of homes sold. In this case the monthly data might be telling us more about the state of the weather than the underlying market. While sales data (but not the price data) are seasonally adjusted, a milder than normal winter will have a substantial upward impact on the sales data.
The best rule of thumb is to see the monthly data as part of a longer trend. If a number is qualitatively different than the ones that proceeded it, most likely it is the result of random error, not a qualitative change in the market. This is especially true with the price data, in part because these series (unlike the Case-Shiller data) do not control for the mix of housing. This means that a reported price rise may be entirely due to the mix of houses being sold, not a higher price for each house.
Addendum: I have corrected earlier graphing problems.
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The NYT did a piece on Governor Mitt Romney’s pledge to impose tariffs on China to pressure it to lower the value of the dollar relative to the yuan. At one point it noted that many business people are opposed to this position:
“business leaders, while pressing for China to open its markets and protect intellectual property, caution that labeling China a currency manipulator could backfire, harming those efforts.”
It would have been worth a paragraph or two expanding on this point. There is a direct conflict in the interests of most workers and many businesses in U.S. policy toward China.
Financial firms like Goldman Sachs and Citigroup have a major interest in getting more access to China’s market. Firms with claims to intellectual property like Microsoft and Pfizer have a major interest in getting China to offer increased protection for their copyrights and patents.
By contrast, workers in the United States have a major interest in lowering the value of the dollar against the yuan. Since other countries would likely follow China in allowing their currencies to rise relative to the dollar (this is exactly what happened in 2005, the last time China had a large re-valuation of its currency), the result could be millions of new jobs in manufacturing. This would offer a large number of relatively good-paying jobs for less educated workers, putting upward pressure on the wages of these workers.
The Obama or Romney administration must decide which goals it will prioritize in its negotiations with China. If it makes more progress in getting access to China’s financial markets for Goldman Sachs and Citigroup or increased protection of Microsoft’s copyrights then it will make less progress in persuading China to raise the value of its currency.
Whoever is in the White House will have to decide which group’s interests are pursued and which group’s interests are downplayed. It would have been worth making this conflict more clear to readers.
The NYT did a piece on Governor Mitt Romney’s pledge to impose tariffs on China to pressure it to lower the value of the dollar relative to the yuan. At one point it noted that many business people are opposed to this position:
“business leaders, while pressing for China to open its markets and protect intellectual property, caution that labeling China a currency manipulator could backfire, harming those efforts.”
It would have been worth a paragraph or two expanding on this point. There is a direct conflict in the interests of most workers and many businesses in U.S. policy toward China.
Financial firms like Goldman Sachs and Citigroup have a major interest in getting more access to China’s market. Firms with claims to intellectual property like Microsoft and Pfizer have a major interest in getting China to offer increased protection for their copyrights and patents.
By contrast, workers in the United States have a major interest in lowering the value of the dollar against the yuan. Since other countries would likely follow China in allowing their currencies to rise relative to the dollar (this is exactly what happened in 2005, the last time China had a large re-valuation of its currency), the result could be millions of new jobs in manufacturing. This would offer a large number of relatively good-paying jobs for less educated workers, putting upward pressure on the wages of these workers.
The Obama or Romney administration must decide which goals it will prioritize in its negotiations with China. If it makes more progress in getting access to China’s financial markets for Goldman Sachs and Citigroup or increased protection of Microsoft’s copyrights then it will make less progress in persuading China to raise the value of its currency.
Whoever is in the White House will have to decide which group’s interests are pursued and which group’s interests are downplayed. It would have been worth making this conflict more clear to readers.
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