It must be very hard to get information over at Fox on 15th Street. They still do not seem to have heard of the housing bubble. The Post noted the weak sales in existing homes for May reported yesterday, as well as the drop in prices, and told readers:
“The housing market is still struggling to recover from a historic slump, according to industry data released Tuesday.”
Of course it is not struggling to recover from a historic slump. It is correcting an unprecedented bubble. There run-up in nationwide house prices between 1996 and 2006 was a break with a hundred-year long trend over which nationwide house prices just kept even with the overall rate of inflation. Over this period, they outpaced the overall rate of inflation by more than 70 percent.
It was the collapse of this bubble that gave us the huge economic slump than the country now faces, but apparently the Post still hasn’t heard about the bubble. House prices have to fall another 8 percent or so to get back to their trend level. Rather than expecting a rebound, we should be expecting a further decline.
It must be very hard to get information over at Fox on 15th Street. They still do not seem to have heard of the housing bubble. The Post noted the weak sales in existing homes for May reported yesterday, as well as the drop in prices, and told readers:
“The housing market is still struggling to recover from a historic slump, according to industry data released Tuesday.”
Of course it is not struggling to recover from a historic slump. It is correcting an unprecedented bubble. There run-up in nationwide house prices between 1996 and 2006 was a break with a hundred-year long trend over which nationwide house prices just kept even with the overall rate of inflation. Over this period, they outpaced the overall rate of inflation by more than 70 percent.
It was the collapse of this bubble that gave us the huge economic slump than the country now faces, but apparently the Post still hasn’t heard about the bubble. House prices have to fall another 8 percent or so to get back to their trend level. Rather than expecting a rebound, we should be expecting a further decline.
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That’s what Washington Post readers must have been thinking when they saw Milbank’s line:
“The truth is that there’s not much more that government can do to boost jobs in the short term.”
Since this is so obviously counter-factual and there is nothing in the article to support the statement, one must assume that this is the sort of truth that gets passed on in the family that is never supposed to be subjected to critical evaluation. Of course as a practical matter, there is an enormous amount that the government can do to create jobs.
The government can spend money. People work for money, meaning that government spending will create jobs. The government can also have more tax cuts or credits. If these tax breaks go to low and moderate income people, then they will spend money. This will create jobs. The Federal Reserve Board can deliberately raise the rate of inflation, thereby lowering real interest rates and reducing debt burdens. This will also lead to more spending and more jobs. The government could also push down the value of the dollar which will increase net exports. This will also create more jobs.
And, the government could provide incentives to employers to shorten workweeks as an alternative to layoffs. The German government has used this practice so successfully that its unemployment rate is lower today than it was at the start of the downturn, even though its growth has been slower than in the U.S. Furthermore, this path can actually be done at the state level by the governors who are the focus on this article.
So, there is a great deal that the government can do to boost jobs in the short-term, contrary to what Mr. Milbank’s parents apparently told him when he was growing up.
That’s what Washington Post readers must have been thinking when they saw Milbank’s line:
“The truth is that there’s not much more that government can do to boost jobs in the short term.”
Since this is so obviously counter-factual and there is nothing in the article to support the statement, one must assume that this is the sort of truth that gets passed on in the family that is never supposed to be subjected to critical evaluation. Of course as a practical matter, there is an enormous amount that the government can do to create jobs.
The government can spend money. People work for money, meaning that government spending will create jobs. The government can also have more tax cuts or credits. If these tax breaks go to low and moderate income people, then they will spend money. This will create jobs. The Federal Reserve Board can deliberately raise the rate of inflation, thereby lowering real interest rates and reducing debt burdens. This will also lead to more spending and more jobs. The government could also push down the value of the dollar which will increase net exports. This will also create more jobs.
And, the government could provide incentives to employers to shorten workweeks as an alternative to layoffs. The German government has used this practice so successfully that its unemployment rate is lower today than it was at the start of the downturn, even though its growth has been slower than in the U.S. Furthermore, this path can actually be done at the state level by the governors who are the focus on this article.
So, there is a great deal that the government can do to boost jobs in the short-term, contrary to what Mr. Milbank’s parents apparently told him when he was growing up.
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The people who are betting trillions of dollars in financial markets have considerable confidence in the ability of the U.S. government to pays its debts, as demonstrated by the fact that the interest rate on 10-year Treasury bonds remain extraordinarily low. However a front page Washington Post article told readers that these actors are mistaken, actually the United States is, “a nation already mired in red ink.”
Most newspapers would restrict such sweeping and unsupported assertions to the editorial pages, however the Washington Post has made debt reduction a crusade. It has little concern for standard journalistic practices in pressing this agenda.
The people who are betting trillions of dollars in financial markets have considerable confidence in the ability of the U.S. government to pays its debts, as demonstrated by the fact that the interest rate on 10-year Treasury bonds remain extraordinarily low. However a front page Washington Post article told readers that these actors are mistaken, actually the United States is, “a nation already mired in red ink.”
Most newspapers would restrict such sweeping and unsupported assertions to the editorial pages, however the Washington Post has made debt reduction a crusade. It has little concern for standard journalistic practices in pressing this agenda.
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The WSJ told readers:
“because the banking sector isn’t large enough to hold more mortgages without expanding its deposit base, securitization markets are an integral part of any lending expansion.”
The problem with this assertion is that one of the main reasons that the banking sector doesn’t have a larger deposit base is that investors can buy government insured mortgage backed securities. If the government reduces or eliminates its role in this market, then investors will have to look for alternative places for their money, such as bank deposits. So, rather than filling an unavoidable gap in private financing in the mortgage market, the government is helping to create this gap.
The WSJ told readers:
“because the banking sector isn’t large enough to hold more mortgages without expanding its deposit base, securitization markets are an integral part of any lending expansion.”
The problem with this assertion is that one of the main reasons that the banking sector doesn’t have a larger deposit base is that investors can buy government insured mortgage backed securities. If the government reduces or eliminates its role in this market, then investors will have to look for alternative places for their money, such as bank deposits. So, rather than filling an unavoidable gap in private financing in the mortgage market, the government is helping to create this gap.
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That’s what NYT readers must have been asking when they heard the Wall Street-backed group described by the NYT as a “unlikely ally” of business efforts to get a special tax concession that would allow them repatriate foreign profits at a near-zero tax rate. What is “unlikely” about a business-funded group supporting a tax break for business?
That’s what NYT readers must have been asking when they heard the Wall Street-backed group described by the NYT as a “unlikely ally” of business efforts to get a special tax concession that would allow them repatriate foreign profits at a near-zero tax rate. What is “unlikely” about a business-funded group supporting a tax break for business?
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That’s what readers must be thinking of an NYT piece on the changes Greece needs to make in order to restore economic growth. The piece never mentions the European Central Bank (ECB).
The ECB is an incredibly important force, either promoting or constraining growth. It is currently doing the latter. It set its overnight interest rate at 1.25 percent. This is higher than the 1.0 percent rate set by the Fed from 2002 to 2004 when the U.S. economy was trying to recover from the stock market crash. It is generally expected to raise its rate further over the course of the year.
By contrast, if the ECB was interested in promoting growth in Greece and elsewhere in the euro zone, it could push its short-term rate to zero, like the Fed. It could also target a 3-4 percent inflation rate to reduce real interest rates further and lesson the debt burden on governments and households across the euro zone.
This path has been advocated in various contexts by Olivier Blanchard, the IMF’s chief economist, Federal Reserve Board Chairman Ben Bernanke, and Nobel prize winning economist and NYT columnist Paul Krugman. Reporters who write about what is necessary for Greece to grow should be familiar with this argument.
That’s what readers must be thinking of an NYT piece on the changes Greece needs to make in order to restore economic growth. The piece never mentions the European Central Bank (ECB).
The ECB is an incredibly important force, either promoting or constraining growth. It is currently doing the latter. It set its overnight interest rate at 1.25 percent. This is higher than the 1.0 percent rate set by the Fed from 2002 to 2004 when the U.S. economy was trying to recover from the stock market crash. It is generally expected to raise its rate further over the course of the year.
By contrast, if the ECB was interested in promoting growth in Greece and elsewhere in the euro zone, it could push its short-term rate to zero, like the Fed. It could also target a 3-4 percent inflation rate to reduce real interest rates further and lesson the debt burden on governments and households across the euro zone.
This path has been advocated in various contexts by Olivier Blanchard, the IMF’s chief economist, Federal Reserve Board Chairman Ben Bernanke, and Nobel prize winning economist and NYT columnist Paul Krugman. Reporters who write about what is necessary for Greece to grow should be familiar with this argument.
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Robert Samuelson devoted his column today to the problem of structural unemployment. He tells us that many positions are going unfilled, in spite of the high rate of unemployment. In fact, according to the Bureau of Labor Statistics, the job opening rate is just 2.2 percent.
Source: Bureau of Labor Statistics.
Since there will always be some time involved in replacing new workers, this rate can never fall to zero. If the rate were to fall to 1.7 percent, its low for this downturn, this would imply that another 650,000 of the 14 million unemployed would have jobs. It is also worth noting that it would be reasonable to expect that employers would be more choosy about their hires, therefore taking longer, in a period in which they face weak demand (and therefore have little urgency for new workers) and have many good workers to choose from.
In a context where the economy is strong and relatively few people are looking for work, employers would be expected to try to hire quickly since there will be little benefit to waiting for a better job candidate. However, in the current labor market, there is a strong likelihood that an employer can find a better candidate if they wait longer to hire. This fact would be expected to raise the number of job openings even if there is no reduction in the quality of the workforce.
It is also important to note that if there really is a serious problem of structural unemployment (firms are unable to find qualified workers for vacant positions) then there should be substantial sectors of the economy where wages are rising rapidly. It is difficult to identify any major sector where this is the case. Wages for workers at all education levels are at best just keeping pace with the rate of inflation.
This implies that if employers are really having trouble finding qualified workers then it is likely because they are offering wages that are below the market rate. The problem then is a lack of qualified employers, not a lack of qualified workers.
Robert Samuelson devoted his column today to the problem of structural unemployment. He tells us that many positions are going unfilled, in spite of the high rate of unemployment. In fact, according to the Bureau of Labor Statistics, the job opening rate is just 2.2 percent.
Source: Bureau of Labor Statistics.
Since there will always be some time involved in replacing new workers, this rate can never fall to zero. If the rate were to fall to 1.7 percent, its low for this downturn, this would imply that another 650,000 of the 14 million unemployed would have jobs. It is also worth noting that it would be reasonable to expect that employers would be more choosy about their hires, therefore taking longer, in a period in which they face weak demand (and therefore have little urgency for new workers) and have many good workers to choose from.
In a context where the economy is strong and relatively few people are looking for work, employers would be expected to try to hire quickly since there will be little benefit to waiting for a better job candidate. However, in the current labor market, there is a strong likelihood that an employer can find a better candidate if they wait longer to hire. This fact would be expected to raise the number of job openings even if there is no reduction in the quality of the workforce.
It is also important to note that if there really is a serious problem of structural unemployment (firms are unable to find qualified workers for vacant positions) then there should be substantial sectors of the economy where wages are rising rapidly. It is difficult to identify any major sector where this is the case. Wages for workers at all education levels are at best just keeping pace with the rate of inflation.
This implies that if employers are really having trouble finding qualified workers then it is likely because they are offering wages that are below the market rate. The problem then is a lack of qualified employers, not a lack of qualified workers.
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If you ever wondered why manufacturing employment has not done well over the last 15 years, President Clinton gave us part of the answer in a column giving advice on job creation [thanks hapa]. His 13th item on job creation is “Enforce Trade Laws,” where he tells readers:
“We lost manufacturing jobs in every one of the eight years after I left office. One of the reasons is that enforcement of our trade laws dropped sharply. Contrary to popular belief, the World Trade Organization and our trade agreements do not require unilateral disarmament. They’re designed to increase the volume of two-way trade on terms that are mutually beneficial. My administration negotiated 300 trade agreements, but we enforced them, too. Enforcement dropped so much in the last decade because we borrowed more and more money from the countries that had big trade surpluses with us, especially China and Japan, to pay for government spending. Since they are now our bankers, it’s hard to be tough on their unfair trading practices. This happened because we abandoned the path of balanced budgets 10 years ago, choosing instead large tax cuts especially for higher-income people like me, along with two wars and the senior citizens’ drug benefit. In the history of our republic, it’s the first time we ever cut taxes while going to war.”
Okay, we have some real serious confusion here from the former president. First, it is true that the economy lost manufacturing jobs in the eight years after President Clinton left office, but the job loss began in his last three years in office. Here are the numbers:
Change in Manufacturing Jobs
1998 -140,000
1999 -170,000
2000 -99,000
It is true that the pace of job loss picked up after Clinton left office, but this was due first and foremost to the recession caused by the collapse of the stock bubble. Blaming President Bush for that downturn would be like blaming Obama for the Lehman crisis if it happened to occur in February of 2009 rather than September of 2008. The downturn caused by the collapse of the bubble was the result of President Clinton’s team failure to try to rein in the bubble. As a result of the collapse of the stock bubble, the country had at the time the longest period without job growth since the Great Depression. It only began to create jobs again once the housing bubble began to fuel a construction and consumption boom.
Now for the other part of Clinton story:
“Enforcement dropped so much in the last decade because we borrowed more and more money from the countries that had big trade surpluses with us, especially China and Japan, to pay for government spending.”
Actually, if President Clinton paid attention to economic data he would have noticed that not only were we losing manufacturing jobs during his last three years in office, but the trade deficit was soaring. The trade deficit grew from just over 1 percent of GDP in 1996 to over 4.0 percent of GDP by the 4th quarter of 2000. President Clinton’s team must have been doing one heckuva job enforcing trade laws.
More importantly, the rest of his story makes no sense either. The United States borrows from China, Japan and other countries because of our trade deficit, not our budget deficit. We were borrowing huge amounts from Japan and China at the end of the Clinton presidency, but most of their loans went to buy stocks, private bonds, and mortgage backed securities, not government bonds. In fact, by the end of the Clinton presidency, because of the large trade deficit, the country was accruing debt to foreigners at a then record pace.
Anyone who thinks that this didn’t matter because the foreigners were holding private assets and not government debt should realize that if they desired for some reason to own government debt, any day of the week they could sell their stock, bonds, or mortgage backed securities and buy government debt. The issue is indebtedness to foreigners and the potential drain on future income. It matters not at all whether the debt is on the public or private side.
This raises the final point, why did the trade deficit soar in the last years of the Clinton administration (aside from the fact that President Clinton apparently was not paying attention)? The answer is simple. The value of the dollar soared.
This was the result of Treasury Secretary Robert Rubin’s high dollar policy. This was a rhetorical point when he first took over as Treasury secretary in 1995. He put the muscle of the IMF behind it in the East Asian bailouts of 1997. These bailouts forced the East Asian countries to repay debts in full. This could only be done by allowing the value of their currencies to plunge against the dollar, making their exports hyper-competitive.
Also, the IMF bailouts were considered so onerous by the rest of the developing world that every country that could decided it had to accumulate massive amounts of reserves to avoid ever being forced to turn to the IMF. This meant pushing down the value of their currencies against the dollar as well. In the late 90s, the normal flow of capital from rich countries to poor countries was reversed in a major way, with developing countries becoming massive lenders to the United States.
This was definitely bad policy, but it was President Clinton’s policy, not President Bush’s. The dollar actually depreciated moderately under President Bush. He certainly should have done more to push down its value, which would have corrected the imbalances built up in the Clinton years, but President Clinton has events seriously backward in this piece.
If you ever wondered why manufacturing employment has not done well over the last 15 years, President Clinton gave us part of the answer in a column giving advice on job creation [thanks hapa]. His 13th item on job creation is “Enforce Trade Laws,” where he tells readers:
“We lost manufacturing jobs in every one of the eight years after I left office. One of the reasons is that enforcement of our trade laws dropped sharply. Contrary to popular belief, the World Trade Organization and our trade agreements do not require unilateral disarmament. They’re designed to increase the volume of two-way trade on terms that are mutually beneficial. My administration negotiated 300 trade agreements, but we enforced them, too. Enforcement dropped so much in the last decade because we borrowed more and more money from the countries that had big trade surpluses with us, especially China and Japan, to pay for government spending. Since they are now our bankers, it’s hard to be tough on their unfair trading practices. This happened because we abandoned the path of balanced budgets 10 years ago, choosing instead large tax cuts especially for higher-income people like me, along with two wars and the senior citizens’ drug benefit. In the history of our republic, it’s the first time we ever cut taxes while going to war.”
Okay, we have some real serious confusion here from the former president. First, it is true that the economy lost manufacturing jobs in the eight years after President Clinton left office, but the job loss began in his last three years in office. Here are the numbers:
Change in Manufacturing Jobs
1998 -140,000
1999 -170,000
2000 -99,000
It is true that the pace of job loss picked up after Clinton left office, but this was due first and foremost to the recession caused by the collapse of the stock bubble. Blaming President Bush for that downturn would be like blaming Obama for the Lehman crisis if it happened to occur in February of 2009 rather than September of 2008. The downturn caused by the collapse of the bubble was the result of President Clinton’s team failure to try to rein in the bubble. As a result of the collapse of the stock bubble, the country had at the time the longest period without job growth since the Great Depression. It only began to create jobs again once the housing bubble began to fuel a construction and consumption boom.
Now for the other part of Clinton story:
“Enforcement dropped so much in the last decade because we borrowed more and more money from the countries that had big trade surpluses with us, especially China and Japan, to pay for government spending.”
Actually, if President Clinton paid attention to economic data he would have noticed that not only were we losing manufacturing jobs during his last three years in office, but the trade deficit was soaring. The trade deficit grew from just over 1 percent of GDP in 1996 to over 4.0 percent of GDP by the 4th quarter of 2000. President Clinton’s team must have been doing one heckuva job enforcing trade laws.
More importantly, the rest of his story makes no sense either. The United States borrows from China, Japan and other countries because of our trade deficit, not our budget deficit. We were borrowing huge amounts from Japan and China at the end of the Clinton presidency, but most of their loans went to buy stocks, private bonds, and mortgage backed securities, not government bonds. In fact, by the end of the Clinton presidency, because of the large trade deficit, the country was accruing debt to foreigners at a then record pace.
Anyone who thinks that this didn’t matter because the foreigners were holding private assets and not government debt should realize that if they desired for some reason to own government debt, any day of the week they could sell their stock, bonds, or mortgage backed securities and buy government debt. The issue is indebtedness to foreigners and the potential drain on future income. It matters not at all whether the debt is on the public or private side.
This raises the final point, why did the trade deficit soar in the last years of the Clinton administration (aside from the fact that President Clinton apparently was not paying attention)? The answer is simple. The value of the dollar soared.
This was the result of Treasury Secretary Robert Rubin’s high dollar policy. This was a rhetorical point when he first took over as Treasury secretary in 1995. He put the muscle of the IMF behind it in the East Asian bailouts of 1997. These bailouts forced the East Asian countries to repay debts in full. This could only be done by allowing the value of their currencies to plunge against the dollar, making their exports hyper-competitive.
Also, the IMF bailouts were considered so onerous by the rest of the developing world that every country that could decided it had to accumulate massive amounts of reserves to avoid ever being forced to turn to the IMF. This meant pushing down the value of their currencies against the dollar as well. In the late 90s, the normal flow of capital from rich countries to poor countries was reversed in a major way, with developing countries becoming massive lenders to the United States.
This was definitely bad policy, but it was President Clinton’s policy, not President Bush’s. The dollar actually depreciated moderately under President Bush. He certainly should have done more to push down its value, which would have corrected the imbalances built up in the Clinton years, but President Clinton has events seriously backward in this piece.
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The Post had a major front page article on the growth in inequality in the United States over the last three decades. While it is good to see the Post taking note of this enormously important development, the piece does manage to misrepresent some key points.
First, there has been new research that sheds additional light on the identity of the top earners, but we have long had a pretty good idea of who the big earners were. There are regular reports from Fortune and other sources on the pay of top executives at the major corporations. The growing gap between this pay and the pay of ordinary workers has long been noted in reports by my friends at the Economic Policy Institute and Institute for Policy Research and elsewhere. So telling us that many of the big earners are CEOs at major companies is not exactly news.
Neither is it news that many of the top earners are Wall Street types. There are news articles every year on the bonuses paid out at Goldman, Citigroup and the rest. We already knew that the financial sector accounted for a hugely disproportionate chunk of the top earners.
The other major flaw in this piece is its seeming willingness to accept the explanation that higher pay is explained by the growth of companies. First, this does not appear to have been the case in the 50s and 60s when the economy and many companies grew very rapidly, with no comparable explosion in pay at the top.
Second, the rise in pay for top executives far exceeds the growth of companies. While there has been some increase in concentration over the last three decades, it has not been nearly large enough to explain the rise in pay of top earners. Many of the huge companies of the 60s and 70s, for example General Motors and AT&T, have been seriously downsized relative to the size of the economy.
The increased size of companies could at best explain a small portion of the rise in executive pay and would not explain at all the huge gap between the pay for top executives at U.S. companies and the pay for top executives for large foreign corporations like Toyota or Volkswagon. These gaps are likely explained by the corruption of the corporate governance process in the United States where the CEOs get to largely decide the people who determine their pay. Stockholders are likely to exert more control elsewhere and thereby keep pay for top executives more in line with the market.
The Post had a major front page article on the growth in inequality in the United States over the last three decades. While it is good to see the Post taking note of this enormously important development, the piece does manage to misrepresent some key points.
First, there has been new research that sheds additional light on the identity of the top earners, but we have long had a pretty good idea of who the big earners were. There are regular reports from Fortune and other sources on the pay of top executives at the major corporations. The growing gap between this pay and the pay of ordinary workers has long been noted in reports by my friends at the Economic Policy Institute and Institute for Policy Research and elsewhere. So telling us that many of the big earners are CEOs at major companies is not exactly news.
Neither is it news that many of the top earners are Wall Street types. There are news articles every year on the bonuses paid out at Goldman, Citigroup and the rest. We already knew that the financial sector accounted for a hugely disproportionate chunk of the top earners.
The other major flaw in this piece is its seeming willingness to accept the explanation that higher pay is explained by the growth of companies. First, this does not appear to have been the case in the 50s and 60s when the economy and many companies grew very rapidly, with no comparable explosion in pay at the top.
Second, the rise in pay for top executives far exceeds the growth of companies. While there has been some increase in concentration over the last three decades, it has not been nearly large enough to explain the rise in pay of top earners. Many of the huge companies of the 60s and 70s, for example General Motors and AT&T, have been seriously downsized relative to the size of the economy.
The increased size of companies could at best explain a small portion of the rise in executive pay and would not explain at all the huge gap between the pay for top executives at U.S. companies and the pay for top executives for large foreign corporations like Toyota or Volkswagon. These gaps are likely explained by the corruption of the corporate governance process in the United States where the CEOs get to largely decide the people who determine their pay. Stockholders are likely to exert more control elsewhere and thereby keep pay for top executives more in line with the market.
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“Night is day,” “slavery is freedom,” okay David Brooks edited those lines out of his column on Fannie Mae today, but this is pretty much how the rest of it reads. He tells us that the economic crisis was the result of Fannie Mae pushing bad mortgages and buying off everyone who tried to stand in their way.
There’s a small problem in this story. The worst junk mortgages that inflated the housing bubble to extraordinary levels were not bought and securitized by Fannie and Freddie, they were securitized by Citigroup, Merrill Lynch, Goldman Sachs, Lehman and the other private investment banks. These investment banks gobbled up the worst subprime and Alt-A garbage that sleaze operations like Ameriquest and Countrywide pushed on homebuyers.
The trillions of dollars that the geniuses at the private investment banks funneled into the housing market were the force that inflated the bubble to its 2006 peaks. Fannie and Freddie were followers in this story, jumping into the subprime and Alt-A market in 2005 to try to maintain market share. They were not the leaders.
Just to be clear, Fannie and Freddie were serious bad actors. They are both huge companies that do nothing else but deal with housing. It is incredible that they did not recognize the housing bubble and take steps to try to deflate it, and protect themselves, before it grew to such dangerous levels.
Suppose that Fannie and Freddie started demanding appraisals of rental values and refused to buy any mortgage where the ratio of sale price to annual rent was higher than 20. This action by itself likely would have shaken some sense into the housing market. I said this back in 2002, when I first warned of the housing bubble and predicted the collapse of Fannie and Freddie. I also frequently criticized Fannie and Freddie in public forums, including debates with their chief economists. Unlike Brooks, I wasn’t worried about non-issues as economic disaster loomed on the horizon.
As much as Fannie and Freddie deserve blame for incompetence and corruption, no serious person can make them the main culprits in this story. The Wall Street crew made hundreds of billions on pushing fraudulent mortgages. Furthermore, if we had competent economists running the Fed, they would have been shooting at the housing bubble as early as 2002 also. This does not mean raising interest rates in an economy that was struggling to recover from the collapse of the stock bubble. (I’ll say that again, since people have a hard time understanding “do not raise interest rates.” The Fed should not have raised interest rates.)
If Greenspan had paid attention to the economy he would have had the Fed’s staff devoted full-time to documenting the evidence for the housing bubble and he would have used every public appearance (e.g. congressional testimonies, public speeches, international forums) to warn of the risks posed by the housing bubble. He also would have used the Fed’s full regulatory authority to police the mortgage issuing practices of the banks under its supervision. He also would have prodded other regulators to use increased scrutiny for the institutions under their control. (Greenspan was never shy about making suggestions to others.)
My guess is that these actions would have by themselves crashed the bubble and done so long before it grew to such dangerous levels. They would be essentially costless, so it is difficult to see why a vigilant Fed chair would not have followed this route.
It is difficult to believe that these actions would not have been sufficient to deflate the bubble. After all, the David Brooks of the world can ignore Dean Baker warning of the housing bubble, they cannot ignore the Fed chair issuing such warnings, backed up by endless Fed papers documenting the case.
It is incredible, that even after the collapse of the housing bubble has wrecked the economy and wiped out the life’s savings of tens of millions of middle class and moderate income families (this loss of wealth is why people are not spending, it has little to do with “pessimism”), there is still so little effort to re-examine the fixation on homeownership in this country.
Why on earth is President Obama looking to push a renewed Fannie and Freddie type system? Does the public really need to subsidize mortgage interest rates through a government guarantee system, in addition to the mortgage interest deduction?
Brooks might devote some of his fire to these loonie schemes. He might also shoot at the whiners who think no one will issue a mortgage if they have to maintain a 5 percent stake in it. And, he might also call for some criminal investigations of the banks that pushed and securitized fraudulent mortgages. But none of this seems to fit Brooks’ agenda.
Addendum:
I had occasion to quote from this 2006 Moody’s assessment of Freddie Mac. It does a great job of putting Fannie and Freddie’s subprime dealings in context:
Freddie Mac has long played a central role (shared with Fannie Mae) in the secondary mortgage market. In recent years, both housing GSEs have been losing share within the overall market due to the shifting nature of consumer preferences towards adjustable-rate loans and other hybrid products. For the first half of 2006, Fannie Mae and Freddie Mac captured about 44 percent of total origination volume — up from a 41 percent share in 2005, but down from a 59 percent share in 2003. Moody’s would be concerned if Freddie Mac’s market share (i.e., mortgage portfolio plus securities as a percentage of conforming and non-conforming origination), which ranged between 18 and 23 percent between 1999 and the first half of 2006, declined below 15 percent. To buttress its market share, Freddie Mac has increased its purchases of private label securities. Moody’s notes that these purchases contribute to profitability, affordable housing goals, and market share in the short-term, but offer minimal benefit from a franchise building perspective. (p 6)
“Night is day,” “slavery is freedom,” okay David Brooks edited those lines out of his column on Fannie Mae today, but this is pretty much how the rest of it reads. He tells us that the economic crisis was the result of Fannie Mae pushing bad mortgages and buying off everyone who tried to stand in their way.
There’s a small problem in this story. The worst junk mortgages that inflated the housing bubble to extraordinary levels were not bought and securitized by Fannie and Freddie, they were securitized by Citigroup, Merrill Lynch, Goldman Sachs, Lehman and the other private investment banks. These investment banks gobbled up the worst subprime and Alt-A garbage that sleaze operations like Ameriquest and Countrywide pushed on homebuyers.
The trillions of dollars that the geniuses at the private investment banks funneled into the housing market were the force that inflated the bubble to its 2006 peaks. Fannie and Freddie were followers in this story, jumping into the subprime and Alt-A market in 2005 to try to maintain market share. They were not the leaders.
Just to be clear, Fannie and Freddie were serious bad actors. They are both huge companies that do nothing else but deal with housing. It is incredible that they did not recognize the housing bubble and take steps to try to deflate it, and protect themselves, before it grew to such dangerous levels.
Suppose that Fannie and Freddie started demanding appraisals of rental values and refused to buy any mortgage where the ratio of sale price to annual rent was higher than 20. This action by itself likely would have shaken some sense into the housing market. I said this back in 2002, when I first warned of the housing bubble and predicted the collapse of Fannie and Freddie. I also frequently criticized Fannie and Freddie in public forums, including debates with their chief economists. Unlike Brooks, I wasn’t worried about non-issues as economic disaster loomed on the horizon.
As much as Fannie and Freddie deserve blame for incompetence and corruption, no serious person can make them the main culprits in this story. The Wall Street crew made hundreds of billions on pushing fraudulent mortgages. Furthermore, if we had competent economists running the Fed, they would have been shooting at the housing bubble as early as 2002 also. This does not mean raising interest rates in an economy that was struggling to recover from the collapse of the stock bubble. (I’ll say that again, since people have a hard time understanding “do not raise interest rates.” The Fed should not have raised interest rates.)
If Greenspan had paid attention to the economy he would have had the Fed’s staff devoted full-time to documenting the evidence for the housing bubble and he would have used every public appearance (e.g. congressional testimonies, public speeches, international forums) to warn of the risks posed by the housing bubble. He also would have used the Fed’s full regulatory authority to police the mortgage issuing practices of the banks under its supervision. He also would have prodded other regulators to use increased scrutiny for the institutions under their control. (Greenspan was never shy about making suggestions to others.)
My guess is that these actions would have by themselves crashed the bubble and done so long before it grew to such dangerous levels. They would be essentially costless, so it is difficult to see why a vigilant Fed chair would not have followed this route.
It is difficult to believe that these actions would not have been sufficient to deflate the bubble. After all, the David Brooks of the world can ignore Dean Baker warning of the housing bubble, they cannot ignore the Fed chair issuing such warnings, backed up by endless Fed papers documenting the case.
It is incredible, that even after the collapse of the housing bubble has wrecked the economy and wiped out the life’s savings of tens of millions of middle class and moderate income families (this loss of wealth is why people are not spending, it has little to do with “pessimism”), there is still so little effort to re-examine the fixation on homeownership in this country.
Why on earth is President Obama looking to push a renewed Fannie and Freddie type system? Does the public really need to subsidize mortgage interest rates through a government guarantee system, in addition to the mortgage interest deduction?
Brooks might devote some of his fire to these loonie schemes. He might also shoot at the whiners who think no one will issue a mortgage if they have to maintain a 5 percent stake in it. And, he might also call for some criminal investigations of the banks that pushed and securitized fraudulent mortgages. But none of this seems to fit Brooks’ agenda.
Addendum:
I had occasion to quote from this 2006 Moody’s assessment of Freddie Mac. It does a great job of putting Fannie and Freddie’s subprime dealings in context:
Freddie Mac has long played a central role (shared with Fannie Mae) in the secondary mortgage market. In recent years, both housing GSEs have been losing share within the overall market due to the shifting nature of consumer preferences towards adjustable-rate loans and other hybrid products. For the first half of 2006, Fannie Mae and Freddie Mac captured about 44 percent of total origination volume — up from a 41 percent share in 2005, but down from a 59 percent share in 2003. Moody’s would be concerned if Freddie Mac’s market share (i.e., mortgage portfolio plus securities as a percentage of conforming and non-conforming origination), which ranged between 18 and 23 percent between 1999 and the first half of 2006, declined below 15 percent. To buttress its market share, Freddie Mac has increased its purchases of private label securities. Moody’s notes that these purchases contribute to profitability, affordable housing goals, and market share in the short-term, but offer minimal benefit from a franchise building perspective. (p 6)
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