The Washington Post had a major article on a threat by Moody’s to downgrade U.S. debt. The article identifies Moody’s as “one of the premier credit-rating agencies.” It also would have been reasonable to identify Moody’s as one of the credit rating agencies that helped to extend the housing bubble by routinely giving investment grade ratings to mortgage backed securities and collaterized debt obligations that were full of bad and even fraudulent mortgages.
Moody’s also has managed to miss most of the major corporate bankruptcies in recent years, giving both Lehman’s and Bear Stearns top investment grade ratings until just before their collapse. It’s record on rating sovereign debt is also not very good. It downgraded Japan’s debt almost a decade ago yet Japan can still borrow long-term at interest rates of less than 1.5 percent. This suggests that financial markets do not have much regard for Moody’s ratings. This would have been useful information to provide readers.
The Washington Post had a major article on a threat by Moody’s to downgrade U.S. debt. The article identifies Moody’s as “one of the premier credit-rating agencies.” It also would have been reasonable to identify Moody’s as one of the credit rating agencies that helped to extend the housing bubble by routinely giving investment grade ratings to mortgage backed securities and collaterized debt obligations that were full of bad and even fraudulent mortgages.
Moody’s also has managed to miss most of the major corporate bankruptcies in recent years, giving both Lehman’s and Bear Stearns top investment grade ratings until just before their collapse. It’s record on rating sovereign debt is also not very good. It downgraded Japan’s debt almost a decade ago yet Japan can still borrow long-term at interest rates of less than 1.5 percent. This suggests that financial markets do not have much regard for Moody’s ratings. This would have been useful information to provide readers.
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Former Senator Alan Simpson, a co-chair of President Obama’s deficit commission, repeatedly misrepresented the commission in a column in the Washington Post. (It is possible that the piece was co-authored by Simpson’s co-chair, Erskine Bowles, a Director of Morgan Stanley. The Post’s identification says, “the writers were co-chairs of the National Commission on Fiscal Responsibility and Reform.”)
The article repeatedly refers to the deficit commission’s report and recommendations. This is not true. The commission did not produce a report and never even voted on one. The column is presumably referring to the report of the co-chairs. This report was never submitted for a vote because it did not have the support of the necessary majority.
Former Senator Alan Simpson, a co-chair of President Obama’s deficit commission, repeatedly misrepresented the commission in a column in the Washington Post. (It is possible that the piece was co-authored by Simpson’s co-chair, Erskine Bowles, a Director of Morgan Stanley. The Post’s identification says, “the writers were co-chairs of the National Commission on Fiscal Responsibility and Reform.”)
The article repeatedly refers to the deficit commission’s report and recommendations. This is not true. The commission did not produce a report and never even voted on one. The column is presumably referring to the report of the co-chairs. This report was never submitted for a vote because it did not have the support of the necessary majority.
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This is the practice at the WSJ when it comes to Republican nonsense on the economy. The Republicans blamed the economy’s weak job performance in May on the deficit and regulations. Is there any coherent story that they can tell on this or does the WSJ not care?
Suppose the Republicans blamed the weak jobs numbers on the Chicago Bulls loss in the NBA semi-finals. Would this also just be repeated without comment. How about if they blamed it on the color purple? Sure, it’s just a he said/she said world.
For the record, if a serious person made this argument then they would back it up with evidence. For example, firms that make longer hiring commitments would be doing less hiring than firms in industries with rapid turnover. (Try to explain the loss of temp jobs in May.) We should also see a big increase in average hours worked, since this does not require any commitment by employers. (We don’t.)
If reporters did their jobs, politicians would actually have to make coherent arguments when they talked about the economy, instead of just saying whatever nonsense advanced their political agenda.
This is the practice at the WSJ when it comes to Republican nonsense on the economy. The Republicans blamed the economy’s weak job performance in May on the deficit and regulations. Is there any coherent story that they can tell on this or does the WSJ not care?
Suppose the Republicans blamed the weak jobs numbers on the Chicago Bulls loss in the NBA semi-finals. Would this also just be repeated without comment. How about if they blamed it on the color purple? Sure, it’s just a he said/she said world.
For the record, if a serious person made this argument then they would back it up with evidence. For example, firms that make longer hiring commitments would be doing less hiring than firms in industries with rapid turnover. (Try to explain the loss of temp jobs in May.) We should also see a big increase in average hours worked, since this does not require any commitment by employers. (We don’t.)
If reporters did their jobs, politicians would actually have to make coherent arguments when they talked about the economy, instead of just saying whatever nonsense advanced their political agenda.
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The bankers are warning of Armageddon if a rule from the Dodd-Frank bill is left in place that requires that retain a 5 percent stake in mortgages where the owner puts less than 20 percent down. In effect, that if the bank sells a loan into a security pool that had a down payment of less than 20 percent, it will be liable for at least 5 percent of the losses incurred on the mortgage if there is default.
While the bankers are portraying this as an ominous restriction that will prevent them from making loans to moderate-income homeowners, a little arithmetic suggests otherwise. Before the bubble, Freddie Mac estimated that its average loss on a foreclosed property was 25 percent of the mortgage’s value.
If we assume that the mortgages in question will have the same 25 percent loss rate once the market becomes more normal, then this would imply a loss of 1.25 percent of the mortgage’s value, given the bank’s 5 percent stake. If one in ten of these mortgages go bad, then this implies an average loss of 0.125 percent on loans in this category.
However, this calculation assumes that the bank can sell off a mortgage with less than 20 percent down at the same price that it can sell off a mortgage with 20 percent or more down. Since this is almost certainly not true, then the loss to the bank from this provision would be somewhat less than 0.125 percent of the price of the mortgage. If this loss were fully passed on to homebuyers then the impact of this provision would at most be equivalent to raising the cost of a mortgage by 0.13 basis points, and almost certainly considerably less. Given this arithmetic, it is not plausible that this 5 percent rule will have any noticeable effect on the access of moderate-income families to mortgages.
The bankers are warning of Armageddon if a rule from the Dodd-Frank bill is left in place that requires that retain a 5 percent stake in mortgages where the owner puts less than 20 percent down. In effect, that if the bank sells a loan into a security pool that had a down payment of less than 20 percent, it will be liable for at least 5 percent of the losses incurred on the mortgage if there is default.
While the bankers are portraying this as an ominous restriction that will prevent them from making loans to moderate-income homeowners, a little arithmetic suggests otherwise. Before the bubble, Freddie Mac estimated that its average loss on a foreclosed property was 25 percent of the mortgage’s value.
If we assume that the mortgages in question will have the same 25 percent loss rate once the market becomes more normal, then this would imply a loss of 1.25 percent of the mortgage’s value, given the bank’s 5 percent stake. If one in ten of these mortgages go bad, then this implies an average loss of 0.125 percent on loans in this category.
However, this calculation assumes that the bank can sell off a mortgage with less than 20 percent down at the same price that it can sell off a mortgage with 20 percent or more down. Since this is almost certainly not true, then the loss to the bank from this provision would be somewhat less than 0.125 percent of the price of the mortgage. If this loss were fully passed on to homebuyers then the impact of this provision would at most be equivalent to raising the cost of a mortgage by 0.13 basis points, and almost certainly considerably less. Given this arithmetic, it is not plausible that this 5 percent rule will have any noticeable effect on the access of moderate-income families to mortgages.
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That’s what readers of the Washington Post front page article on the economy are asking. Those who know economics saw that house prices were falling and would continue to fall. This decline has eliminated close to $1 trillion in housing wealth since the peak reached last July. It will likely eliminate another $1 trillion by the end of the year. The winding down of the original stimulus package, coupled with state and local government cutbacks, was expected to be another major source of drag on the economy.
The boost provided by the Fed’s QE2 policy was generally anticipated to be limited, lowering 10-year Treasury rates by perhaps 20-30 basis points. The net stimulus from the tax cuts was very modest, with the 2 percentage point cut in the Social Security tax providing only marginally more stimulus than the Making Work Pay credit that it replaced.
The problem appears to be the Post relies on experts who are poorly informed about the economy. This is the reason it failed to notify its readers of the dangers created by the growth of the housing bubble. It continues to be a major problem with its economic reporting.
It is also worth noting one other potential source of stimulus not mentioned in this article: a lower valued dollar. A lower dollar would make U.S. goods more competitive in world markets. This would stimulate the economy by reducing imports and increasing exports.
In the longer run it will be necessary to have the dollar fall to bring the trade deficit closer to balance. Until the trade deficit is brought down, then by definition the country must either have a large government deficit or negative private savings, or some combination of the two. This is implied by the fact that the trade deficit is equal to net national savings so that if the country is running a deficit, then the public and/or private sector must have negative savings.
That’s what readers of the Washington Post front page article on the economy are asking. Those who know economics saw that house prices were falling and would continue to fall. This decline has eliminated close to $1 trillion in housing wealth since the peak reached last July. It will likely eliminate another $1 trillion by the end of the year. The winding down of the original stimulus package, coupled with state and local government cutbacks, was expected to be another major source of drag on the economy.
The boost provided by the Fed’s QE2 policy was generally anticipated to be limited, lowering 10-year Treasury rates by perhaps 20-30 basis points. The net stimulus from the tax cuts was very modest, with the 2 percentage point cut in the Social Security tax providing only marginally more stimulus than the Making Work Pay credit that it replaced.
The problem appears to be the Post relies on experts who are poorly informed about the economy. This is the reason it failed to notify its readers of the dangers created by the growth of the housing bubble. It continues to be a major problem with its economic reporting.
It is also worth noting one other potential source of stimulus not mentioned in this article: a lower valued dollar. A lower dollar would make U.S. goods more competitive in world markets. This would stimulate the economy by reducing imports and increasing exports.
In the longer run it will be necessary to have the dollar fall to bring the trade deficit closer to balance. Until the trade deficit is brought down, then by definition the country must either have a large government deficit or negative private savings, or some combination of the two. This is implied by the fact that the trade deficit is equal to net national savings so that if the country is running a deficit, then the public and/or private sector must have negative savings.
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The Washington Post reported that House Budget Committee Chairman Paul Ryan won applause from the Republican freshman caucus when he criticized President Obama for saying that Ryan’s Medicare plan would turn the program into a voucher system. The Post should have reminded readers that Ryan Medicare plan does turn the program into a voucher system.
Ryan’s plan gives beneficiaries a fixed amount on money that they can use to buy insurance in the private market. This is what most people would consider a voucher system. The Congressional Budget Office’s projections indicate that it would raise the cost of buying Medicare equivalent policies by $34 trillion, approximately 5 times the size of the projected Social Security shortfall.
The Washington Post reported that House Budget Committee Chairman Paul Ryan won applause from the Republican freshman caucus when he criticized President Obama for saying that Ryan’s Medicare plan would turn the program into a voucher system. The Post should have reminded readers that Ryan Medicare plan does turn the program into a voucher system.
Ryan’s plan gives beneficiaries a fixed amount on money that they can use to buy insurance in the private market. This is what most people would consider a voucher system. The Congressional Budget Office’s projections indicate that it would raise the cost of buying Medicare equivalent policies by $34 trillion, approximately 5 times the size of the projected Social Security shortfall.
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The Washington Post, which is part of a corporation whose primary income comes from for-profit colleges, told readers that new regulations on student loans would:
“effectively would shut down for-profit programs that repeatedly fail to show, through certain measures, that graduates are earning enough to pay down the loans taken out to attend those programs.”
It is important to note that the rules being proposed don’t restrict for-profit colleges in any way. They simply impose conditions that they must meet in order for their students to be eligible to receive student loans.
The rules are restrictions on students trying to get loans in the same way that prohibitions on using food stamps for junk food would a restriction on food stamp recipients, not restrictions on the junk food industry. In that case, the junk food industry would still be free to sell their product to whoever wanted to buy it, including people receiving food stamps. However, they would just be prohibited from buying the junk food with their food stamps.
In the same way, anyone who wants to would still be able to attend any for-profit college they chose. They could even borrow money to do so. They would just be unable to get a subsidized loan from the government for this purpose.
The Washington Post, which is part of a corporation whose primary income comes from for-profit colleges, told readers that new regulations on student loans would:
“effectively would shut down for-profit programs that repeatedly fail to show, through certain measures, that graduates are earning enough to pay down the loans taken out to attend those programs.”
It is important to note that the rules being proposed don’t restrict for-profit colleges in any way. They simply impose conditions that they must meet in order for their students to be eligible to receive student loans.
The rules are restrictions on students trying to get loans in the same way that prohibitions on using food stamps for junk food would a restriction on food stamp recipients, not restrictions on the junk food industry. In that case, the junk food industry would still be free to sell their product to whoever wanted to buy it, including people receiving food stamps. However, they would just be prohibited from buying the junk food with their food stamps.
In the same way, anyone who wants to would still be able to attend any for-profit college they chose. They could even borrow money to do so. They would just be unable to get a subsidized loan from the government for this purpose.
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Major news outlets like to adhere to the pretext that the truth in any political argument always lies in the middle. This means that they feel the need to say that the truth in the current battles over the budget and Medicare lies somewhere between the Democratic and Republican positions.
In the past this practice meant, for example, that most of these news organizations said things like the truth on civil rights was somewhere between the positions put forward by people like Martin Luther King and segregationists like George Wallace. Many might think the truth does not always lie between the positions set out by the major actors in national political debates.
In keeping to this “truth lies in the middle” approach, AP’s Fact Check criticized Representative Debbie Wasserman Schultz, the chair of the Democratic National Committee, for attacking Representative Paul Ryan’s plan for Medicare, which was adopted by the Republican House. Fact Check criticizes Wasserman for:
“falsely accusing the GOP of pushing a proposal that tells the elderly ‘you’re on your own’ with health care and that lets insurers deny coverage to the sick.”
Fact Check goes on to quote Wasserman as saying about the Ryan plan:
“‘You know what, you’re on your own. Go and find private health insurance in the health care insurance market; we’re going to throw you to the wolves and allow insurance companies to deny you coverage and drop you for pre-existing conditions. We’re going to give you X amount of dollars, and you figure it out.'”
It then tells readers:
“THE FACTS: First, the Ryan plan explicitly forbids insurance companies from denying coverage to anyone who qualifies for Medicare, including those who have pre-existing illnesses. Second, it does not merely send money to the elderly and leave them to their own devices in arranging for medical care.
“The plan calls for Medicare to stay the same for people 55 and older. But starting in 2022, new beneficiaries would get their health insurance from competing private insurers instead of from the government. The government would offer subsidies to pay for the coverage and set standards that insurers must follow. One condition, says the plan, is that participating insurers “agree to offer insurance to all Medicare beneficiaries, to avoid cherry-picking and ensure that Medicare’s sickest and highest-cost beneficiaries receive coverage.”
“Nor would the government merely send ‘X amount of dollars’ to the elderly and let them figure out whether they can afford coverage. The subsidies would go to the plan selected by the beneficiary.”
While Fact Check is correct on the treatment of pre-existing conditions, it is wrong to imply that the Ryan plan in any way guarantees coverage. According to the Congressional Budget Office’s (CBO) projections, the cost of a Medicare equivalent plan for a person at age 65 would be equal to 44 percent of the median person’s income by 2030. It would have risen to 68 percent of the median 65-year old’s income by 2050. (This ignores the fact that the plan increases the age of eligibility to 67 by 2046. )
Health care costs are higher for older retirees. CBO’s projections imply that by 2050 the cost of a Medicare equivalent plan for someone age 75 would be 143 percent of the median 75-year-old’s income and 200 percent of the median 85-year-old’s income. Given the huge gap between the cost of care and the ability of seniors to pay it is wrong to imply, as Fact Check does, that the Ryan plan in any way ensures that seniors will get decent coverage. As Wasserman claimed, if the Ryan subsidy is insufficient to pay for care, the plan tells seniors that they are on their own.
The truth does not always lie in the middle. Fact Check would have known this if it had bothered to analyze the CBO projections before criticizing Representative Wasserman.
Major news outlets like to adhere to the pretext that the truth in any political argument always lies in the middle. This means that they feel the need to say that the truth in the current battles over the budget and Medicare lies somewhere between the Democratic and Republican positions.
In the past this practice meant, for example, that most of these news organizations said things like the truth on civil rights was somewhere between the positions put forward by people like Martin Luther King and segregationists like George Wallace. Many might think the truth does not always lie between the positions set out by the major actors in national political debates.
In keeping to this “truth lies in the middle” approach, AP’s Fact Check criticized Representative Debbie Wasserman Schultz, the chair of the Democratic National Committee, for attacking Representative Paul Ryan’s plan for Medicare, which was adopted by the Republican House. Fact Check criticizes Wasserman for:
“falsely accusing the GOP of pushing a proposal that tells the elderly ‘you’re on your own’ with health care and that lets insurers deny coverage to the sick.”
Fact Check goes on to quote Wasserman as saying about the Ryan plan:
“‘You know what, you’re on your own. Go and find private health insurance in the health care insurance market; we’re going to throw you to the wolves and allow insurance companies to deny you coverage and drop you for pre-existing conditions. We’re going to give you X amount of dollars, and you figure it out.'”
It then tells readers:
“THE FACTS: First, the Ryan plan explicitly forbids insurance companies from denying coverage to anyone who qualifies for Medicare, including those who have pre-existing illnesses. Second, it does not merely send money to the elderly and leave them to their own devices in arranging for medical care.
“The plan calls for Medicare to stay the same for people 55 and older. But starting in 2022, new beneficiaries would get their health insurance from competing private insurers instead of from the government. The government would offer subsidies to pay for the coverage and set standards that insurers must follow. One condition, says the plan, is that participating insurers “agree to offer insurance to all Medicare beneficiaries, to avoid cherry-picking and ensure that Medicare’s sickest and highest-cost beneficiaries receive coverage.”
“Nor would the government merely send ‘X amount of dollars’ to the elderly and let them figure out whether they can afford coverage. The subsidies would go to the plan selected by the beneficiary.”
While Fact Check is correct on the treatment of pre-existing conditions, it is wrong to imply that the Ryan plan in any way guarantees coverage. According to the Congressional Budget Office’s (CBO) projections, the cost of a Medicare equivalent plan for a person at age 65 would be equal to 44 percent of the median person’s income by 2030. It would have risen to 68 percent of the median 65-year old’s income by 2050. (This ignores the fact that the plan increases the age of eligibility to 67 by 2046. )
Health care costs are higher for older retirees. CBO’s projections imply that by 2050 the cost of a Medicare equivalent plan for someone age 75 would be 143 percent of the median 75-year-old’s income and 200 percent of the median 85-year-old’s income. Given the huge gap between the cost of care and the ability of seniors to pay it is wrong to imply, as Fact Check does, that the Ryan plan in any way ensures that seniors will get decent coverage. As Wasserman claimed, if the Ryan subsidy is insufficient to pay for care, the plan tells seniors that they are on their own.
The truth does not always lie in the middle. Fact Check would have known this if it had bothered to analyze the CBO projections before criticizing Representative Wasserman.
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If the Washington Post sent reporters through northern Japan they would note the wrecked roads and buildings, the large number of deaths, the crisis at the nuclear power plants, but they would never notice the earthquake/tsunami that caused it all. That is what one can assume from its continued failure to notice the housing bubble.
Anyone who followed trends in house prices should not have been at all surprised by the drop in prices reported for March (the “double-dip”). Nationwide house prices are still close to 10 percent above their long-term trend.
No one — as in not a single economist anywhere — has presented a remotely plausible reason as to why we should expect house prices to diverge from their 100-year long trend. Given the continued near-record vacancy rates, and huge inventory of homes in the foreclosure process, there is no reason to think that house prices will stop falling any time soon.
The Post should try to find at least one person who recognized the housing bubble (the largest asset bubble in the history of the world) for its articles on the housing market, instead of relying exclusively on people who were caught by surprise by its collapse.
If the Washington Post sent reporters through northern Japan they would note the wrecked roads and buildings, the large number of deaths, the crisis at the nuclear power plants, but they would never notice the earthquake/tsunami that caused it all. That is what one can assume from its continued failure to notice the housing bubble.
Anyone who followed trends in house prices should not have been at all surprised by the drop in prices reported for March (the “double-dip”). Nationwide house prices are still close to 10 percent above their long-term trend.
No one — as in not a single economist anywhere — has presented a remotely plausible reason as to why we should expect house prices to diverge from their 100-year long trend. Given the continued near-record vacancy rates, and huge inventory of homes in the foreclosure process, there is no reason to think that house prices will stop falling any time soon.
The Post should try to find at least one person who recognized the housing bubble (the largest asset bubble in the history of the world) for its articles on the housing market, instead of relying exclusively on people who were caught by surprise by its collapse.
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The WSJ had a chart alongside an article on the House vote on raising the debt ceiling. The chart shows the debt ceiling through time. The ceiling is shown in nominal dollars. By not adjusting for the growth in the economy or even the rate of inflation, the chart makes the ceiling look hugely out of line with past levels.
That’s a good practice if the point is to scare readers about the size of the debt. It is bad journalism. The debt ceiling was higher relative to the size of the economy during World War II and its aftermath.
It’s also worth commenting on its reference to credit default swaps (CDS) as a reference to the risk that investors assign that the U.S. could default on its debt. In fact, the price of CDS on the U.S. debt imply nothing of the sort. If the government actually defaults on its debt, the issuer of a CDS on the debt will almost certainly be bankrupt, so the CDS would itself be worthless.
Rather than being a bet on the government defaulting on its debt, the price of a CDS on U.S. government debt should be viewed as a bet on how much people will be willing to pay for the CDS tomorrow. In this way the price of a CDS on U.S. debt can be viewed as comparable to the price of an awful painting by a very famous artist. No one actually wants the painting, but it may hold great value because other people are willing to assign it great value.
The WSJ had a chart alongside an article on the House vote on raising the debt ceiling. The chart shows the debt ceiling through time. The ceiling is shown in nominal dollars. By not adjusting for the growth in the economy or even the rate of inflation, the chart makes the ceiling look hugely out of line with past levels.
That’s a good practice if the point is to scare readers about the size of the debt. It is bad journalism. The debt ceiling was higher relative to the size of the economy during World War II and its aftermath.
It’s also worth commenting on its reference to credit default swaps (CDS) as a reference to the risk that investors assign that the U.S. could default on its debt. In fact, the price of CDS on the U.S. debt imply nothing of the sort. If the government actually defaults on its debt, the issuer of a CDS on the debt will almost certainly be bankrupt, so the CDS would itself be worthless.
Rather than being a bet on the government defaulting on its debt, the price of a CDS on U.S. government debt should be viewed as a bet on how much people will be willing to pay for the CDS tomorrow. In this way the price of a CDS on U.S. debt can be viewed as comparable to the price of an awful painting by a very famous artist. No one actually wants the painting, but it may hold great value because other people are willing to assign it great value.
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