J. Bradford DeLong's Blog, page 2135

Bethany McLean on This Year's Winners of the Stupidest Economists Alive Contest

Bethany McLean:

Why won't the GOP's financial-crisis report follow the money?: [O]n Dec. 15, defecting Republicans—former Calif. Rep. Bill Thomas; Keith Hennessey, who served on President Bush's National Economic Council; Douglas Holtz-Eakin, the former head of the Congressional Budget Office; and Peter Wallison, a fellow at the conservative American Enterprise Institute... released what they describe as their "preliminary findings and conclusions." This "primer" (in a blog, Wallison denied that it was either a "report" or a "response") put blame just where many Republicans would like to see it: on the government's push for homeownership. "There were three important ways that the government pushed investors toward investing in mortgage debt," the authors write.

First, the regulatory capital requirements associated with mortgage debt were lower than for other investments. Second, the government encouraged the private market to extend credit to previously underserved borrowers through a combination of legislation, regulation and moral suasion. Third, and most important, during the bubble's expansion, the largest investors in the mortgage market … Fannie Mae and Freddie Mac, were instruments of U.S. government housing policy.

As a result of government-established affordable-housing goals starting in 1993, the authors argue, Fannie and Freddie had to "invest in mortgages of increasingly lower quality and higher risk to the taxpayer." This narrative... is shockingly incomplete... a ludicrous distortion.... [T]he government did lower the regulatory capital requirements... in the face of fierce lobbying from the private sector.... Countrywide and Ameriquest didn't make mortgages—and Wall Street firms didn't package those mortgages and sell them off to investors—because the government was holding a gun to their heads.... As for the implication that subprime lending began with Fannie and Freddie and resulted from the government's affordable housing goals, that's simply false....

For most of the 1990s, Fannie's and Freddie's affordable-housing goals required them to buy a certain percentage of mortgages made to families with a median income level. That was hardly onerous or risky, and anyway Fannie executives, who were far more preoccupied with return to shareholders, used to joke about the ways they neutered the affordable-housing rules....

The GOP report—oops, primer—provides a calculatedly incomplete account of how bad mortgages found their way onto the balance sheets of financial firms. There's an interesting dissection of the kinds of risk that banks took—but no mention of the reason they took those risks.... As for the ways the risky mortgages were packaged into supposedly safe securities, all readers get is a whitewash.... [No] mention of the Street's failure to investigate the underlying mortgages, despite its promises to investors that it was doing so.
Oh, and here's the line about the credit-rating agencies like Moody's and Standard and Poor's, which made fortunes by stamping triple-A ratings on bundles of bad mortgages:

The credit rating agencies made many of the same mistakes as mortgage investors, and ratings on MBS proved to be severely inflated.

Er, the mortgage investors were relying on the credit-rating agencies to do their job by assessing risk accurately. Anyone with even a rudimentary understanding of the 2008 crisis knows that. But apparently it never came up in those "hundreds of interviews" financed by taxpayer dollars....

[T]he explanation—that in essence, what happened to Wall Street was simply a "run on a bank"—ignores the active role Wall Street itself played in causing the run. If you sell hundreds of billions of dollars in bad securities to investors, and then those investors start to realize that you also own some of those same securities, well, there might just be a run. And a justified one at that...

Daniel Davies Comes Terribly Close to Winning the Entire Internet...

He writes:

I saw "Black Swan" after reading the book, and I must say, Nicholas Taleb must be wondering what the hell happened in development.

Repeat A Lie Enough Times . . .

Barry Ritholtz:

Repeat A Lie Enough Times . . . | The Big Picture: All last year, I kept getting emails from people asking me: “Why do you keep hammering  on these issues?  Why do you beat up on the eejits who push the Fannie Freddie CRA meme? Its dead, everyone knows its nonsense.” Except, not so much. That 4 members of the FCIC could push such as discredited meme reflects a broader strategy of Agnotology. Even Gretchen Morgenson, of that liberal media outlet NYTimes, began her column on Sunday with this sentence:

DECIDING what to do with Fannie Mae and Freddie Mac, the taxpayer-owned mortgage giants that helped set the financial crisis in motion, will be a huge job for Congress next year.

That single sentence is a huge victory for the reality challenged.

Dani Rodrik on the Planned Trial of His Father-in-Law, Cetin Dogan

Dani Rodrik:

Dani Rodrik's weblog: A weird, weird trial: The most significant court case in Turkey in at least five decades is about to start. Nearly two hundred retired and active-duty officers will be on trial for having plotted back in 2003 to destabilize the country through violent acts (including the bombing of mosques and the downing of a Turkish fighter jet) and to overthrow the AKP government. Defendant no. 1 in this trial, and the alleged leader of the coup plot, is my father-in-law, Cetin Dogan.

The tragedy is that this is as much a show trial as the one that took place on the tiny Yassiada island almost exactly 50 years ago. Then, the roles were reversed. A military junta (that time, a real one) had deposed the elected government and placed the president, prime minister, and cabinet ministers on trial on trumped up charges.

True to form, history is repeating itself as a farce. The evidence behind the current case, a trove of documents on CDs delivered to a newspaper by a “secret informer,” consists of blatant forgeries. These documents are allegedly secret military plans from 2003 detailing the coup preparations. Yet they contain anachronisms that leave no doubt that they were prepared in late 2008 at the earliest... references to entities -- firms, NGOs, military installations, hospitals – by names that they had yet to acquire. It’s as if a text pretending to be from 1970 referred to Diana Spencer as Princess of Wales—a title which she acquired only in 1981—or mentioned her car crash decades later. To any but the most jaundiced eye it is obvious that the incriminating documents have been authored not by the military officers on trial, but by others many years later....

[T]he case says much about Turkey at present, not any of it pretty. The AKP government has fanned the flames against the defendants and exploited the case for political purposes. The pro-government media have disgraced themselves by publishing a steady stream of disinformation on the case (just check out Today’s Zaman for a good dose of it on a daily basis). Many leading members of the Turkish liberal intelligentsia have chosen to disregard the fabricated evidence lest their cherished narrative of a democratic government putting an end to “military tutelage” get tarnished.

As for the once-powerful military establishment, it stands so weakened by its own history of coups and meddling in politics, that it has been totally incapable of putting up a credible storyline.... [T]his trial... will say a lot about where Turkey is headed...

Buce on the Stupidest Economists Alive

Buce:

Underbelly: The Blogger has Questions: They say the Devil has nine questions. Barry Ritholtz has ten; he poses them to the four guys [Peter Wallison, Keith Hennessey, Bill Thomas and Douglas Holtz-Eakin] who didn't finish their term paper:

From 2001 to 2003, Alan Greenspan took rates down to levels not seen in almost half a century, then kept them there for an unprecedentedly long period. What was the impact of ultra low interest rates on Housing, credit, the bond markets, and derivatives?

How significant were the Ratings Agencies (S&P, Moodys and Fitch) to the collapse? What did their AAA ratings on junk derivatives affect? What about their being paid directly by underwriters for these ratings?

The Commodities Futures Modernization Act of 2000 removed all Derivatives from all oversight, including reserve requirements, exchange listings, and disclosures. What effect did the CFMA have on firms such as AIG, Bear, Lehman, Citi, Bank of America?

Prior to 2004, Investment Houses were limited to 12-to-1 leverage by the SEC’s net capitalization rule. In 2004, the 5 largest investment banks asked for, and received, a full exemption from leverage restrictions (known as the Bear Stearns exemption) These five firms all jacked up their leverage. What impact did this increased leverage have on the crisis?

For seven decades, Glass Steagall separated FDIC insured depository banks from riskier investment houses. Prior to the repeal of Glass Steagall in 1998, the market had regular crashes that did not spill over into the real economy: 1966, 1970, 1974, and most telling of all, 1987. What impact did the repeal of Glass Steagall have on the banking system during the 2008-09 crash?

NonBank Lenders: Most of the sub-prime mortgages were made by unregulated non-bank lenders. They had a ”Lend to securitize” business model, and they sold enormous amounts of subprime loans to Wall Street for this purpose. Primarily located in California, they were also unregulated by both the Federal Reserve and the California State legislator. What was the impact of these firms?

These firms abdicated traditional  lending standards. They pushed option arms, interest only loans, and negative amortization mortgages, all of which defaulted in huge numbers. Was non-bank sub prime lending a major factor in the crisis?

The entire world had a simultaneous global housing boom and bust. US legislation such as the CRA or Fannie & Freddie only covered US housing and lenders.  How did this cause a worldwide boom and bust — even bigger than that in the US ?

Prior to the 2004, many States had Anti-Predatory Lending (APL) laws on their books (and lower defaults and foreclosure rates). In 2004, the Office of the Comptroller of the Currency (OCC) Federally Preempted state laws regulating mortgage credit and national banks. What was the impact of this OCC Federal Preemption ?

Corporate Structure: None of the Wall Street partnerships got into trouble, only the publicly traded iBanks. Partnerships have full personal liability for their losses. What was the impact of this lack of personal liability of senior management on Wall Street risk management?

Comment:  Some of these come close to being purely rhetorical in the sense that (I suspect) Barry feels he knows the answer, and that the answer is damning to the culprits.  For every one of them, I suspect somebody over at the American Enterprise Institute will be ready with a memo showing that it was a total non-issue and oh look!  There's Barney Frank!  Even given AEIs risible record of "research," still a number of these do represent real issues on which I'd love to have a better sense of who is right.  Example: repeal of Glass Steagall is part of the standard mantra.  Yet wouldn't I be right that the worst afflicted banks (Bear Stearns, Lehman) are the ones least diversified, the ones that took least advantage of Glass Steagall repeal?  Can we document that Federal preemption really changed anything?

I know, that's not really his point--his point being to try to shame four guys who seem to have no sense of shame, and who pass on, as an "investigation report," a set of AEI talking points that they could have drafted before the commission was ever appointed.

Quotes to Live For...

Paul Kedrosky writes:

Three Quotes to Live By: Phil Libin of the excellent Evernote has a cute idea in this video discussion with Jason Calacanis. He says everyone should have three quotes around which they aim to structure their lives, quotes that one day they'd like to say, in the right context. Here are his:

Set the controls for the heart of the sun.
Fire the explosive bolts.
This week I'm working out of the Tokyo office.

So far he's one for three. Wonder what mine are. Or yours. [-]

14 yo · 2 hours ago:

I am absolutely certain I'm on the right side of this trade.
Well boys, it appears that we've bought too much champagne.
Mr. President, you are The Man.

Department of "Huh?!"

Yahoo! can't make a go of del.icio.us?

Britain: This Time Is Not Different

Adam Posen:

Inflation and Monetary Policy: T]he persistently above target CPI inflation the UK economy is experiencing is almost entirely due to the combination of the depreciation of Sterling prior to January 2009 and the increase in VAT in January 2010. As a committee, our forecast underestimated the size and particularly the persistence of these inflationary effects, and I accept my share of responsibility for that mistake. The lesson we need to take therefore is to update our estimates of transmission from external shocks going forward. That said, annual inflation in the UK as measured in the CPIY series, which excludes the price effect of indirect taxes, has been below target throughout this calendar year. Thus, if we allow for even just some exchange rate pressure upwards on prices over this period as well, underlying UK inflation has stayed well below target. Recognizing that fact has to be the starting point for our forecast.

This is not to dismiss the harmful impact of the past months of higher inflation on the vast majority of British citizens. British households do suffer.... What British households have suffered in this regard over the last year, however, is a decline in their purchasing power due to one-time factors that is neither amenable to reversal through monetary policy nor going to feed a more general rise in prices and wages. The MPC would only make things worse by making policy looking in the rear-view mirror, trying to make up for past mistakes, especially given the fact that the underlying trend inflation rate is below target....

Moreover, both the MPC and the British public should maintain some perspective on the size of our inflation forecast error given the magnitude of the shocks to which the UK economy has been subjected. That is not an excuse, but a reality check. I think both the Bank of England and the public gained an exaggerated confidence over the NICE decade of 1997-2007 about just how finely the MPC could both forecast and control inflation.... Given an appropriate degree of humility about our ability to forecast inflation, and the right mindset to keep looking forward by learning from past errors (rather than doing harm by trying to make up for them), how should we make our inflation forecast? To me, the right way to think about it is to consider what has happened to the UK and other similar economies when they have been in post-financial crisis situations like the one we are in now. As an already classic recent book (Reinhart and Rogoff (2010)) reminds us, economic policymakers as well as investors get into trouble when they arrogantly say “this time is different.” If anything, part of the reason the UK and other western economies got into the difficulties we have been in is because many of us assumed this time was different during the mid-2000s boom....

I would rather look at several cases, or even better try to draw conclusions statistically from a large sample, and try to take into account the specific conditions of the UK economy at present, than to just leap to conclusions from our current indicators or from comparison with one or two prior UK recessions... the last couple of UK recessions... came about due to monetary tightening, not as the result of a financial crisis, [and so]may be more different in nature from today‟s situation than other economies' post financial crisis experiences.... [I]f one plots the course of our current recovery versus that of the UK from recession in 1992 and that of Japan from its initial recession in 1993, one can discern no significant divergence between them.... [W]e all know what terrible things happened to Japan after 1993, and both credit and fiscal developments in the UK today look a lot more like Japan then than the UK at the same time.

Can't Anybody in the White House Play This Game?

A paragraph from Ezra Klein this morning struck me as yet more evidence that the staff in the Obama White House are simply not professionals, and do not understand the game.

Ezra Klein:

Orszag and Citigroup: It's difficult to overstate how much bad will has developed between Orszag and the White House he used to serve. Some of that comes from perceived disloyalty in Orszag's public statements -- like his first New York Times column, which called for a short-term extension of all the tax cuts when the White House was arguing for the permanent extension of most of the cuts and the expiration of the cuts for the rich...

Look: Peter Orszag believes--as do I--that the most basic principles of good governance mandate that the American government have a long-term plan in place to match its long-term projected expenditures with its long-term projected revenues. Peter Orszag believes--as do I--that requiring that every policy initiative be paid-for in the long-term so that it does not increase the projected debt, say, ten years out into the future is the minimum low bar that policy should be able to clear.

Barack Obama has not taken Peter Orszag's advice: he has not proposed only initiatives that are paid-for in the long-term. He has not pledged to veto bills that raise the projected debt ten years hence.

Peter Orszag is no longer in the government.

Does he now have a duty to tell those who read his New York Times columns the same things that he told Obama when he was in government?

Or does he have a duty to tell lies to his readers about what he thinks good policy is in order to advance the interests of an administration that he is no longer part of?

I would say he has the first duty.

The White House staff has no warrant to expect that ex-officials will say things that the administration regards as convenient after they leave government when they are different than what the ex-officials said at NEC meetings.

The assumption that Peter would rests, I think, on a lack of understanding that he really believes in the policies he advocates--that his primary loyalty is and always has been to the policies and not to any one or any group of politicians. It is, I think, very dangerous to have such a White House staff.

Deficit Hawks and Deficit Frauds

Ezra Klein:

Ezra Klein - Deficit hawks vs. deficit frauds: The deficit frauds are the folks who use deficits for short-term political gain: This year, they've mainly been Republicans who opposed unemployment benefits because they'd add $56 billion to the deficit but demanded tax cuts that would add $4 trillion to the deficit. And they've been empowered not by Peterson's money or even the climate in Washington, but by the fact that people get very anxious about the deficit when the economy slows, as it's a number that they think helps explain the economic problems even as it mainly tracks them, and because a misplaced analogy to the European debt crises has made our deficit look scarier than it actually is.