jonathan lundell
Economics broadly construed: macro, micro, behavioral, money, finance.
From dshort.com.
The implied message, I suppose, is that the current crash could easily have a long way to go before it hits bottom. Or not, I suppose.
Barry Ritholtz posted this graph the other day, along with a question: Is the market “cheap”? Not by this measure, anyway.
Obviously we should all be moving into real estate. No, wait…
Dan Ariely, a professor of behavioral economics at Duke, reports on a series of experiments he and his colleagues performed, in which they measure the incentive effects of smaller and larger bonuses.
What’s the Value of a Big Bonus?
What would you expect the results to be? When we posed this question to a group of business students, they said they expected performance to improve with the amount of the reward. But this was not what we found. The people offered medium bonuses performed no better, or worse, than those offered low bonuses. But what was most interesting was that the group offered the biggest bonus did worse than the other two groups across all the tasks.
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When I recently presented these results to a group of banking executives, they assured me that their own work and that of their employees would not follow this pattern. (I pointed out that with the right research budget, and their participation, we could examine this assertion. They weren’t that interested.) But I suspect that they were too quick to discount our results. For most bankers, a multimillion-dollar compensation package could easily be counterproductive. Maybe that will be some comfort to the boards at UBS and Goldman Sachs.
(emphasis mine)
Felix Salmon.
The Return of the $70 Per Hour Meme
You might expect it from right-leaning commentators like Will Wilkinson. You wouldn’t expect it from someone like Mark Perry, who lives in Flint, Michigan. And you certainly wouldn’t expect to see it in the New York Times, from the likes of Andrew Ross Sorkin. But all of them are perpetuating the meme that the average GM worker costs more than $70 an hour, once you include health and pension costs.
It’s not true.
The average GM assembly-line worker makes about $28 per hour in wages, and I can assure you that GM is not paying $42 an hour in health insurance and pension plan contributions. Rather, the $70 per hour figure (or $73 an hour, or whatever) is a ridiculous number obtained by adding up GM’s total labor, health, and pension costs, and then dividing by the total number of hours worked. In other words, it includes all the healthcare and retirement costs of retired workers.
Now that GM’s healthcare obligations are being moved to a UAW-run trust, even that fictitious number is going to fall sharply. But anybody who uses it as a rhetorical device suggesting that US car companies are run inefficiently is being disingenuous. As of 2007, the UAW represented 180,681 members at Chrysler, Ford and General Motors; it also represented 419,621 retired members and 120,723 surviving spouses. If you take the costs associated with 721,025 individuals and then divide those costs by the hours worked by 180,681 individuals, you’re going to end up with a very large hourly rate. But it won’t mean anything, unless you’re trying to be deceptive.
It’s not just the Big Three. NY Times:
And for the first time, Mercedes-Benz, Toyota, and Nissan have each asked to lease space from the port [of Long Beach CA] for these orphan vehicles. They are turning dozens of acres of the nation’s second-largest container port into a parking lot, creating a vivid picture of a paralyzed auto business and an economy in peril.
One of my favorite Dean Baker themes.
Politicians as Political Philosophers: Differences at the G-20
The NYT reported today on the political philosophy of that renowned political philosopher, George W. Bush, and how it prevented it from reaching agreement on many issues with the other leaders at the G-20 summit. According to the NYT article “it was clear that bridging ideological gaps among nations afflicted with different versions of the economic contagion would provide the new president and other world leaders with a daunting challenge.”
Maybe the problem is ideology but there is an alternative explanation. The financial sector is an extremely powerful interest group in the United States. It is relatively less powerful in countries like France and Germany, where the financial industry is a smaller share of the economy and other interest groups, like unions play a more important role.
Suppose the President Bush and other U.S. politicians feel the need to respond to the demand of a key interest group that plays an important role in their election. Suppose that the leaders of other countries instead feel the need to respond to the demands of others economic actors who have been hurt by the financial sector?
I don’t know if my description of the motivations of President Bush and other leaders is correct, but the NYT certainly does not know that it is wrong. It is worth noting that the people at the G-20 meeting all got there because of their success in politics, not political philosophy. It would be best if reporters refrained from imputing motives that they cannot know. News reporting should just tell us what the politicians said and did and not speculate about their thoughts.
—Dean Baker
Matthew Yglesias looks at the argument for a Big Three bailout and puts his finger on the problem.
Matthew Yglesias: Bailing Out in the Real World
I feel like some of the commentary on the prospect of an auto industry bailout is starting to remind me of some of the stuff I fell for before we invaded Iraq. The kind of thing where someone yes, “yes this sounds like a bad idea, but if we do it like this and like that and like this then it’ll all be okay, therefore we should do it.” Which is fine. But we also need to ask ourselves, if we accept the proposition of Detroit’s management, the UAW, and Michigan politicians that what’s good for General Motors is good for America, how likely is any of this stuff to happen.
TNR‘s Jonathan Cohn, for example, makes the most persuasive case for a Detroit bailout. Per Krugman’s summary:
If the economy as a whole were in reasonably good shape and the credit markets were functioning, Chapter 11 would be the way to go. Under current circumstances, however, a default by GM would probably mean loss of ability to pay suppliers, which would mean liquidation — and that, in turn, would mean wiping out probably well over a million jobs at the worst possible moment.
In essence, given the credit crunch Chapter 11 bankruptcy won’t work so the only alternative to bailout is liquidation, but liquidation is unacceptable given the macroeconomic situation, so we need to keep GM on life support as a jobs program.
But then read Jon’s colleague Clay Risen also in TNR:
There’s little I could say in addition to Jonathan’s wonderful article laying out the case for a brokered bailout for Detroit. […] But any bailout must be predicated on a planned shrinkage of the three companies. Suppliers need to be transitioned to other firms or industries, employment needs to be gradually reduced, and production facilities need to be shuttered. There should probably be a forced consolidation, too, with GM taking over Chrysler—a move that was already in the works before the credit crunch made it impossible to complete without government assistance.
Now there’s no metaphysical issue or law of nature preventing the government from first keeping these firms on life support as a jobs program, and then when the economy starts recovering beginning to shrink the workforce and drop suppliers. But in the real world, that’s very hard to imagine. If you think it’s politically difficult for politicians to stand aside and do nothing as a situation that threatens to cost a lot of people their jobs develops, just wait ’till you try to tell the White House political office that you want the president to order a round of massive layoffs in key midwestern swing states.
Similarly with all this environmental stuff. GM, Ford, and Chrysler may not be very good at turning a profit by selling cars and trucks but they’ve got a lot of political clout. Perhaps enough to get tens of billions of dollars of taxpayer money. Whatever conditions they agree to, they’ll probably be able to fight off.
I hope I’m wrong about this. But I’m pessimistic. The mere fact that it would be desirable to do something to keep everyone who depends on the car industry for a living that simultaneously restores the domestic car firms’ economic viability and serves environmental policy goals doesn’t make it possible. Generally the reason we try not to have the government running businesses is that promoting public goals and maximizing profits require you to do different things. We normally try to advance policy goals by establishing a framework of taxes and regulations so that firms pursuing their interests will be compatible with the public interest. But if GM is going to be a welfare agency, it’s hard to also expect it to be a viable company that will rapidly get off the federal teat.
The FRBSF’s Kevin Lansing wonders, and concludes with a rather noncommittal “further research is needed”; “unsatisfying”, says Mark Thoma. It seems to me that Lansing’s actual views are clear enough, a little earlier in the Letter.
Monetary Policy and Asset Prices, by Kevin Lansing, FRBSF Economic Letter
…
Beyond the setting of short-term nominal interest rates, a broader view of monetary policy includes regulatory oversight of financial institutions. Throughout history, asset price bubbles have typically coincided with outbreaks of fraud and scandal, followed by calls for more regulation once the bubble has burst (see Gerding 2006). Recent bubble episodes are no different. If a goal of financial regulation is to prevent fraud, and as history attests, asset price bubbles are typically associated with fraud, then one could argue that financial regulators at central banks should strive to prevent bubbles.According to Mishkin (2008), financial regulators at central banks may have a greater likelihood of identifying a credit-fueled bubble in real time because “they might have information that lenders have weakened their underwriting standards and that credit extension is rising at abnormally high rates.” He argues that “financial developments might then lead policymakers to consider implementing policies to…help reduce the magnitude of the bubble.” During the recent housing bubble, underwriting standards were weakened and credit extension did rise at abnormally high rates, resulting in rapid growth of subprime mortgage lending. In the aftermath of the burst housing bubble, financial regulators are now taking steps to strengthen the integrity of underwriting, appraisal, and credit-rating procedures.
…
via Mark Thoma
Tough something, anyway. Two good pieces from NPR Morning Edition making the case for Chapter 11. Go have a listen.
Bankruptcy Could Help Fix Automakers’ Problems
President-elect Barack Obama wants to give U.S. automakers federal funds. Critics say funding without conditions would be like pouring gas into a broken-down clunker. Paul Ingrassia, a former Detroit bureau chief for The Wall Street Journal, says bankrupty might be a better option. He tells Ari Shapiro that bankruptcy could open the door to badly needed changes.
Professor: GM Must Confront Financial Challenges
Advocates for the nation’s automakers are warning that the collapse of General Motors could set off a catastrophic chain reaction in the economy. Douglas Baird, a professor at the University of Chicago Law School, says in order to fix its financial problems, GM needs to confront its challenges head on. Baird tells Ari Shapiro that getting a bailout won’t solve the car companies’ problems.
Meanwhile, GM’s website offers me a great deal ($54,608.39) on a Hummer. Feed ’em to the sharks. And the Chevy Volt? Gimme a break. I like the underlying series-hybrid technology, but look, this is GM. Surely somebody else will come and do it right.
No wonder GM expects to sell only 10,000 (at $40K a pop, it seems) … in 2010.
Dean Baker, posting at TPMCafe.
The High Priests of the Bubble Economy
Those following the meeting of Barack Obama’s economic advisory committee could not have been very reassured by the presence of Robert Rubin and Larry Summers, both former Treasury secretaries in the Clinton administration. Along with former Federal Reserve Board chairman Alan Greenspan, Rubin and Summers compose the high priesthood of the bubble economy. Their policy of one-sided financial deregulation is responsible for the current economic catastrophe.
It is important to separate Clinton-era mythology from the real economic record. In the mythology, Clinton’s decision to raise taxes and cut spending led to an investment boom. This boom led to a surge in productivity growth. Soaring productivity growth led to the low unemployment of the late 1990s and wage gains for workers at all points along the wage distribution.
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Rather than handing George Bush a booming economy, Clinton handed over an economy that was propelled by an unsustainable stock bubble and distorted by a hugely over-valued dollar.
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While the Bush administration must take responsibility for the current crisis (they have been in power the last eight years), the stage was set during the Clinton years. The Clinton team set the economy on the path of one-sided financial deregulation and bubble driven growth that brought us where we are today. (The deregulation was one-sided, because they did not take away the “too big to fail” security blanket of the Wall Street big boys.)For this reason, it was very discouraging to see top Clinton administration officials standing centre stage at Obama’s meeting on the economy. This is not change, and certainly not policies that we can believe in.
What Kevin Drum says. Especially that last bit.
Even Yet More on Credit Default Swaps
Admit it: you can’t get enough of credit default swaps, can you? Well, after yesterday’s post on the subject, a bunch of people insisted that I needed to read Michael Lewis’s latest piece in Portfolio right away, and since I’m a big Michael Lewis fan I got right on it. As usual, it’s great, so do yourself a favor and drink in the whole thing sometime soon.
For now, though, let’s focus just on the CDS part of Lewis’s piece. Here’s the backstory: a hedge fund manager named Steve Eisman, who believed the entire subprime house of cards was due to implode, wanted a way to bet against the market. So he shorted the stocks of subprime originators like New Century and Indy Mac and then looked around for even more targeted ways to make money on the coming collapse. The Holy Grail came from Greg Lippman, a mortgage-bond trader at Deutsche Bank:
The smart trade, Lippman argued, was to sell short not New Century’’s stock but its bonds that were backed by the subprime loans it had made. Eisman hadn’’t known this was even possible — because until recently, it hadn’’t been. But Lippman, along with traders at other Wall Street investment banks, had created a way to short the subprime bond market with precision… Instead of shorting the actual BBB bond, you could now enter into an agreement for a credit-default swap with Deutsche Bank or Goldman Sachs. It cost money to make this side bet, but nothing like what it cost to short the stocks, and the upside was far greater.
But why was a bond trader recommending that Eisman short bonds in his own market? The answer came after Eisman had a conversation at an industry dinner:
His dinner companion in Las Vegas ran a fund of about $15 billion and managed C.D.O.’s backed by the BBB tranche of a mortgage bond, or as Eisman puts it, “the equivalent of three levels of dog shit lower than the original bonds… [But] not only did he not mind that Eisman took a dim view of his C.D.O.’s; he saw it as a basis for friendship. “Then he said something that blew my mind,” Eisman tells me. “He says, ‘I love guys like you who short my market. Without you, I don’’t have anything to buy.’”
That’’s when Eisman finally got it. Here he’d been making these side bets with Goldman Sachs and Deutsche Bank on the fate of the BBB tranche without fully understanding why those firms were so eager to make the bets. Now he saw. There weren’’t enough Americans with shitty credit taking out loans to satisfy investors’’ appetite for the end product. The firms used Eisman’’s bet to synthesize more of them…The only assets backing the bonds were the side bets Eisman and others made with firms like Goldman Sachs. Eisman, in effect, was paying to Goldman the interest on a subprime mortgage. In fact, there was no mortgage at all. “They weren’t satisfied getting lots of unqualified borrowers to borrow money to buy a house they couldn’t afford,” Eisman says. “They were creating them out of whole cloth. One hundred times over! That’s why the losses are so much greater than the loans. But that’s when I realized they needed us to keep the machine running. I was like, This is allowed?”
I still won’t pretend that I fully understand this. In fact, every time I read a story like this, it seems to get right up to the good stuff — “They were creating them out of whole cloth. One hundred times over!” — and then suddenly moves on. But I want more! I want an entire 10,000 word piece on how the combination of CDOs and CDS allowed Wall Street to magnify their underlying subprime losses so catastrophically. Instead, I just get a teaser and then the story meanders off in a more colorful direction.
Better than nothing, I suppose. And you should read Lewis’s entire piece regardless. But I still wish someone could explain in layman’s terms what this all means.
Paul Krugman, on economic lessons to be learned from the Great Depression.
Suddenly, everything old is New Deal again. Reagan is out; F.D.R. is in. Still, how much guidance does the Roosevelt era really offer for today’s world?
The answer is, a lot. But Barack Obama should learn from F.D.R.’s failures as well as from his achievements: the truth is that the New Deal wasn’t as successful in the short run as it was in the long run. And the reason for F.D.R.’s limited short-run success, which almost undid his whole program, was the fact that his economic policies were too cautious.
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Now, there’s a whole intellectual industry, mainly operating out of right-wing think tanks, devoted to propagating the idea that F.D.R. actually made the Depression worse. So it’s important to know that most of what you hear along those lines is based on deliberate misrepresentation of the facts. The New Deal brought real relief to most Americans.That said, F.D.R. did not, in fact, manage to engineer a full economic recovery during his first two terms. This failure is often cited as evidence against Keynesian economics, which says that increased public spending can get a stalled economy moving. But the definitive study of fiscal policy in the ’30s, by the M.I.T. economist E. Cary Brown, reached a very different conclusion: fiscal stimulus was unsuccessful “not because it does not work, but because it was not tried.”
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What saved the economy, and the New Deal, was the enormous public works project known as World War II, which finally provided a fiscal stimulus adequate to the economy’s needs.
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The economic lesson is the importance of doing enough. F.D.R. thought he was being prudent by reining in his spending plans; in reality, he was taking big risks with the economy and with his legacy. My advice to the Obama people is to figure out how much help they think the economy needs, then add 50 percent. It’s much better, in a depressed economy, to err on the side of too much stimulus than on the side of too little.
Via the BBC:
Study shows how spammers cash in
Spammers are turning a profit despite only getting one response for every 12.5m e-mails they send, finds a study.
By hijacking a working spam network, US researchers have uncovered some of the economics of being a junk mailer.
The analysis suggests that such a tiny response rate means a big spam operation can turn over millions of pounds in profit every year.
It also suggests that spammers may be susceptible to attacks that make it more costly to send junk mail.
Stephen Dubner, in the NY Times Freakonomics column, reports on a study that suggests that Daylight Saving Time increases electricity demand by about 1%, based on a “natural experiment” in Indiana.
We spent the better part of the 1990s in Arizona, which does not observe DST, and can attest to the desirability of doing away with the time change; the energy expended in setting clocks alone would make abandoning it worthwhile.
Here’s the abstract.
Does Daylight Saving Time Save Energy? Evidence From a Natural Experiment in Indiana
The history of Daylight Saving Time (DST) has been long and controversial. Throughout its implementation during World Wars I and II, the oil embargo of the 1970s, consistent practice today, and recent extensions, the primary rationale for DST has always been to promote energy conservation. Nevertheless, there is surprisingly little evidence that DST actually saves energy. This paper takes advantage of a natural experiment in the state of Indiana to provide the first empirical estimates of DST effects on electricity consumption in the United States since the mid-1970s. Focusing on residential electricity demand, we conduct the first-ever study that uses micro-data on households to estimate an overall DST effect. The dataset consists of more than 7 million observations on monthly billing data for the vast majority of households in southern Indiana for three years. Our main finding is that—contrary to the policy’s intent—DST increases residential electricity demand. Estimates of the overall increase are approximately 1 percent, but we find that the effect is not constant throughout the DST period. DST causes the greatest increase in electricity consumption in the fall, when estimates range between 2 and 4 percent. These findings are consistent with simulation results that point to a tradeoff between reducing demand for lighting and increasing demand for heating and cooling. We estimate a cost of increased electricity bills to Indiana households of $9 million per year. We also estimate social costs of increased pollution emissions that range from $1.7 to $5.5 million per year. Finally, we argue that the effect is likely to be even stronger in other regions of the United States.
I woke up, it was a Dean Baker morning, and…
“Free-Marketers” and the Bank Bailout
The Post tells us how the people who designed the bank bailout were committed to the free market. Interestingly, the key decisions that they made gave the banks much better terms than they could have received from the free market.
Since the post doesn’t really know the inner most thoughts of the bailout designers, let’s try an alternative hypothesis. They wanted to help the banks as much as possible with public money, yet they wanted to rationalize this give away of taxpayer dollars as somehow consistent with the free market. Their alleged belief in the free market is simply a cover for efforts to aid the rich.
I don’t know if this alternative hypothesis is true, but the Post certainly does not know that the story it presented to readers as fact is true. How about we just get the news media to skip the speculation about people’s ideologies and just report on where the money went.
—Dean Baker
Dean Baker is sounding a little frustrated, don’t you think? Not without reason…
It’s the Housing Bubble, Not the ***** Credit Crunch!
No one will lend me $1 billion, that’s how bad the credit crunch has gotten. There are probably reporters at major news outlets who would print that.
The news media almost completely missed the housing bubble. They relied almost entirely on sources who either had an interest in not calling or attention to an $8 trillion housing bubble or somehow were unable to see it. As a result they did not warn the public that their house prices were likely to plunge in future years.
Having dismally failed in their jobs to inform the public, reporters are still relying almost exclusively on sources that completely missed the housing bubble. As a result, they are still badly misinforming the public, first and foremost by attributing the economic downturn to a credit crunch.
This is truly incredible. Homeowners have lost more than $5 trillion in housing wealth. There is a very well established wealth effect whereby $1 of housing wealth is estimated as leading to 5 to 6 cents of annual consumption. This implies that the loss of wealth to date would cause consumption to fall by $250 billion to $300 billion annually (1.7 percent to 2.0 percent of GDP). If you add in the loss of around $6 trillion in stock wealth, with an estimated wealth effect of 3-4 cents on the dollar, then you get an additional decline of $180 billion to $240 billion in annual consumption (1.2 percent to 1.6 percent of GDP).
These are huge falls in consumption that would lead to a very serious recession, like the one we are seeing. This would be predicted even if all our banks were fully solvent and in top flight financial shape. Even the soundest bank does not make loans to borrowers who it does not think can pay the loans back (except during times of irrational exuberance).
Obviously the problems of the banking system make the situation worse, but the real cause of the downturn is the collapse of the housing bubble, and the reporters who talk about the economy should know this. (Of course, they should have seen the housing bubble too.)
—Dean Baker
Missing the Stock Bubble and Housing Bubble Makes You Qualified to Fix the Crisis
I have nothing against Larry Summers, but I think there is some sense to having people evaluated based on their job performance. Larry Summers thought the stock bubble was cool, ignored the housing bubble, was in favor of the over-valued dollar and gave warmly supported financial deregulation.
This track record arguably make Summers one of the main villains in the current economic crisis. So why does the LA Times tell us that we need his wisdom to fix the situation?
I have no doubt that Summers is very bright, but his brilliance did not prevent him from supporting the policies that got us into this mess. Why do we think that his brilliance will lead him to choose the best policies to get us out of it?
—Dean Baker
Dean Baker thinks it’d be a good idea. (How about we let Dean pick the new CoS?)
The Next Treasury Secretary: What’s Their Track Record?
It would be a really bad start to his administration if President Obama picked a Treasury Secretary who shares a substantial part of the blame for the bubble economy and the financial crisis. It will not be easy to pick up the pieces and get the economy back on its feet, but we would be going in the wrong direction to put one of the people responsible for getting us in this mess in the top economic position in the Obama administration.
Sheila Bair, the current head of the Federal Deposit Insurance Corporation, can boast of clean hands. Unlike other contenders, she never obstructed regulation of the $60 trillion credit default swap market. Nor did she push to maintain the over-valued dollar that gave us an $800 billion trade deficit. Unlike many others dealing with the fallout from the housing crash, she has noticed that people are losing their homes and has made preventing this a top priority.
President Obama has a chance to make a fresh start. He would handicap his administration by relying on those whose mistakes helped to bring about about this economic crisis.
Or so says the Boston Fed, disagreeing with the Minnesota Fed folks (see my earlier post). Here’s a summary; get the pdf here.
Looking Behind the Aggregates: A reply to “Facts and Myths about the Financial Crisis of 2008, Working Paper No. QAU08-5, by Ethan Cohen-Cole, Burcu Duygan-Bump, Jose Fillat, and Judit Montoriol-Garriga, Federal Reserve Bank of Boston
Abstract As Chari et al (2008) point out in a recent paper, aggregate trends are very hard to interpret. They examine four common claims about the impact of financial sector phenomena on the economy and conclude that all four claims are myths. We argue that to evaluate these popular claims, one needs to look at the underlying composition of financial aggregates. Our findings show that most of the commonly argued facts are indeed supported by disaggregated data.
Overview The US and world economies are in the midst of a severe financial crisis. The crisis is undoubtedly linked in some fashion to financial institutions. The fundamental question Chari et al (2008), henceforth CCK, seek to address is the degree to which varied claims about the way the crisis affects the real economy are true.
CCK make two primary arguments. First, they argue that a set of four now common claims about the nature of the crisis are false. Second, they assert that interest rate spreads, in particular the spread between the London Interbank Offered Rate (LIBOR) and the fed funds rate may be informative about the cost of borrowing during normal times, but misleading during crises as the increased spreads may be “due to the drop in the real return to Treasury securities as a result of the flight to quality and does not constitute an increase in the real cost of borrowing.”
In this short note, we consider their first argument and present further evidence on the four claims that are examined in CCK. Using publicly available data, we show that these facts are indeed true and not mythical. Their second argument on spreads remains a more theoretical one that we leave for another short note. …
Conclusion Our analysis has shown that the claims regarding the financial markets and the mechanism through which they may affect the real economy are largely supported by looking behind the aggregates of publicly available data. Having said so, we would like to point out the need for a more thorough analysis than the simple plots we have provided here. After all, there are many other confounding factors that make interpretation of these numbers difficult. For example, it is hard to even understand what it means to observe a decrease in lending. Simple plots cannot help us disentangle the extent to which changes in new bank lending are caused by banks cutting lending or by decreased demand for loans due to a slow-down in the real economy.
Given that both the US and the world economies are undergoing a financial crisis, we emphasize, along with CCK, the need for ample data and analyses to support policy decisions. We encourage future studies. …
Zubin Jelveh lays out the argument, concluding:
What’s the upshot here? Frankly, it’s hard for me to tell. Both papers are right, depending on which universe of data is your poison. But the most important takeaway would appear to be that it’s a mistake to think the Minn. Fed’s conclusions mean there’s been little or no impact on nonfinancial firms from the credit crunch.
via Mark Thoma
Thus Mike Meyers in the Star Tribune:
The nation indeed may be facing a financial crisis, with large institutions failing in the wake of multibillion debts, but most bank-lending to business customers actually has been on the rise.
“The story goes that they [banks] are holding on to the money or putting it into Treasury bills,” said Lawrence Christiano, a Northwestern University economist and consultant to the Federal Reserve Bank of Minneapolis. “That seems to fly directly into the face of the evidence that’s out there.”
The latest government numbers, through mid-October, show bank commercial and industrial loans up, bank commercial real estate loans rising and interbank loans climbing. Indeed, from September 2007 to mid-October of this year, the numbers in all three categories have climbed consistently.
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Four claims about the nature of the nation’s financial crisis appear to be myths, [Chari, Lawrence Christiano, a Northwestern University economist and consultant to the Federal Reserve Bank of Minneapolis, and University of Minnesota economist Patrick Kehoe] concluded.
Their findings:
- Bank lending to corporate America and individuals has not declined.
- Lending between banks has not dried up.
- Commercial paper (short-term borrowing by nonfinancial companies) has fallen, but not seized up as a source of commercial lending. (Indeed, commercial-paper levels last week started to head back up for the first time since the failure of Lehman Brothers, in mid-September.)
- Banks do not, as popularly believed, play a large role in channeling money from savers to borrowers.
I’m skeptical, frankly, but an explanation would be welcome.
Bailing Out Homeowners: What Does It Mean?
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As everyone should know now, the basic problem is that tens of millions of people (urged on by bankers, financial advisers, economists, and politicians) bought homes at bubble inflated prices. The bubble is now bursting so tens of millions of people now live in homes that are worth substantially less than what they paid, and in most of these cases, much less than what they owe on their home.
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One point on which it should be possible to agree is that we should want the bubble to deflate as quickly as possible. While many economists have hugely exaggerated the problem caused by deflation (who cares if prices are rising 0.5 percent a year or falling 0.5 percent a year?), there is a real problem associated with falling house prices. Declining house prices mean that the people who buy homes in the current market will see a loss on their home. If they can’t absorb this loss, then the bank that makes the loan (or whoever holds it) will absorb the loss. Rather than a program of house price supports, the country would be best served by a crash the bubble policy.The big problem in this story is that the folks who somehow could not see the largest housing bubble in the history of the world are still running economic policy. Unlike custodians and dishwashers, economists are not held accountable for their job performance. For this reason, we should expect many tough times ahead.
—Dean Baker
Apropos Baker’s argument, and via Barry Ritholtz, we have this WSJ graphic (click it for a larger interactive version) on the real estate disaster across much of California.
