Pragmatos

I don’t generally post on these conversations (or even read them very much, really), but this one has a particularly good cast. I’ll be following it closely.

Book Clubbing With Paul Krugman

This week at Cafe, Paul Krugman is joining us to talk about his new book The Return Of Depression Era Economics And The Crisis of 2008 — a revised version of his 1999 book. The first version focused on Asia and Latin America– this one turns its gaze on our current economic troubles and America.

Paul’s first post will be up shortly, and he’ll introduce the discussion. In the meantime, check out his Nobel Prize lecture, which he recently delivered in Stockholm on December 8th.

We’ve roped in a great group of economists to discuss with Paul all week: Dean Baker, co-director of the Center for Economic and Policy Research, and assistant professor of economics at Bucknell University; Brad DeLong, professor of economics at UC Berkeley, and former Deputy Assistant Secretary of Treasury in the Clinton Administration; Robert Reich, professor at UC Berkeley’s Goldman School of Public Policy, and former U.S. Secretary of Labor from 1993 to 1997; Dana Chasin, Senior Policy Advisor at OMB Watch; Jo-Ann Mort, the founder and CEO of ChangeCommunications, Randall Wray, professor of economics and research director at the Center for Full Employment and Price Stability at the University of Missouri-Kansas City; Mark Thoma, associate professor of economics at the University of Oregon; and Susan Feiner, professor of economics and women’s and gender Studies at the University of Southern Maine.

Update: the first installment.

NYT Informs Readers of Forecaster’s Track Record

Yes, it can be done. The NYT headline read, “Goldman, Once Warning Of $200 Oil, Sees $45 In 2009.”

This is exactly what the media should be doing when they present forecasts from various experts. For example, when they share the views of people like Alan Greenspan on the economy, they can preface them with a comment like, “Alan Greenspan, who insisted there was no housing bubble.” In fact, the media should preface the predictions of almost all their economic experts with this comment.

With some experts this assertion would be especially important information. For example, predictions from Frederick Mishkin, a New York University professor and a former governor of the Federal Reserve Board, should carry the preface “who recently praised Iceland’s economy for its effective inflation targeting.” Statements from Frank Nodthrift, the former chief economist with Freddie Mac, should include the phrase, “who asserted that house prices never fall.”

Reporters should be familiar with the track record of the experts they rely upon and they should share this information with the public.

—Dean Baker

Stimulus Is for Suckers

…
The historical role of a stimulus is to kick things off, to grease the wheels of credit, to get things “moving again.” But the effect ends when the stimulus does, when the sugar shock wears off. Compulsive budget balancers who prescribe a “targeted and temporary” policy followed by long-term cuts to entitlements don’t understand the patient. This is a chronic illness. Swift action is definitely needed. But we also need recovery policies that will continue for years.

First, we must fix housing. We need, as in the 1930s, a Home Owners’ Loan Corporation to restructure failed mortgages on sustainable terms. The basic objective should be to keep people in their homes by all necessary means …

Second, we must backstop state and local governments with federal funds. Otherwise falling property (and other) tax revenues will implode their budgets, forcing destructive cuts in public services and layoffs for teachers, firefighters, and police. …

Third, we should support the incomes of the elderly, whose nest eggs have been hit hard by the stock market collapse. … The best way is to increase Social Security benefits. …

Fourth, we should cut taxes on working Americans. Obama proposes to effectively offset the first $500 of Social Security taxes with a refundable credit. It’s a good idea, but can be expanded. …

Finally, we must change how we produce energy, how we consume it, and above all how much greenhouse gas we emit. …

What a dollar of stimulus puts back into the economy when spent on…

Chapter 11 is the right road for US carmakers

The debate about whether or not to bail out the Big Three carmakers has been mischaracterised. It has been described as a package to help the undeserving dinosaurs of Detroit. In fact, a plan to bail out the carmakers would benefit shareholders and bondholders as much as anybody else. These are not the people that need help right now. In fact they contributed to the problem.

Financial markets are supposed to allocate capital and monitor that it is used to good effect. They are supposed to be rewarded when they do that job well, but bear the consequences when they fail. The markets failed. Wall Street’s focus on quarterly returns encouraged the short-sighted behaviour that contributed to their own demise and that of America’s manufacturing, including the automotive industry. Today, they are asking to escape accountability. We should not allow it.

What needs to be done is to help the automakers get a fresh start and allow them to focus on producing good cars rather than trying to juggle their books to meet past obligations.

The US car industry will not be shut down, but it does need to be restructured. That is what Chapter 11 of America’s bankruptcy code is supposed to do. …

Barry Ritholtz.

More CRA Idiocy

Howard Husock has an exercise in cognitive dissonance in today’s NYT Op-Ed pages titled Housing Goals We Can’t Afford, and it begins:

“The national wave of home foreclosures, many concentrated in lower-income and minority neighborhoods, has created a strong temptation to find the villains responsible.”

What can you say about an Op-Ed whose very first sentence is a giant pile of steaming bullshit? That statement is demonstrably false. As the prior post on foreclosures shows, the concentration is mostly middle class and upper middle class white suburban neighborhoods.

…

Let’s put some context around what the CRA  is and isn’t.

In the 1960s and 70s, banks would redline neighborhoods. They would literally put a map on a wall, and with a red magic marker, draw a redline enveloping certain neighborhoods. If you lived within the redlined areas, regardless of your income, credit score, assets, debt servicing ability, if you were in the redlined area you could not qualify for a mortgage.

Although Redlining was made illegal by the Fair Housing Act of 1968, the practice still surreptitiously continued. The Community Reinvestment Act of 1977 was the next attempt to stop redlining. There were two main aspects of the CRA: First, it required banks to apply the same lending criteria in all communities. Credit Score, Loan-to-value, percentage of monthly take home, etc. had to be the same across different areas.

Second, the Community Reinvestment Act required banks to make good faith attempts to loan the money back to its own depositors. If you open up a branch in Harlem, you cannot suck up all the local business and residents’ cash, and then turn around and only lend it out to Tribeca condo buyers. You must make a fair attempt to loan the money locally. Banks have no obligation to open branches in Harlem, but if they did, they are required to at least try to lend the locals back their own money.

Note that there are no quotas, minimums or mandates. This is a very soft rating system.

The rest of Husock’s article is filled with the usual dissembling and half-truths. He mentions “in 1995 the Clinton administration added tough new regulations,” but omits any mentions that the Bush administration substantially watering down the act in 2004.

…

And of course, vast numbers of sub-prime mortgages were written by non-CRA banks. Indeed, none of the 300+ mortgage originators that imploded were depository banks covered by the CRA.

This is a an intellectually silly argument from other perspectives also. Why was there no credit/housing meltdown from 1977 to 2005? Why did 30 other countries, none of which have are covered by the CRA, have a remarkably similar housing boom and bust to the USA? Husock’s arguments not only fail legally and factually, they also fail in terms of time and space …

via The Big Picture

Quelle Surprise! Banks Increase “Mark to Make-Believe” Assets to $610 Billion

Banks are, if nothing else, entirely predictable. If there is a way to game the system, they will avail themselves of it.

Curious? Go read Yves Smith.

#4 of Foreign Policy magazine’s 10 Worst Predictions for 2008:

“[A]nyone who says we’re in a recession, or heading into one—especially the worst one since the Great Depression—is making up his own private definition of ‘recession.’” —Donald Luskin, The Washington Post, Sept. 14, 2008

(aka “The Stupidest Man Alive“)

Collect them all!