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How Did Fannie and Freddie Get to be the Symbols of the Housing Bubble? Print
Saturday, 17 December 2011 08:40

In an article on addressing global warming would a serious newspaper throw in a comment to the effect that "many Americans consider it a hoax," without pointing out that it is not? It did the equivalent in an article on the Security and Exchange Commission's charges against the top executives at Fannie Mae and Freddie Mac for inaccurately representing their exposure to subprime debt.

The Post article at one point commented that:

"Fannie Mae and Freddie Mac, which came to symbolize the housing bubble and its painful aftermath."

In fact, the charges described in the article describe a situation in which the top executives at these institutions bought up stakes in non-prime loans and subprime backed securities just as the market was collapsing. The purchases began in late 2006 and accelerated in 2007 and 2008.

The housing bubble had peaked in the middle of 2006 and subprime issuance plummeted in the second half of the year. It had virtually ceased altogether by 2007. In other words, Fannie and Freddie purchases at this point could have played no role in the splurge of subprime junk loans because the splurge had already stopped.

The purchases of securities backed by subprime and Alt-A loans was simply reducing the explosure of the private investment banks that had issued these securities (e.g. Goldman Sachs and Lehman) or issuers that still had some loans on their books (e.g. Countrywide or Ameriquest). This would have transferred bad debt from the private sector to the government sponsored enterprises, but the economic damage caused by the issuance of these loans had already been done. 

[Addendum: This comment should not at all be taken as a defense of Fannie and Freddie. Unlike the right-wing buffoons who now criticize them for causing the housing bubble, I was critical at the time. I was trying to call attention to the bubble since 2002. Fannie and Freddie financed close to half of the housing in the country at the time. They could have taken steps to stop the bubble (e.g. require appraisals of rental values and refuse to make loans at purchase prices that exceeded a ratio of 18 to 1). Housing is all they do. They should have seen the bubble. Nonetheless, the worst loans were securitized by Citigroup, Merrill Lynch and other private lenders. That is really not a debatable point. Angelo Mozilo and Robert Rubin should be the symbols of the housing bubble, not Fannie and Freddie.]

 
The Naked Truth on Short-Selling Print
Friday, 16 December 2011 06:36

For some reason short-selling has a bad reputation in many circles. It is often blamed for bad things happening to good companies and/or good countries. The story among short-sellings critics is that it involves market manipulation, where big actors are attempting to profit by sending stocks or bonds plummeting.

Floyd Norris has a good column on short-selling in today's NYT. It sums up research on the issue which indicates that most of the time when companies are complaining about short-sellers, the shorters are actually identifying over-valued stocks and in some cases uncovering fraud.This certainly seems to have been true of the short-sellers who were attacked Fannie Mae and Freddie Mac before they were put into conservatorship or Lehman, Citigroup and other badly troubled banks in the heyday of the financial crisis.

Certainly there are instances where shorting is in fact market manipulation, but there are also instances where traders take long positions to manipulate the market. (The notion of market manipulation here is using your trading to deliberately drive stock prices in the hope of being able to profit from the movement you have created. In the case of shorting, you hope to send the stock price plummeting and then buy back shares at a big discount. On the long side, the hope is to create a euphoria around the stock and then dump it before people realize that the price has no basis in the fundamentals.) There is no intrinsic reason that short trades will be more susceptible to manipulation than long trades, except that most small investors (who lack the ability to move markets) can't do shorts.

Short-trading, when it is based on fundamentals, can be seen as equivalent to exposing counterfeit money. It is showing the public that a company is not as profitable as widely believed. It would have been hugely beneficial to the economy if we had many people shorrting Lehman, Citigroup and the other companies pushing and securitizing subprime mortgages back in 2004. 

 
Quick, How Big a Deal Is $200 Billion Over the Next Quarter Century? Print
Friday, 16 December 2011 05:20
That's what NYT readers are asking themselves after the NYT told them that the oil and gas industry may spend up to $200 billion (in 2010 dollars) by 2035 on pipeline construction. While NYT readers are quite educated as a group, most probably do not have a clear idea of how much this spending would mean to the economy. It's a bit less than 0.05 percent of projected GDP over this period. That is not trivial, but it's not going to replace the auto industry (@ 4.0 percent of GDP).
 
Time Magazine Decides to Throw Numbers to the Wind to Promote Representative Ryan Print
Thursday, 15 December 2011 14:05

Every budget expert knows that the stories of exploding budget deficits in the tens or hundreds of trillions of dollars (depends how many centuries in the future we wants to count), are driven by our broken health care system. If the United States paid the same amount per person for its health care as other wealthy countries, we would be looking at long-term budget surpluses not deficits. However, people who don't do budget calculations for a living do not generally know that the real story is a broken health care system.

This allows charlatans like Representative Paul Ryan to push nonsense budget plans that mean huge tax cuts for the wealthy, while slashing the programs that low and middle income people depend upon, like Social Security and Medicare. They also know that they can count on innumerate reporters to tout their programs to the sky, since the media is largely controlled by people who also want to see government programs for low and middle and income people slashed.

This is why Time Magazine made Representative Ryan the runner-up for person of the year. He proposed a plan that, according to the Congressional Budget Office's (CBO) projections would increase the cost of buying Medicare equivalent policies by $34 trillion over the program's 75-year planning period. Under Representative Ryan's plan, the CBO projections imply by 2050 the cost of buying a Medicare equivalent policy at age 65 will be two-thirds of the median retiree's income. For a person who is 85 the cost will be twice the median retiree's income.

Meanwhile, Representative Ryan proposed massive tax cuts for the country's richest people. Under his proposal, the tax cuts are paid for by the cuts in Medicare, Medicaid and other government programs. The projected deficits are little affected, since the revenue lost to tax cuts is roughly equal to the cuts in government programs.

Representative Ryan's program would imply a massive upward redistribution to the one percent. While Time Magazine holds out the prospect:

"the $15 trillion U.S. economy grows by 3% rather than 2% per year, after a decade that extra percentage point will mean almost $2 trillion extra in the national wallet each year,"

serious people do not listen to such nonsense. There is a vast vast pool of evidence on the impact of tax rates on growth. There is no way that a serious person can use this evidence to conclude that tax reform can have more than a modest impact on growth, and certainly not an increase of one percentage point, unless of course you work for the One Percent.

 
How Does the Post Know that the Ryan-Wyden Plan Will "Preserve" Medicare? Print
Thursday, 15 December 2011 06:08

Whether or not the premium support plan put forward by Representative Paul Ryan and Senator Ron Wyden would preserve what people understand as "Medicare" is a topic open to debate. Nonetheless the Post asserts that in both the headline and the first sentence of its article that the plan will preserve Medicare.

Of course the Post supports such premium support plans as it has repeatedly said on its editorial pages. However serious newspapers maintain a distinction between their editorial position and news stories.

 
SOPA Will Cost Jobs! The NYT Should Talk to an Economist, not the Chamber of Commerce Print
Thursday, 15 December 2011 05:42

Standard economic models show that tariffs cost jobs. The reason is that they make consumers pay more money for the protected product. This pulls money away that could be spent in other areas. If the spending took place elsewhere, it would create more jobs than the additional money earned by the protected industry.

The same logic applies to increasingly stringent protections for copyright, except the economic waste and resulting job loss is likely to be much larger. Tariffs rarely raise the price of products by more than 15-20 percent. Copyright can make items very costly that could otherwise be available for free or nearly free. This implies a tariff of several thousand percent or higher.

In addition, there are enormous costs associated with copyright enforcement, with both the public and private sector required to make substantial expenditures to prevent unauthorized copies of copyrighted material from being circulated. This amounts to a waste of resources that could instead go to productive activity.

Copyright and its enforcement can be thought of as being analogous to toll booths, which can be used as a way to finance road construction. If the only way we have to finance road construction is toll booths, then we absolutely need toll booths to pay the road-builders.

However, once we have roads that are financed through other mechanisms (e.g. government funding), then it becomes increasingly difficult to collect money at the tollbooths since people will opt to use the free roads. We could go the route that many in Congress want to take with the Stop Online Piracy Act (SOPA), which effectively amounts to building toll booths that are harder to get around and imposing tough penalties on those who try to take free roads.

This gets more money for the people who build and operate toll booths, but may not do very much to help the people who build roads. Alternatively, we could try to find ways to get more money directly to the road-builders without spending vast sums erecting bigger more expensive toll booths and being more punitive to those who use free roads.

If the NYT had relied on an economist rather than the Chamber of Commerce, it would know that the SOPA is likely to cost large numbers of jobs rather than create jobs because of the costs it imposes on the economy and the money it will drain out of consumers' pockets.  

 
NYT Forgot to Mention That Ryan's Medicare Plan Raises Costs Print
Thursday, 15 December 2011 05:21

The NYT neglected to mention that the Congressional Budget Office has repeatedly found that adopting plans providing more choice within Medicare, like the one by Representative Paul Ryan and Senator Ron Wyden touted in this article, raise rather than lower the cost of providing care. The basic problem is that private insurers are very good at cherry picking patients -- better than government bureaucrats in preventing cherry picking. This means that private insurers will find ways to get patients who cost them less than the average payment, or less than the average risk-adjusted payment, for Medicare beneficiaries.

This is the reason that Medicare Advantage and its precedessor in the 90s, Medicare Plus Choice, raised the cost of Medicare. The Congressional Budget Office has also found that private insurers are less effective in controlling costs, which is why they projected that Representative Ryan's proposal for privatizing Medicare would increase the cost of providing Medicare equivalent policies by $34 trillion over the program's 75-year planning period. 

 
NYT Presents Good Analysis of State Tax Breaks for Business Print
Wednesday, 14 December 2011 05:18
Businesses are increasingly playing a game of telling states that they will shut their doors and move elsewhere unless they get tax breaks. This is the old "why not?" philosophy. Good piece in the NYT on the issue.
 
7-8 Percent Pension Returns Are Not "Hopeful" Print
Tuesday, 13 December 2011 22:54

There are more arithmetic problems at the NYT. It noted that pension returns have been very low in recent years and then commented:

"Pension plans hope to make up these lost years and reach performance targets that in some cases are still set at a hopeful 7 to 8 percent a year."

Bizarrely, the NYT seems to think that low returns in the recent past should imply low returns in the future. In fact, the exact opposite is true.

The low returns in the recent past were the result of a drop in stock prices. This means that price to earnings ratios in the stock market are much lower than in the past. That means that investors are paying much less for a dollar of future earnings now than they did 4 years ago. It would have made much more sense for the NYT to refer to 7-8 percent return assumptions as "hopeful" in 2007 than it does today.

 
Bruce Bartlett Uncovers the Most Misleading Poll Question of All Times Print
Tuesday, 13 December 2011 08:17

Bartlett found a poll ( I beleive an NYT poll) that asked the extent to which people agree or disagreed with the statement:

"it is the responsibility of government to reduce income differences."

Since we live in a country in which the government pursues a wide range of policies that increase income differences, most poll takers could not help but be confused by this sort of question. After all, we have a government that subsidizes Wall Street by providing too big to fail protection and massive subsidies when the doofuses bring their banks to the brink of ruin. It grants drug companies patent monopolies that raise the price of drugs by hundreds of billions of dollars above the free market price.

We have a trade policy that is designed to put our manufacturing workers in direct competition with the lowest paid workers in the developing world while protecting our most highly educated workers from the same competition. And, we have a central bank (the Fed), which deliberately acts to throw people out of work to ensure that inflation doesn't reduce profits in the financial sector.

Most people would probably be happy to have a government that did not increase income differences. Asking them about a government that reduces income differences no doubt would strike poll takers as a bizarre question.

 
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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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