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Is the Obama Administration Still Clueless on Housing Bubble? Print
Thursday, 03 March 2011 06:15

The NYT implied that the Obama administration, which includes not a single economist who recognized the danger of the housing bubble, still does not understand the bubble. According to the NYT:

"the Obama administration, as well as the F.D.I.C., sees any broad settlement with the servicers [over improper foreclosure actions] as an opportunity to do more than just fix the foreclosure process. They want to stabilize the housing market, where prices are continuing to decline, and try to help bolster the economic recovery."

Actually nationwide house prices are still 10-15 percent above their trend levels. The housing vacancy rate, while down somewhat from its peak, is still far higher than any pre-bubble level. In other words, the Obama administration should fully anticipate that house prices will continue to fall. There is no obvious reason to want to prevent house prices from returning to more affordable levels.

Unfortunately the piece does not point out the absurdity of the position attributed to the Obama administration. Nor does it identify any of the officials holding this view so that they can be subjected to the ridicule they deserve.

 
Why Does the Post Think Politicians Are Philosophers? Print
Thursday, 03 March 2011 06:04
The Post referred to disputes among policymakers on how best to structure regulation of the financial sector told readers that:

"there are also deep philosophical and political differences as to what the government should do to prevent future crises."

The people who are making the decisions about regulating the financial sector are politicians. They get and keep their jobs by appealing to powerful interest groups who can finance election campaigns. Few, if any, of these people are known for their contributions to political philosophy. There is no obvious reason to believe that philosophy is a major factor in determining their approach to this issue and the Post certainly does not give us one.

 
Ben Bernanke, Who Claims to Have Brought the Economy to the Brink of a Second Great Depression, Gives States Advice on Dealing With Budget Shortfalls Print
Thursday, 03 March 2011 05:44

Suppose former FEMA director Michael Brown gave a lecture on how to best rebuild New Orleans following Katrina. Presumably the media covering the speech would point out that Brown's ineptitude in responding to the storm was one reason that the city's population was so devastated by it.

For this reason, it is surprising that Post never noted the same irony in reporting on Federal Reserve Board Chairman Ben Bernanke's advice to states dealing with budget shortfalls. The reason that nearly all the states are facing severe budget problems is that the economy is in the middle of the worst downturn since the Great Depression.

This downturn is the direct result of the Fed's failure to take steps to curb the growth of the housing bubble before it reached the point where its collapse would devastate the economy. Bernanke was at the center of this failure, having been one of 7 Fed governors from 2002 to 2005 and then coming back as Fed chairman in January of 2006.

Bernanke has never downplayed the extent of this disaster himself, telling Congress in the fall of 2008 that the economy was on the brink of a complete collapse. While the claim that the economy was at risk of a second Great Depression is not true (we know how a reflate an economy, so there never was any risk of a decade of double-digit unemployment), Bernanke has helped to promote it.

 


 
Are Republicans Really Worried That The Economy Is Creating Too Many Jobs? Print
Wednesday, 02 March 2011 05:47

That's what the NYT told readers this morning. The NYT said that:

"Republicans worry that the Fed is overstimulating the economy."

For those not familiar with the word "overstimulate," it means that the Fed is causing the economy to grow too rapidly and create too many jobs. This is an interesting position to hold at a time when the economy is experiencing 9.0 percent unemployment. It probably would have been better to just report what the Republicans said rather than directly attribute such an extreme view to them.

The article also quoted Alabama Senator Richard Shelby saying that: "Once price stability has been lost, it’s difficult and very costly to regain," adding that Shelby then invoked the 80s. It would have been useful to point out to readers that the recession brought on by Paul Volcker in 1981 to tame inflation was far milder than the one we are now experiencing.

The unemployment rate rose by 3.6 percentage points from its low in the summer of 1981 to its peak in December of 1982. This compares with a trough to peak increase of 5.7 percentage points in this downturn. Three years after the start of the 1981 recession the unemployment rate was back to its pre-recession level. By contrast, three years after the start of the current recession the unemployment rate stands 4.5 percentage points above its pre-recession level.

In other words, Senator Shelby is warning that if we take stronger steps to reduce the unemployment rate we risk a higher rate of inflation. And, the cost of bringing down this inflation may be less than the costs in unemployment that we are currently experiencing.

This article also presents Federal Reserve Board chairman Ben Bernanke's assessment on a range of issues. It would have been worth reminding readers that Mr. Bernanke did not see the $8 trillion housing bubble, the collapse of which brought on the worst downturn since the Great Depression.

 
The Washington Post Tell Readers That Obama Doesn't Have Fiscal Credibility (Yes, In Its News Sections) Print
Wednesday, 02 March 2011 05:33

In following its practice that there is no division between news and editorial perspective when it comes to budget reporting, The Post (a.k.a. Fox on 15th Street) told readers in a front page news article that:

"Obama, who has overseen an expansion in spending, does not have the fiscal credibility that helped give President Bill Clinton the winning political hand in 1995 and 1996."

One might think that whether or not President Obama has "fiscal credibility" is an assessment that readers should make for themselves. According to the Congressional Budget Office and a wide range of private forecasters, the increase in spending that has taken place on President Obama's watch has boosted growth and prevented the unemployment rate from rising further.

It is bizarre to imply that because he acted to prevent a steeper recession President Obama lacks fiscal credibility. By the Post's logic, President Roosevelt could have established fiscal credibility by cutting the defense budget in half in 1943 in the middle of World War II. While most people might have viewed letting our military lose to the Axis powers in order to balance the budget as close to crazy, the Post no doubt would have applauded such an act of fiscal responsibility. At least it would if it applied the paper's current logic. 

 
They are Just Trade Agreements, not "Free-Trade" Agreements Print
Tuesday, 01 March 2011 06:43

A NYT article on President Obama's trade agenda repeatedly referred to "free-trade" agreements. This is a term that politicians who back these pacts use to garner public support, however, it is not accurate. The deals generally do little or nothing to reduce barriers to trade in highly paid professional services, like physician and lawyer services. They also increase protectionism in some areas, most notably by strengthening copyright and patent protections.

It is understandable that the proponents of these trade pacts would want to dub them "free-trade" pacts to make them more politically appealing. However, the media should not be using such inaccurate terminology.

 
Uninformed Appraisals Should Lead to Inaccurate Appraisals, Not Low Appraisals Print
Tuesday, 01 March 2011 05:07

USA Today reported that many home sales are not going through because the appraisals are too low to support the mortgage. At one point it reports complaints from realtors that appraisers now often come from outside the area and make low appraisals because they don't know the housing market.

If appraisers are unfamiliar with an area then it would be expected that they would make inaccurate appraisals. This would mean that there might be mortgages that don't go through because an appraisal comes in too low, however some mortgages may end up being issued that should not be because the appraisals are too high. There is no obvious reason that the appraisals would be biased on the low side.

 
There Are No Rich and Poor In David Brooks' America Print
Tuesday, 01 March 2011 04:47

David Brooks told readers that it is very important that we redistribute money from the old to young. He argues that this is due to the government debt built up as a result of the downturn. This debt will put pressure to reduce government spending, which he argues should come primarily at the expense of the elderly.

It is impressive that Brooks could only think of redistribution by generation after the United States has just gone through the most massive upward redistribution in the history of the world over the last three decades. Other observers might have thought of dealing with unmet needs by adopting measures that partially reverse this upward redistribution.

For example, the government could raise more than $1.8 trillion by taxing financial speculation. This revenue would come almost entirely at the expense of speculators and the financial industry. It could save a comparable amount of money by adopting alternatives to patent monopolies for supporting prescription drug research. And it could substantially reduce the interest burden of the current debt by having the Federal Reserve Board buy and hold a substantial amount of the debt. This would mean that the interest paid on this debt would be refunded to the government, leading to no net interest burden on the bonds held by the Fed.

However, Brooks never considers any measures that could reverse the upward redistribution of the past three decades. He is only interested in taking away Social Security and Medicare benefits and reducing the pay of public sector workers.

 
Consumers Continue to Spend Rather Than Save Print
Tuesday, 01 March 2011 04:32

The Washington Post told readers that "consumers are sitting on their pocketbooks," in reference to the 5.8 percent savings rate reported for January. In fact, this savings rate is well below the average for the 50s, 60s, 70s, and 80s. The wealth effect from the stock bubble in the 90s and the housing bubble in the 00s depressed saving rates in these decades.

 

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With the housing bubble now finishing its deflation we should expect the saving rate to rise back to its historical level. The alternative would imply that workers will have much less money for their retirement relative to their income in their working years.

 
USA Today's Government/Private Pay GAP Could be Eliminated by Hiring More Groundskeepers Print
Tuesday, 01 March 2011 03:46

USA Today ran an article highlighting a difference in pay between government workers and private sector workers in Wisconsin and 40 other states. The methodology used in the article simply takes average compensation per worker without adjusting for their education, experience or other factors that typically affect pay. (Most people expect a cardiologist with 25 years of experience to earn more than a 20-year old counter person at McDonalds.)

The gap in compensation (pay and benefits) highlighted in the USA Today article could be eliminated if governments made a point of replacing work that is often contracted to outside businesses (e.g. cafeterias in government buildings, custodial work in government buildings and groundskeeping on government properties) with government employees. By increasing the ratio of less educated workers to more highly educated workers (e.g. teachers, nurses, and doctors) state governments can eliminate the sort of pay gap that concerns USA Today.

Analyses that do control for education, experience and other factors in ways that are standard within economics consistently find that public sector workers receive somewhat lower compensation than comparable workers in the private sector. This article does cite Jeffrey Keefe, an economist who has done such analyses, pointing out this fact, but it is unlikely that many readers will pick up this point.

 
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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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