CEPR - Center for Economic and Policy Research

Multimedia

En Español

Em Português

Other Languages

Home Publications Blogs Beat the Press

Beat the Press

 facebook_logo  Subscribe by E-mail  


Are We Better Off Getting Advice from the IMF than a Drunk in the Street? Print
Sunday, 27 June 2010 07:44

If we look at the track record, probably not. After all, where was the IMF when the housing bubble in the United States and elsewhere was building up to ever more dangerous levels? Was it frantically yelling at governments to rein in the bubbles before they burst with disastrous consequences? No, the housing bubbles were no big deal at IMF land.

This would have been worth noting in a Washington Post article that repeats at length IMF recommendations about reducing budget deficits, cutting back on labor market protections for workers, and rolling back pension and health care benefits. After all, any reasonable person would ask when the IMF stopped being wrong about the economy. 

Actually, advice from the IMF may compare unfavorably to advice from a random drunk. The drunk will just be incoherent. There is reason to believe that the IMF has political motivations in the advice it gives. At the end of 2001 Argentina defaulted on its debt enraging the IMF. Prior to the default Argentina had been an IMF poster child eagerly embracing the IMF's program. 

The IMF's growth forecasts clearly reflected its change of attitude toward Argentina. Prior to the default the IMF was consistently overly optimistic about Argentina's growth prospects projecting much higher growth than Argentina actually experienced. After the default, the IMF was hugely over-pessimistic, projecting much lower growth rates than it subsequently experienced. It is difficult to explain this pattern of errors except by a political motivation.  

 

 
Pension Fund Accounting: The Crash Does Not Lower Future Returns, it Increases Them Print
Sunday, 27 June 2010 05:46

The NYT had another piece complaining that state and local pension funds are using overly optimistic assumptions on returns. The complaint is that the funds assume an 8 percent (nominal) average annual rate based on the historic returns on the mix of assets held by these funds, rather than a 6 percent rate which would be closer to the average risk-free rate on long-term U.S. Treasury debt.

At one point the piece presents us with the good news that:

"The financial crash provoked a few states to lower their assumed returns. This will better reflect reality, but it will not repair the present crisis."

Actually, the opposite is the case. Because the crisis sent stock prices plummeting, the ratio of stock prices to trend earnings ratio is much lower than it had been previously. As a result, it is much more reasonable to now to assume 8 percent average returns going forward than it was before the crisis. State and local pension funds do face substantial shortfalls, but calculations based on a 6 percent rate of return on assets would exaggerate the size of this shortfall.

 
The Post Tries to Get the Fed Off the Hook Print
Saturday, 26 June 2010 07:51

In a chart accompanying an article on the financial reform bill approved by the House-Senate Conference Committee the Washington Post told readers that:

"Ahead of the crisis, there was no agency in the government responsible for monitoring the financial system as a whole and looking for potential threats to its health."

This is not true. There was an agency that had responsibility for the monitoring the financial system as a whole and looking for potential threats to its health. It is called the "Federal Reserve Board." This is a main purpose of the Fed and it has fulfilled this role on several occasions, most notably when it intervened to halt the stock market crash in 1987 and to arrange the orderly unraveling of the Long-Term Capital Hedge Fund in 1998.

This point is important, because the problem that led to this crisis was not a lack of regulatory authority as this assertion implies. Alan Greenspan and Ben Bernanke had all the power they needed to rein in the housing bubble before it grew large enough to threaten the health of the economy. They chose to not use this authority either because they did not recognize the bubble or did not consider it a serious problem.

There is absolutely no reason to believe that if we had the newly created "Financial Services Oversight Council" in place in the years 2002-2007, when the housing bubble was inflating, that anything would have been different. Greenspan and Bernanke both repeatedly insisted that everything was fine in the housing market and the financial system more generally.

There were very few dissenting voices to the Greenspan-Bernanke position. Those in authority (and newspapers like the Washington Post) had no problem ignoring these dissenting voices. If there had been a Financial Services Oversight Council in the years when the bubble was inflating it almost certainly would have been staffed entirely by people who shared the Greenspan-Bernanke view. There is no reason whatsoever to believe that it would have done anything to avert the current economic crisis.

 
They Don't Know About Unemployment at the Washington Post Print
Friday, 25 June 2010 05:58

In keeping with the policy of fact-free reporting at the Post, David Ignatius touts the economic successes of the last year and proclaims: "much of the necessary repair work has been done, with one nagging exception -- the lack of a credible long-term plan to control the deficit."

Wow, no one told him about 9.7 percent unemployment.

 
Budget Deficits and the Gap to Be Filled Print
Friday, 25 June 2010 05:49

Morning Edition had a useful piece about efforts to stimulate the economy with budget deficits and the attempt to rein in these deficits. It compared this deficit reduction to President Roosevelt's effort to balance the budget in 1937 which led to a second recession.

While the piece included some discussion of the size of current deficits, it would have been useful to note the size of the hole in private sector spending that the government is trying to fill. The collapse of the housing bubble led to a falloff in residential construction of more than $500 billion annually. The collapse of the bubble in non-residential real estate led to a drop of more than $100 billion in construction in this sector. And, the loss of housing bubble wealth led to decline of more than $500 billion in wealth driven consumption. The total loss of private sector demand is more than $1 trillion a year. This is gap that must be filled by stimulus from the government sector.

 
Is Eliminating a Tax Break a New Tax? Print
Friday, 25 June 2010 05:25

The Washington Post reported on the Senate's refusal to extend unemployment benefits. At one point it referred to plans to change the tax treatment of income earned by managers of hedge funds, private equity funds, and real estate funds as a "new tax."

Currently, much of the income of these managers is taxed as capital gains even though it is paid in exchange for work. As a result, many of the richest people in the country are paying a 15 percent tax on their earnings (if they cash them out -- there is no tax paid on money left in the fund), instead of the 35 percent rate that high earners would otherwise pay (39.6 percent after the end of the year). The proposed change in the tax code would treat some of their earnings as labor income subject to ordinary taxes. It is not clear that change should be described as a new tax.

The article also discusses the additional debt that would incurred if the unemployment extension bill was approved by Congress. It tells readers that the proposal would have increased deficits over the course of the decade by $33 billion. It would have been helpful to note that this is equal to approximately 0.02 percent of projected GDP over this period.

 
If Fannie Mae Goes Out of Business, How Will It Enforce Sanctions Against Strategic Defaulters? Print
Friday, 25 June 2010 05:09

That is a question that the NYT should have asked in an article reporting on Fannie Mae's new plans to punish people who walk away from a mortgage that they could still pay. The article notes several problems that Fannie Mae will encounter in trying to impose its announced penalties on strategic defaulters, but only mentions in passing that the company many not even be in business for 7 years.

This matters in the current context, since one of the sanctions is that Fannie Mae will refuse to buy a mortgage by anyone who had strategically defaulted for 7 years. This could have a big impact on a person's ability to get a loan if Freddie Mac adopts the same policy and the two companies still dominate the secondary market 7 years from now. However, if the companies are shut down, as many people advocate (perhaps more will now), then this sanction will be meaningless.

In this context it probably is also worth noting that the top executives of both Fannie Mae and Freddie Mac earn $6 million a year (more than 30 times the pay of the Treasury Secretary). These publicly owned companies have repeatedly upped their estimates of losses from the collapse of the housing bubble.

The article is also far too generous in its explanation of Fannie Mae's collapse, telling readers: "during the housing boom Fannie overreached and bought many loans of buyers who were ill-equipped to pay them." Actually, Fannie Mae and Freddie Mac, both completely missed the housing bubble. Even though housing is all these companies do, they could not see the $8 trillion bubble in the market. They did not alter their loan buying behavior at all (actually they became less cautious) as house prices grew ever more out of line with fundamentals. It was easy for anyone, other than the highly paid executives who ran the companies, to see that they would face serious problems when the bubble burst.

 
The Post Shows Compassion for Its Victims Print
Thursday, 24 June 2010 13:23

In discussing the case for extending unemployment benefits a Post editorial tells readers that: "it is possible -- in theory, anyway -- for Congress to be both compassionate and prudent." This makes a great "who's on first," moment.

There is a reason that we have 15 million people unemployed. The people running economic policy -- people with names like Alan Greenspan, Ben Bernanke, Jack Snow, Hank Paulson, Robert Rubin -- thought that an $8 trillion housing bubble was really cool. The Washington Post mostly parroted the words of wisdoms coming from these and other people who expressed the same view. It completely ignored those who warned that the housing bubble would burst and wreak havoc on the economy when it did. (David Lereah, the former chief economist for the National Association of Realtors and the author of the book, Why the Housing Boom Will Not Bust and How You Can Profit From It, was the Post's most widely cited expert on the housing market leading up to the collapse of the bubble.)

Now the boom has burst and wrecked the economy. Remarkably, not one person who was responsible for the policy that brought about this disaster seems to be out of work. However, millions of factory workers, retail clerks, and school teachers have lost their jobs. These people are unemployed not because their lacked the necessary skills. Nor do they lack the desire to work -- they had been working until the economy collapsed.

Tens of millions of people are unemployed or underemployed because people with names like Greenspan and Bernanke do not know how to run the economy. And the Post wants to show them compassion by extending unemployment benefits.

 
The Myth of "Wealthier Seniors" and Cutting Social Security and Medicare Print
Thursday, 24 June 2010 06:40

One of the important untrue items circulating in policy debates in Washington is that we can have substantial budget savings if we cut Social Security and Medicare benefits for "wealthier seniors." Peter Peterson, the billionaire Wall Street investment banker regularly announces that he doesn't need his Social Security when highlighting his efforts to reduce the budget deficit.

In fact, everyone in the policy debate knows that there are very few people like Peter Peterson among Social Security and Medicare beneficiaries and it would not matter one iota if we took away their benefits completely. The billionaires or even millionaires are such a small share of the senior population, that it would barely affect the finances of these programs even if we could find a simple way to take back all their benefits (we can't).

This is why it is incredibly dishonest when the Washington Post puts forth its case in an editorial for cutting Social Security and Medicare benefits for "wealthier seniors," a change that the paper describes as making the programs "more progressive." Invariably what the Post and others mean when they use this line is cutting benefits for people with incomes of $50,000 or $60,000 a year. While these incomes would put a senior household way above the $29,700 median for the over 65 population, these incomes would not fit anyone's definition of wealthy. By contrast, President Obama put the cutoff at $250,000 when setting an income floor on people for raising taxes.

While income distribution is highly unequal, there is not much inequality in the distribution of Social Security and Medicare benefits. This means that very little money can be obtained by cutting benefits for the small number of genuinely wealthy elderly. The only way to save large amounts of money from these programs is by cutting benefits for large numbers of people, including people who are not wealthy.

Everyone in the debate knows this, but since cutting benefits for middle-income families who paid for these benefits with their taxes is not popular, we get nonsense lines about cutting benefits for "wealthier seniors" to make the program "more progressive."

Of course, the Post has never felt the need to be constrained by the truth in pushing its agenda. In arguing the case for NAFTA a few years ago, the lead editorial told readers that Mexico's GDP had quadrupled between 1988 and 2006. According to the IMF its GDP had risen by 83 percent. Oh well.

 
How Many Taxpayer Dollars Will Fannie Mae Spend Punishing Homeowners? Print
Thursday, 24 June 2010 05:00

That is the question that reporters should have asked when Fannie Mae announced a new policy of going after deficiency judgments against homeowners who strategically default on mortgages. Usually banks do not pursue deficiency judgments because whatever they are able to collect will not cover the expenses involved. Fannie Mae is apparently planning to pursue these legal actions even when it will lose it money.

Since Fannie Mae is already receiving over a hundred billion dollars from the government to cover its losses, this means that it will require even more taxpayer dollars than would otherwise need in order to engage in this punitive activity against defaulting homeowners. It also announced that it would increase the period in which it excludes a defaulting homeowner from qualifying for another mortgage from 5 to 7 years, if it determines that they had strategically defaulted.

This decision also appears to be based on a desire to punish defaulters, not profit maximization. This would mean that Fannie would be turning down the opportunity to buy otherwise profitable mortgages, further increasing its losses. As the Washington Post would say in other contexts (e.g. discussions of extending unemployment benefits), Fannie's actions will add to government deficits that are already at record levels.

It is also worth reminding readers that the losses at Fannie and Freddie were effectively subsidies to banks. They paid banks more for mortgages than they were worth.

 

[Addendum: Just to emphasize a point in the original note, banks typically do not pursue deficiency judgments because they don't believe that they will collect enough money to cover the costs. The suggestion in this article is that Fannie Mae intends to depart from the normal practice, not because they think they will recover more money, but rather to punish people who strategically default. This means that Fannie will be costing taxpayers more money, not less, because Fannie's executives (who get paid $6 million a year) decided it was important to punish strategic defaulters.]

 
<< Start < Prev 371 372 373 374 375 376 377 378 379 380 Next > End >>

Page 371 of 390

CEPR.net
Support this blog, donate
Combined Federal Campaign #79613

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.

Archives