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The NYT Doesn't Know About Robert Rubin's Record Print
Friday, 12 August 2011 04:35

In the list of people most responsible for the economy's wreckage, Robert Rubin is the only person who can rival Alan Greenspan for the top spot. As Treasury Secretary he pushed the over-valued dollar policy which led to the massive U.S. trade deficits.

These trade deficits are the fundamental imbalance in the U.S. and world economy. A trade deficit implies that either or both the government or private sector has negative savings. In other words, because we have a large trade deficit we must have a budget deficit or the sort of asset bubble-driven consumption boom that we had during the stock and housing bubbles.

Rubin also was a big proponent of removing government restrictions on the financial system. He helped to push through the repeal of Glass-Steagall. He also nixed Brooksley Born's efforts to regulate derivatives like credit default swaps.

After his years in the Clinton administration he took a top position at Citigroup where he earned over $100 million. When he left the bank in 2008 it was on government provided life support. It had been at the center of the subprime crisis, securitizing hundreds of billions of dollars of subprime mortgages.

Presenting Rubin as just a wise man who used to be Treasury Secretary, as this NYT article does, is like presenting the Unabomber as simply a man who lived in a small cabin in Montana.

 
Short Sales and Market Manipulation Print
Friday, 12 August 2011 04:07

The NYT had a piece on the decision of four European countries to ban short selling. One of the rationales was that traders were spreading negative rumors about banks and profiting from them by shorting their stocks. Insofar as this is happening, this is a form of market manipulation which is a violation of security laws everywhere.

In principle, regulators should be able to track down and punish manipulators, however as a practical matter manipulation will often be difficult to detect. It is possible that outlawing short sales for a period of time can prevent manipulation, but the real issue is manipulation not short sales. Manipulation also takes place on the upside (e.g. rumors of exaggerated corporate profits) and is every bit as harmful to the proper working of the market and the economy.

 
Huffington Post Exaggerates the Size of the Stock Wealth Effect Print
Thursday, 11 August 2011 05:13

A Huffington Post piece hugely overstated the size of the stock wealth effect. It told readers that:

"According to a research note from J.P. Morgan Chase earlier this year, every 100-point drop in the S&P 500 index translated to a $1 trillion loss in household wealth, and a 1.5 percent drop in consumption."

While this may accurately represent the research note (no link is provided), this is far out of line with the findings of a large literature on the stock wealth effect. With total consumption at more than $10 trillion, a 1.5 percent decline implies a drop of $150 billion. This would imply a stock wealth effect of 15 percent. Most of the literature has found a stock wealth effect in the range of 3-4 percent, usually with considerable lags.

 
How Big Is China? The Washington Post Doesn't Have a Clue Print
Thursday, 11 August 2011 04:52

The Washington Post had a front page column that waxed philosophically on the meaning of the debt downgrade by S&P. It concluded by telling readers:

"The U.S. economy is still nearly three times the size of China’s."

According to the IMF's projections, the United States economy is currently less than 40 percent larger than China's on a purchasing power parity basis. The IMF projects that China will surpass the United States as the world's largest economy by the end of the term of the president elected next year.

 
The Chicago White Sox Sunday Defeat Sent Stock Market Tumbling: It Wasn't the Debt Downgrade Print
Thursday, 11 August 2011 04:07

Time to beat up on really really bad news reporting. The stock market doesn't tell people why it does what it does. We have commentators who bloviate on what they think caused the market to rise or fall, but they don't really know and they could be completely wrong.

That is why it was incredibly irresponsible for NPR to tell listeners in its top of the hour news segment that the market plunged because Standard and Poor's downgrade of U.S. debt. NPR does not know this to be true and it certainly is not obviously the case.

The market that should have been most immediately affected by the S&P downgrade was the U.S. bond market. However bond prices soared in the trading immediately following the downgrade and continued to rise through Wednesday. If there was greater fear that the U.S. would default because of the downgrade, then bond prices should have plunged as investors demanded a higher risk premium. This did not happen.

The most obvious alternative explanation for the plunge in the market is the risk that the euro could break up as the debt crisis spread from relatively small countries like Greece and Ireland, to the euro zone giants, Spain and Italy. The prospect of a euro zone break-up raises a real risk of a Lehman-type freeze up of the world financial system. It is far more plausible that this prospect led to the plunge in the stock market than the downgrade by one of three major credit rating agencies.

This point is important because many political actors, including National Public Radio, are trying to use the debt downgrade as an argument for cutting Social Security and Medicare. Their argument will be furthered if they can claim that the downgrade had enormous consequences for the stock market, since so many people involved in political debates (i.e. columnists, policy wonks, reporters, congressional staffers) have substantial amounts of money invested in the stock market.

 
The Difference Between China and Germany Print
Thursday, 11 August 2011 03:58

The NYT has a good editorial outlining the weak U.S. growth prospects, although the double-dip discussion is silly – we're looking at too slow growth, not a double-dip. The piece makes another serious error at the end when it argues that Germany, like China, should reduce its trade surplus.

China and Germany are in fundamentally different positions in the world economy. China is an extremely fast growing developing country. It would be expected that China would have a large trade deficit. By contrast, Germany is a very slow growing wealth country with a stagnant or declining labor force. It should be expected that Germany would have a large trade surplus as it sends capital to countries where it can be better used.

 
The Financial Crisis Was Housing, not Subprime, and There Is Much More That the Fed Can Do Print
Thursday, 11 August 2011 03:44

A front page piece in the NYT compared the current turmoil in financial markets with the situation in the fall of 2008. It referred to the 2008 crisis as being a subprime crisis. While subprime mortgages took the biggest hit, prime mortgages also defaulted at rates that were many times higher than expected.

The piece also said that the Federal Reserve Board is largely out of ammunition in terms of its ability to counter a crisis. This is not true. The Fed could take far more aggressive measures to counter the downturn. For example, it could target a longer-term interest, committing itself to keep the 5-year Treasury bond rate to 1.0 percent for the next year.

Also, it could target a higher rate of inflation (3-4 percent), a policy that Bernanke himself had advocated for Japan when he was still a professor at Princeton. This would reduce the real interest rate, giving firms more incentive to borrow and also reduce the indebtedness of homeowners as house prices would presumably rise in step with inflation.

It is irresponsible for the NYT to make unsupported assertions about the lack of Fed power. The Fed is one of the main tools for affecting the economy and it is wrong to tell readers that it cannot do anything.

 
Why Would Liberals Be Happy About a Senator Who Wants to Cut Social Security and Medicare? Print
Wednesday, 10 August 2011 04:55

The Washington Post told readers that Senator John Kerry's appointment to the Supercommittee that is supposed to come up with $2.5 trillion in deficit reduction "could help appease liberals." Senator Kerry has repeatedly expressed his willingness to cut Social Security and Medicare, despite the fact that retirees and near-retirees saw much of their wealth destroyed with the collapse of the housing bubble.

It is difficult to see why liberals would be appeased this selection, especially since the Republicans selected are likely to be adamantly opposed to any tax increases.

 
The New York Times Announces Thomas Friedman's Dismissal Print
Wednesday, 10 August 2011 10:26

In the spirit of Thomas Friedman's column today, we should not have confidence in the quality of the news and opinion writing we see in the NYT until we see the following press release from the New York Times.

 

"As of this date we have notified Thomas Friedman that the New York Times no longer has a place for his column. While we recognize that Mr. Friedman had a substantial following, his column had simply become too much of an embarrassment for the newspaper and its staff. Column after column would make broad assertions that were almost completely impervious to the facts.

"For example, he recently wrote a piece telling readers that everyone will have to join together to help solve the country's economic and fiscal problems. This piece completely ignored the massive redistribution from wages to profits over the last three decades and from low wage workers to high workers. This call for togetherness must have been deeply offensive to the hundreds of millions who are suffering because of this upward redistribution of income.

"The prior week he told readers that Social Security, Medicare, and Medicaid were unaffordable 'entitlements' ignoring the fact that Social Security is actually fully funded for the next quarter century and according to the Congressional Budget Office, more than 80 percent funded for the rest of the century. The projections that show Medicare and Medicaid becoming unaffordable are based on projections of exploding private sector health care costs. A competent columnist would have focused on the need for fixing the U.S. health care system.

"In another column he explained that the Germans were going to bail out the Greeks, but that they would insist that the Greeks work German hours and take German vacations. Apparently Mr. Friedman did not realize that German workers on average work fewer hours than Greek workers and get longer vacations.

"The NYT is a great newspaper. It should not be associated with this sort of sloppiness week after week. For this reason we will be looking for a new columnist to replace Mr. Friedman. In the mean time we will run Tom Toles cartoons in his space."

 
The New York Times Tells President Obama That He Has to Cut Social Security and Medicare Print
Wednesday, 10 August 2011 04:36

The NYT ran a piece that told readers that it was necessary for President Obama to cut Social Security and Medicare for the good of the economy. This is not obviously true. There is no shortage of economists who would say that the economy's main problem is a lack of demand. This can be met by more stimulus, more aggressive action from the Fed, or a decline in the value of the dollar.

Remarkably, the NYT did not include the views of any economist who made these points. The only views presented in these articles were of those who wanted to cut Social Security and Medicare. The former is especially peculiar since the latest projections from the Congressional Budget Office projects that the program will be fully solvent until 2038 even with no changes and it could always pay more than 80 percent of scheduled benefits. Also, under the law the program cannot contribute to the deficit since it can only spend money raised through its designated tax.

One of the two experts cited in the piece suggested the need to means-test Social Security. Analysts familiar with the program generally do not support means-testing since it is likely to raise little money unless it is applied to people with very modest incomes.

 
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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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