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The Banking Industry Wins On Risk Retention With Mortgages Print
Friday, 24 October 2014 05:29

It's too bad that so many people in public life aren't old enough to remember all the way back to 2008. That is the only explanation for the rush to remove down payment minimums for a risk retention requirement on mortgages placed in mortgage backed securities.

This is the topic of an excellent column by Floyd Norris on how the banking and housing industry, with the support of some consumer groups, managed to remove any down payment requirements. The idea was that banks would have to keep a portion of the risk on all but the safest loans, thereby increasing the likelihood that they would not issue bad loans.

However the rules in the Dodd-Frank bill have been watered down so that even loans with no down payment could be put into mortgage pools even though they have more than four times the default risk of loans with 20 percent down payments. It is also worth pointing out that the cost of requiring that banks retain risk on low down payment loans did not mean that people could not get loans without large down payments as often claimed.

In fact, the only issue was whether they would pay somewhat higher interest rates in the form of mortgage insurance. This would add roughly 0.6-0.7 percentage points to the cost of a typical loan, reflecting the higher default risk. This issue has been hugely misrepresented by the banking industry and its allies so that they can freely return to the practices of the bubble years. 


David Brooks' Great Adventures in Fantasy Land Print
Friday, 24 October 2014 04:44

David Brooks has a tough job. He is supposed to present an intellectually respectable case for a political party that denies human caused global warming and has questions about evolution and the shape of the earth. This is why he must depart from the truth in laying out the path forward for the economy in his column this morning.

He gives us four items to move the economy forward, but we don't have to get beyond the first one to realize that he is not serious. Brooks tells us:

"If you get outside the partisan boxes, there’s a completely obvious agenda to create more middle-class, satisfying jobs. The federal government should borrow money at current interest rates to build infrastructure, including better bus networks so workers can get to distant jobs. The fact that the federal government has not passed major infrastructure legislation is mind-boggling, considering how much support there is from both parties."

Really? There is bipartisan support for having the federal government borrow money (i.e. run larger deficits) to build up the infrastructure? Is Paul Ryan calling for this? Ted Cruz? Marco Rubio? John Boehner? Who are the Republicans who are there demanding that the government run larger deficits to build up the infrastructure?

Brooks could do the country an enormous public service here by naming names. The reality is that President Obama has been unable to get any notable Republican support for even nickel and dime infrastructure projects. It probably wouldn't even matter if he agreed to restrict the spending to Republican congressional districts.

Then we get Brooks telling us:

"The government should reduce its generosity to people who are not working but increase its support for people who are. That means reducing health benefits for the affluent elderly."

There are two questions that come up here. First what is the definition of "affluent" and second what counts as "generosity."  When we were debating tax brackets in 2012 the Republicans insisted that you wouldn't be wealthy enough to pay higher taxes unless your income was above $400,000 a year. By contrast, President Obama put the cutoff at $250,000.

If we accept either of these definitions and think that the excessive generosity takes the form of Social Security and Medicare benefits, then we can stop right here. The money involved is too trivial to make any difference in the lives of working people. In order to have anything worth the trouble we would have redefine affluent to something like an income of $40,000 a year.



Wanting to Run a Marathon in Two Hours is Not the Same Thing as Having a Plan to Run a Marathon in Two Hours Print
Thursday, 23 October 2014 19:59

That distinction would have improved the accuracy of a NYT article on the Republicans' economic plans. The piece noted that Senate Republicans have limited their economic agenda. It told readers that they no longer call for the repeal of the Affordable Care Act and have abandoned the "so-called Ryan Plan, a long-term budget to revamp Medicare and Medicaid and significantly reduce other domestic and military spending enough to balance the budget in 10 years, while sharply cutting taxes."

Actually the Ryan plan was not really a plan to balance the budget while sharply cutting taxes. Ryan instructed the Congressional Budget Office (CBO) to assume enough budget cuts from non-Social Security and non-Medicare spending to bring the budget into balance. He never proposed any specific cuts that would come anywhere close to meeting this target. In fact, he recently has been pushing for increases in spending in one of the areas that he previously had slated for cuts, the Earned Income Tax Credit.

There is a similar story on the tax side. Ryan instructed CBO to assume in its scoring that enough deductions would be eliminated to offset the revenue lost from his tax cuts, however he has never actively supported the elimination of any major tax break (e.g. the mortgage interest deduction or the deduction for employer-provided health insurance). In short, he had nothing resembling a real plan.

The piece also told readers:

"While most economists and business executives do not look to Congress for much, they do want a rewriting of the corporate tax code and a revamping of fast-growing entitlement benefit programs, even as they acknowledge that is virtually unachievable."

It is not clear how it determined the views of most economists and business executives. While there probably is little disagreement that the corporate tax code is a mess, it is not clear that most economists and business executives see an urgency to "revamping fast-growing entitlement programs." The real news here is that the sharp slowdown in health care cost growth in recent years has caused projected growth of Medicare and Medicaid spending to fall sharply. In fact, the projections have fallen more as a result of the slower pace of health care cost growth than would have been accomplished by many austerity plans, like the one put forward by Erskine Bowles and Alan Simpson, the co-chairs of President Obama's deficit commission.

This slowdown in health care cost growth has removed the urgency for doing anything to change Medicare and Medicaid. Given the very limited assets of most workers near retirement age, there are few economists who view it as realistic to have any substantial cuts for Social Security any time soon. So it is simply not true that there is some widespread consensus around overhauling these programs.


Cut the Fracking Nonsense: Demand, not Supply Explains Low Oil Prices Print
Wednesday, 22 October 2014 07:57

Joe Nocera is anxious to credit shale oil with the recent plunge in oil prices, but our old friend Mr. Arithmetic sees things differently. In his column pronouncing the end of OPEC, Nocera credits the "shale revolution" in North America, which he credits with an additional 3 million barrels a day of production.

While this undoubtedly has put downward pressure on prices, it is not the major cause of price declines as can be easily seen from looking at the projections from before the economic collapse in 2008. The 2007 World Energy Outlook projected output in 2015 of 98.5 million barrels per day (Table 1.3). The most recent projections put production at 92.7 million barrels per day, 5.8 million fewer than had been projected before the slump. This means production has actually grown less rapidly than projected. That is not a good explanation for declining prices.

Obviously the key is on the demand side. The story here is primarily that the collapse has led to less demand for energy than had been projected as world GDP is still far below the levels projected in 2007. It is likely that conservation and the switch to alternative energy sources also played a role in reducing the demand for oil, but clearly a less important one.

The point is that crowning fracking as the killer of OPEC doesn't make sense, because the numbers don't support it. And, we still don't have basic questions answered about the damage of fracking to the surrounding environment. (The frackers won't reveal the chemicals they use because they claim they are a trade secret. This makes it almost impossible to prove that fracking is responsible for contaminating ground water. The permission to pollute the area surrounding frack sites with impunity is yet another great departure from free market economics when it suits the interests of the rich and powerful.)

The plunge in oil prices is also not especially good news for folks who would rather not see the planet destroyed by global warming. A sane approach would be to impose a tax to offset the drop in prices with the revenue used to promote conservation and clean energy. But that one isn't likely to be on the political agenda any time soon.

The European Union's Greenhouse Gas Emissions Are Less Than Half as Much Per Capita as U.S. Emissions Print
Wednesday, 22 October 2014 03:43

That would have been useful background to be included in a NYT article on the European Union's plans for future emission targets. Many readers may not realize that the countries in the European Union are starting from a much lower emissions level than the United States. This means that reductions will be more costly to achieve.

Gretchen Morgenson Warns on Pensions and Private Equity (Guest Post) Print
Sunday, 19 October 2014 20:16

by Eileen Appelbaum

Gretchen Morgenson had a great column in Sunday’s New York Times that pulls back the veil of secrecy surrounding pension fund investments in private equity. PE firm Carlyle recently agreed to pay $115 million to settle charges that it had engaged in illegal activities. Shockingly, neither Carlyle nor the firm’s executives and shareholders will pay a penny of this amount. Instead, it’s the pension funds and other limited partners in this PE fund that are on the hook for paying the fine. As Morgenson points out:

Instead, investors in Carlyle Partners IV, a $7.8 billion buyout fund started in 2004, will bear the settlement costs that are not covered by insurance. Those investors include retired state and city employees in California, Illinois, Louisiana, Ohio, Texas and 10 other states. Five New York City and state pensions are among them.

The retirees — and people who are currently working but have accrued benefits in those pension funds — probably don’t know that they are responsible for these costs. It would be very hard for them to find out: Their legal obligations are detailed in private equity documents that are confidential and off limits to pensioners and others interested in seeing them.

Indeed, Morgenson only knows about this because in a rare coup, the New York Times was able to obtain a copy of an agreement that limited partners in a Carlyle fund signed. In general, the secrecy surrounding the agreements that pension funds and other limited partners sign has made it impossible to tally up the total fees and expenses PE firms charge pension funds and their other PE fund partners. Despite the fact that public employee pension funds provide almost a quarter of the capital committed to private equity, while private pension funds commit another 10 percent, the terms of these partnership agreements are kept secret from the workers and retirees whose money is at stake. This is especially egregious in light of the sunshine laws that in most states require transparency and accountability on the part of government agencies, including public pension funds. Yet, as Morgenson documents, the version of the Limited Partner Agreement with Carlyle that the New York Times obtained through a Freedom of Information request was heavily redacted – 108 of its 141 pages were either entirely or mostly blacked out.

In an otherwise excellent article that should be read by every worker and retiree whose retirement savings are in a pension fund, Morgenson makes two misstatements that need to be corrected. First, she uncritically repeats the PE industry’s false characterization of its own activities.

"Private equity firms now manage $3.5 trillion in assets. The firms overseeing these funds borrow money or raise it from investors to buy troubled or inefficient companies. Then they try to turn the companies around and sell at a profit."



The Post Tells Us the Economy is SO Complicated Print
Sunday, 19 October 2014 10:47

The Post is really angry that people are talking about the rich getting everything at the expense of everyone else. It demands in the headline of an article, "stop with the fiction of a binary economy." 

Actually, nothing in the article really gives us much reason to question the reality of the binary economy that many economists have written about. For example, it tells readers:

"The jobless rate in the center of the United States from North Dakota to Texas is less than 5 percent and has been well below the national rate for five years."

Yes, and this means what? Wages are rising in North Dakota, with a labor force of 470,000 (just over 0.3 percent of the national labor force), but not much in Texas. Furthermore, the country had a 4.0 percent unemployment rate as a year-round average in 2000. This meant that many states were around 3.0 percent.

Then we get this bizarre discussion:

"But the top two income quintiles saw annual gains of a percent to a percent and a half until 2008.

"That isn’t what it was in the 20th century, but we tend to forget that the 20th century also saw much higher inflation. And we forgot that just as income growth has slowed, the costs of many basic goods and services also dropped. In 1950, food represented 32 percent of a family’s budget, according to federal statistics; today, it accounts for less than 15 percent. Energy use has seen similar declines, along with clothing and basic necessities. Health care costs more, but that in part is because we are living longer. Education eats up more costs, but many more people are going to college."



In Context of Accusations of CIA Drug Smuggling, WaPo Calls $10 Million a Week "Relatively Small" Print
Sunday, 19 October 2014 08:07

The movie Kill the Messenger has brought to new attention to charges that the CIA was involved in drug smuggling in the 1980s. The central allegation is that the CIA at least looked the other way, as its allies in arming the Contras trying to overthrow the Nicaraguan government smuggled large amounts of cocaine into the United States. Jeff Leen, the Post's assistant managing editor for investigations, took up the issue in the Post's Outlook section today.

Leen is essentially dismissive of the charges, at one point telling readers:

"The first thing I looked for was the amount of cocaine that the story said 'the CIA’s army' had brought into the country and funneled into the crack trade. It turned out to be relatively small: a ton in 1981, 100 kilos a week by the mid-1980s, nowhere near enough to flood the country with crack."

For those not familiar with the price of cocaine in the mid-1980s, the Office of National Drug Control Policy reported (Figure 1) that the price for major wholesalers was around $100 a gram, while the price for users was between $200-$300 gram. (Prices did fall sharply toward the end of the decade.) This means that the flow of 100 kilos a week would have had a wholesale value of around $10 million and a retail value between $20-$30 million. That amounts to over $500 million a year at the wholesale level and between $1.0-$1.5 billion at the retail level.



I will give some additional context for the "relatively small" drug trade. relative to today's economy, the cocaine would be worth between $4.0-$6 billion a year at the retail level. It is also enough to supply 100,000 users with a gram of cocaine a week. 


The text has been corrected -- thanks ltr.

The Unmentionable Trade Deficit Doesn't Appear Again Print
Sunday, 19 October 2014 07:24

It is really bizarre how folks find it so difficult to mention the trade deficit as the obvious source of weak demand in the economy. This is not a debatable point. We have a trade deficit of around $500 billion a year or roughly 3.0 percent of GDP. This is money that is creating demand elsewhere, not in the United States.

If we are going to maintain something like full employment then we need to make up this $500 billion in lost demand with higher than normal expenditures from another sector, which means either government spending, investment, residential construction, or consumption. This is all simple GDP accounting, the stuff everyone learns in intro economics. This is about an accounting identity, it is not a theory that can be debated. It is by definition true.

In the last decade we made up the shortfall in demand with consumption driven by ephemeral housing equity created by the housing bubble and by a boom in housing construction. In the late 1990s, when the deficit first exploded, the gap was filled by demand generated by the stock bubble. 

Now, with no bubbles in the economy, we are facing a $500 billion shortfall in demand due to the trade deficit. But no one seems able to talk about it.

Today's culprit is Matt O'Brien. In a mostly good piece about the death of inflation (we'll have to talk about the claims of overstated inflation later) O'Brien explains the cause:

"Well, it's the crisis, stupid. Households can't or won't borrow, even though interest rates are zero, because they're still trying to pay down their old debts. That means growth is weak, and price pressure is too."

This one doesn't work because households are in fact borrowing. Consumption is actually quite high as a share of disposable income or GDP (pick your denominator). It's not quite as high as it was at the peak of the housing or stock bubbles, when it was being spurred by trillions of dollars of ephemeral wealth, but it is far higher than at any point in the post war period until the end of the 1990s.

In other words, it makes zero sense to blame the ongoing weakness of the economy on weak consumption. It just ain't so. While investment is not booming, it is actually above its 2005 level as a share of GDP, which means it is not especially weak either. We can say we need larger government budget deficits (fine by me), but the deficit is also not especially low by post-war standards. 

The obvious culprit in the story is the unmentionable trade deficit. In the standard textbook story, rich countries like the United States (and Europe and Japan) are supposed to be running trade surpluses with fast growing developing countries like China and India. The idea is that capital should be flowing to the countries that can use it better. 

That story did reasonably well describe the world in the 1990s until the East Asian financial crisis. The botched bailout (brought to you by the I.M.F. and the U.S Treasury Department) reversed these flows in a big way, setting the stage for the global imbalances were see today.  

It should be possible for reporters to talk about the trade and deficit and its causes. What's the problem here, will the NSA throw people in jail for jeopardizing national security?

NYT Tells Readers Maine Governor Boasts About Creating Jobs at 75 Percent of the Rate of the Rest of the Country Print
Sunday, 19 October 2014 07:04

That is what the NYT told readers, but because of the way it told them, most readers probably did not realize it. The paper had an article on Maine's gubernatorial race in which it reported that Paul LePage, the incumbent Republican governor, boasts of creating 22,000 private sector jobs during his term of office.

It is not possible to know whether this is a good or bad performance without knowing the size of Maine's labor force. While most readers would probably not know this statistic offhand, NYT reporters should have the time to look it up. The Bureau of Labor Statistics reports that in January of 2011 there were 490,000 private sector jobs in Maine. This means that the number of private sector jobs has increased by 4.5 percent during Mr. LePage's term in office.

By comparison, the number of jobs in the country as a whole increased by just under 6.0 percent over this period. This means that Maine has seriously lagged the rest of the country in private sector job creation.

While there may be factors that would slow Maine's job growth that are beyond the control of the governor, on its face, his job creation record is something he should be apologizing for, not boasting about. Unfortunately, most NYT readers would not recognize this fact.

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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.