Category Archives: economics

Guess what? Government housing policy did NOT create the subprime crisis:

A couple of economists at the Federal Reserve actually did the research, and what do you know?  The government policy of supporting home ownership didn’t encourage the unworthy peasants to borrow beyond their means, as the Republicans would like to tell the story today.

It was actually the slimy mortgage lenders who gave undocumented mortgages to anyone who was breathing.  They did it because they could sell them off to unscrupulous Wall Street investment houses.  They in turn bought them because they could buy AAA ratings from the ratings agencies for the bundles they made from them.

And then the Wall Street could slice and dice the bundles and sell them to unsuspecting pension funds and charitable organizations looking for safe yields to replace the bonds they could no longer invest in because they were only yielding paltry interest rates.  Why?  Because Alan Greenspan kept interest rates so low in the early 2000’s that charities couldn’t meet their obligations to pay out 5% of their assets and still grow with the safe investments they were used to investing in.

So let’s not drink the Kool-Aid we’re being sold.  Here it is from the horse’s mouth- first the Abstract, then the link to the entire research paper:

ABSTRACT

A growing literature suggests that housing policy, embodied by the Community Reinvestment Act (CRA) and the affordable housing goals of the government sponsored enterprises, may have caused the subprime crisis. The conclusions drawn in this literature, for the most part, have been based on associations between aggregated national trends. In this paper we examine more directly whether these programs were associated with worse outcomes in the mortgage market, including delinquency rates and measures of loan quality.

We rely on two empirical approaches. In the first approach, which focuses on the CRA, we conjecture that historical legacies create significant variations in the lenders that serve otherwise comparable neighborhoods. Because not all lenders are subject to the CRA, this creates a quasi-natural experiment of the CRA’s effect. We test this conjecture by examining whether neighborhoods that have been disproportionally served by CRA-covered institutions historically experienced worse outcomes. The second approach takes advantage of the fact that both the CRA and GSE goals rely on clearly defined geographic areas to determine which loans are favored by the regulations. Using a regression discontinuity approach, our tests compare the marginal areas just above and below the thresholds that define eligibility, where any effect of the CRA or GSE goals should be clearest.

We find little evidence that either the CRA or the GSE goals played a significant role in the subprime crisis. Our lender tests indicate that areas disproportionately served by lenders covered by the CRA experienced lower delinquency rates and less risky lending. Similarly, the threshold tests show no evidence that either program had a significantly negative effect on outcomes.

http://www.federalreserve.gov/pubs/feds/2011/201136/201136pap.pdf

 

 

 

 

 

 

 

 

 

 

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I’ve been away and this is what happens….

Like my current idol, Barry Ritholtz, who says that every time he goes away, the world breaks loose and things happen, I’ve been away from my computer and look what has been going on!  Rather than try to catch up, I’ll just let a few of my favorites sum it up – Paul Krugman, Barry Ritholz, and Andy Borowitz, for a little levity in these turbulent times.  Enjoy –

The Hijacked Crisis – by Paul Krugman

Has market turmoil left you feeling afraid? Well, it should. Clearly, the economic crisis that began in 2008 is by no means over.

But there’s another emotion you should feel: anger. For what we’re seeing now is what happens when influential people exploit a crisis rather than try to solve it.

For more than a year and a half — ever since President Obama chose to make deficits, not jobs, the central focus of the 2010 State of the Union address — we’ve had a public conversation that has been dominated by budget concerns, while almost ignoring unemployment. The supposedly urgent need to reduce deficits has so dominated the discourse that on Monday, in the midst of a market panic, Mr. Obama devoted most of his remarks to the deficit rather than to the clear and present danger of renewed recession.

What made this so bizarre was the fact that markets were signaling, as clearly as anyone could ask, that unemployment rather than deficits is our biggest problem. Bear in mind that deficit hawks have been warning for years that interest rates on U.S. government debt would soar any day now; the threat from the bond market was supposed to be the reason that we must slash the deficit now now now. But that threat keeps not materializing. And, this week, on the heels of a downgrade that was supposed to scare bond investors, those interest rates actually plunged to record lows.

What the market was saying — almost shouting — was, “We’re not worried about the deficit! We’re worried about the weak economy!” For a weak economy means both low interest rates and a lack of business opportunities, which, in turn, means that government bonds become an attractive investment even at very low yields. If the downgrade of U.S. debt had any effect at all, it was to reinforce fears of austerity policies that will make the economy even weaker.

So how did Washington discourse come to be dominated by the wrong issue?

Hard-line Republicans have, of course, played a role. Although they don’t seem to truly care about deficits — try suggesting any rise in taxes on the rich — they have found harping on deficits a useful way to attack government programs.

But our discourse wouldn’t have gone so far off-track if other influential people hadn’t been eager to change the subject away from jobs, even in the face of 9 percent unemployment, and to hijack the crisis on behalf of their pre-existing agendas.

Check out the opinion page of any major newspaper, or listen to any news-discussion program, and you’re likely to encounter some self-proclaimed centrist declaring that there are no short-run fixes for our economic difficulties, that the responsible thing is to focus on long-run solutions and, in particular, on “entitlement reform” — that is, cuts in Social Security and Medicare. And when you do encounter such a person, you should be aware that people like that are a major reason we’re in so much trouble.

For the fact is that right now the economy desperately needs a short-run fix. When you’re bleeding profusely from an open wound, you want a doctor who binds that wound up, not a doctor who lectures you on the importance of maintaining a healthy lifestyle as you get older. When millions of willing and able workers are unemployed, and economic potential is going to waste to the tune of almost $1 trillion a year, you want policy makers who work on a fast recovery, not people who lecture you on the need for long-run fiscal sustainability.

Unfortunately, giving lectures on long-run fiscal sustainability is a fashionable Washington pastime; it’s what people who want to sound serious do to demonstrate their seriousness. So when the crisis struck and led to big budget deficits — because that’s what happens when the economy shrinks and revenue plunges — many members of our policy elite were all too eager to seize on those deficits as an excuse to change the subject from jobs to their favorite hobbyhorse. And the economy continued to bleed.

What would a real response to our problems involve? First of all, it would involve more, not less, government spending for the time being — with mass unemployment and incredibly low borrowing costs, we should be rebuilding our schools, our roads, our water systems and more. It would involve aggressive moves to reduce household debt via mortgage forgiveness and refinancing. And it would involve an all-out effort by the Federal Reserve to get the economy moving, with the deliberate goal of generating higher inflation to help alleviate debt problems.

The usual suspects will, of course, denounce such ideas as irresponsible. But you know what’s really irresponsible? Hijacking the debate over a crisis to push for the same things you were advocating before the crisis, and letting the economy continue to bleed.

 

Barry Ritholtz:  Speaking Soothing Words vs. the Truth Bomb (Aug. 11, 2011) – an excerpt from his comments – calling out those who were trying to calm markets for their own purposes:

My comment on Bloomberg Tuesday that Bank of America should seek a pre-packaged, GM-like bankruptcy reorg generated a stern phone call from a Mr. Someone, a regular on BubbleTV. Understand, I have been saying this exact same thing for over 3 years (only adding the GM part since their reorg). The other party was a bit of an ass, and when I called them on it (Long BAC are we?), we had a few choice words.  When they crossed a line, I informed them all of our calls were recorded — I could practically hear the sphincter tighten on the other end of the line — I added a few choice words the only way I knew how: My exact phrase to this person was a less than eloquent expression involving self-love that is not possible amongst those who are not double jointed.

Which brings me to pundit motivation: People who try to soothe the savage market psychology do so because its their jobs, and it is in their self-interest. They may work for Fed or the Treasury or a firm so large they cannot be tactical investors. Hence, their calming words amount to little more than propaganda, self-interest, and crowd control.

If you think people are sheep, then you try to manipulate their fears and psychology via the media. You engage in color coded terror warnings, you threaten total financial Armeggedon, you warn of an economic seizure. You say what cows the masses into a corner to be harvested and sold off for parts.

I prefer the Truth bomb. Precision guided, accurate to within millimeters, high yielding explosive truths.

If you have the slightest respect for Humanity, you tell them what is. You give them the facts. You honor the Truth, and let the chips fall where they may. Despite my curmudgeonly world views, I still have enough respect for my fellows that I believe Truth telling is the only way to go. And I am more than happy to call out anyone who wants to tell lies to reach their objectives…….

Andy Borowitz:
AUGUST 22, 2011

Gaddafi Found Running for Republican Nomination

Libyan Madman Turns Up in New Hampshire

CONCORD, NH (The Borowitz Report) – The mystery surrounding Col. Muammar Gaddafi’s whereabouts was resolved today as the dictator announced his candidacy for the Republican presidential nomination in a town hall meeting in Concord, New Hampshire.

In announcing his candidacy, the Libyan madman joins a Republican field which is believed to number in excess of seven hundred candidates.

While some New Hampshire Republicans seemed surprised to see Col. Gaddafi shaking hands and kissing babies at the Concord town hall, an aide to the Libyan strongman said his transformation to GOP candidate made perfect sense.

“In those final days in Tripoli he was becoming increasingly disconnected from reality,” said the aide.  “So I think he’ll fit right in.”

Mr. Gaddafi, dressed in his trademark yellow turban and matching robe, got mixed reviews in his first appearance on the campaign trail, with some New Hampshire citizens saying that his six-hour stump speech was badly in need of pruning.

Additionally, some felt that his rhetoric needed to be toned down, especially his closing line about fighting for the Republican nomination “until the last drop of blood.”

But others gave him high marks for his grasp of history and geography, which most agreed was stronger than Michele Bachmann’s.

Perhaps underscoring the challenges that lie ahead for Mr. Gaddafi in his quest for the GOP nod, current polls show him in the back of the pack, leading former Senator Rick Santorum but trailing the pizza guy.

“Unfortunately for Muammar Gaddafi, he might be out of step with the current crop of Republican candidates,” one pollster said.  “There’s a perception that he’s too moderate.”

The Two-Headed Monster:

Barry always has it RIGHT!

His column today in the Washington Post is right on the money.  Basically, he reiterates that we should not blindly follow Europe off the austerity cliff, which will not help to create a recovery after this credit crisis:

Wall Street analysts and economists have this recession recovery wrong

The recession is well behind us now, and Wall Street seems to think this recovery should be all wrapped up.

Consider this: The federal non-farm jobs report for June was pretty awful. The private sector created 57,000 jobs. Federal, state and local governments cut 39,000 positions (the eighth straight monthly decrease in government employment). We picked up a mere 18,000 net new jobs.

Graphic

No run-of-the-mill recession

No run-of-the-mill recession

Not a single forecaster in Bloomberg’s monthly survey of 85 Wall Street economists got it anywhere close to right. The most common reaction was “surprise.” That any professional can sincerely claim to be surprised by continued weakness — in employment, GDP or retail sales — was the only revelation.
Let’s put the number into context: In a nation of 307 million people with about 145 million workers, we have to gain about 150,000 new hires a month to maintain steady employment rates. So 18,000 new monthly jobs misses the mark by a wide margin.

Why have analysts and economists on Wall Street gotten this so wrong? In a word: context. Most are looking at the wrong data set, using the post-World War II recession recoveries as their frame of reference.

History suggests the correct frame of reference is not the usual contraction-expansion cycles, but rather credit-crisis collapse and recovery. These are not your run-of-the-mill recessions. They are far rarer, more protracted and much more painful.

Fortunately, a few economists have figured this out and provide some insight into what we should expect. Among the most prescient are professors Carmen M. Reinhart and Kenneth S. Rogoff. Back in January 2008 (!), they published a paper warning that the U.S. subprime mortgage debacle was turning into a full-blown credit crisis. Looking at five previous financial crises — Japan (1992), Finland (1991), Sweden (1991), Norway (1987) and Spain (1977) — the professors warned that we should expect a prolonged slump. These other crises had a number of surprisingly consistent elements:

First, asset market collapses were prolonged and deep. Real housing prices declined an average of 35 percent over six years, while equity prices collapsed an average of 55 percent. Those numbers were stunningly close to what occurred in the U.S. crisis of 2007-09.

Second, they’ve noted that the aftermaths of banking crises “are associated with profound declines in employment.” They found that following a crisis, the average increase in the unemployment rate was 7 percentage points over four years. U.S. unemployment climbed 6 percentage points (from about 4 percent to about 10 percent), while the broadest measure of joblessness gained over 7 percentage points (from about 9 percent to about 16 percent). Again, they were right on the money.

Third, the professors warned that “government debt tends to explode, rising an average of 86 percent.” Surprisingly, the primary cause is not the costs of bailing out the banking system, but the “inevitable collapse in tax revenues that governments suffer in the wake of deep and prolonged contractions.” They also warned that “ambitious countercyclical fiscal policies aimed at mitigating the downturn” also tend to be costly.

Hmmm, plummeting tax revenues just as the government tries to stimulate the economy . . . does any of this sound familiar? It should.

Read the rest here in the Washington Post, or on his blog,  here.

In conclusion, we are in for a long haul, no matter what we do, but austerity, or slashing government spending is the WRONG way to go, unless, like Republicans, you want to follow ideology and damn the little people, with no power, who will get hurt.

 

 

Great “TOO BIG TO FAIL” Visual

Check this out:

http://www.creditloan.com/blog/wp-content/uploads/2011/06/TooBigToFail-Dan-062411-FINAL.jpg

And why has nobody been outed or prosecuted or gone to jail?  I guess not only the institutions, but the ‘big people’ are “too big to fail”.  That’s why this country has become, not a meritocracy, but a plutocracy.  Those who have given themselves all the money now own the government.  Oh dear.

How many times do we need to repeat – NOW IS NOT THE TIME TO WORRY ABOUT THE DEFICIT

Economist and asset manager and my favorite (and Time Magazine’s) financial blogger, Barry Ritholtz says it so well, as usual about how to jump-start the economy:

“The focus on Deficits today is absurd, forcing us towards another 1938-type recession. The time to reduce the government’s economic deficit and footprint is during a robust expansion, not during (or just after) major contractions.

During the de-leveraging following a credit crisis is the worst possible time to be deficit obsessed.”

He has some great ideas in this post about what to do.  If it weren’t for the fact that it is an election year next year, and if my cynical take on it were not that the Republicans were so hopeful that the economy would not improve at all, so that they could make the point that Obama had failed, all Barry’s ideas would be a great way to help both create jobs and grow our economy.  But the ideas have an ice-cube’s chance in hell of getting past the deadloked and partisan Congress which is not acting in the interests of the country, but in their own political interests. So where is Obama and his great rhetoric when we need him?

How wrong is Meredith Whitney about Muni Bonds

Just get the actual facts and know she is way off base.  Hope you bought munis when they sold off 6 months ago when she issued her apocalyptic forecast of $100 billion defaults.  Read a great analysis here:

The Big Picture – David R. Kotok

The Bush Tax Cuts After Ten Years – The stuff of Nightmares!

This information comes from the CTJ – Citizens for Tax Justice

Ten years ago, on June 7, 2001, President George W. Bush signed into law the first of several tax cuts that drove the balanced budget he inherited from President Clinton deep into the red. Last year, Congressional supporters of Bush’s policies pushed through an extension of these tax cuts through the end of 2012.

Many lawmakers want to extend the Bush tax cuts again into 2013 and beyond, which would almost double the federal budget deficit.

Extending the Bush tax cuts from 2013 through 2022 would cost $5.5 trillion.

Great article from my favorite guy – Barry Ritholtz

Barry Ritholtz
Barry Ritholtz
Columnist – Washington Post
After a recession, the least rational rise (temporarily) to prominence. Ignore them 

By , Published: June 4

If you are reading this, the previously scheduled end of the world did not occur. Perhaps the date was wrong — next Saturday night? 1994? October?No matter.

Despite millennia of Armageddon forecasts, betting on the end of the world has always been a money-losing wager. Given this oh-fer batting record of 0.000 percent, one wonders why people still regularly make this forecast. Wall Street fund strategists, religious zealots and economists seem strangely drawn to it. Never mind that if it were ever a winning trade, no one would be left for you to collect from. (That is called counterparty risk.)

You humans are a hardy breed. No matter how dire the circumstance, your species has managed to prosper.You survived the Ice Age, the Dark Ages, the Middle Ages, the Age of Aquarius (as well as Disco and Polyester). Mother Nature has thrown floods, earthquakes, droughts, plagues, pandemics, tornadoes, asteroids, tsunamis, hurricanes, melting glaciers and global warming at you. Not to mention world wars and nuclear proliferation.Economically, you’ve withstood the Panics of 1819, 1825, 1837, 1847, 1857, 1866, 1873, 1884, 1890, 1893, 1896, 1907, 1929, 1933, 1938, 1973, 1987, 1998, 2000, and 2007-09 — and that is just over the past two centuries. You also saw through the Tulip Bubble, the South Sea Bubble, the Great Depression and the Great Recession, the Nifty-Fifty, the Asian Contagion, the Dot-com Bubble, the subprime fiasco and Bernie Madoff.What is it going to take to kill this species off — or at least to bankrupt it?

Given this long and storied history of survival, why does anyone pay attention to the dang fools predicting the end of the world?

It turns out there is a very good explanation: the recency effect — the unfortunate tendency to greatly overemphasize our most recent experiences. Our memories of recent events is more vivid than those of older events and can even trump the here and now.

In other words, we tend to concentrate most on what we can see in the rear-view mirror and not what we are looking at through the windshield.

This has enormous consequences for investors. It helps to explain why you buy so much stock at market tops and sell most heavily at panic bottoms. You are looking at the past few days or weeks, versus the bigger, long-term picture.

How does this manifest itself in the world of investing? Traders have a tendency to describe themselves as bullish after they buy stocks. They also are more likely to describe themselves as bearish after they sell them. What happened recently is used as part of a broader self-rationalization process. And it is how you justify your own actions.

The recency effect also helps explain the rise of the cranks, who have enjoyed undeserved credibility in the aftermath of the recession. These are the people who, after a tremendous collapse, only see doom and gloom.

They include:

  •  Crisis rock stars: The collapse made their reputations, and they are reluctant to go back to a more normal footing.
  •  Hyper-inflationistas, who are convinced we are returning to the days of the Weimar Republic.
  •  Gold bugs: The yellow metal may have underperformed equities for four decades, but it is their excuse for missing a 100 percent market gain over two years.
  •  Conspiracy theorists: From Birthers to Truthers to all manner of blithering idiots, these folks would be totally ignored during normal times.
  •  Austerians: The people who believe the only way forward is through painful spending cuts.
  •  Thinly veiled partisans who opportunistically grab the crisis as proof the other guy is unfit to govern.
  • Analysts trying to turn one good call into a new business model.
  • One-sided Web sites that never see anything positive; their URLs tend to have “Doom” or “Collapse” in their titles.

It is no coincidence that negative predictions increase after major recessions or market collapses. They are predicting what just occurred, not what is likely to happen.

And they are not making their followers money.

Listening to their advice, their readership missed the greatest market rally in four generations. They piled into commodities in time for a major collapse; they got frightened out of municipal bonds that have no credit issue or default threat. They have otherwise missed opportunities and lost capital.

I have never been a perma-bull — not only because it is money-losing to be one-sided but also because throughout most of my career, equities have been somewhat overpriced.

This is not a suggestion to abandon risk management and make blindly optimistic bets. Indeed, market risk is now higher than it has been during any time since the rally began in March 2009.

In our tactical accounts, we are carrying only a 50 percent long position, with 30 percent cash and 20 percent short. That is a rather defensive posture. But it is based on data and expectations that we are overdue for a major correction — and not the end of the world.

Ritholtz is chief executive of FusionIQ, a quantitative research firm. He runs a finance blog,The Big Picture.

A Misstep on Medicare –

This was a good blog in the New York Times about the Republicans’ miscalculation in proposing the Ryan Medicare overhaul that was passed in the House.  Although it was last week, I’m just catching up and you may not have seen it either, so here it is:
May 16, 2011, 9:34 PM

The Need for Greed

By TIMOTHY EGAN

Timothy EganTimothy Eganon American politics and life, as seen from the West.

The bet was audacious from the beginning, and given the miserable, low-down tenor of contemporary politics, not unfathomable: Could you divide the country between greedy geezers and everyone else as a way to radically alter the social contract?

But in order for the Republican plan to turn Medicare, one of most popular government programs in history, into a much-diminished voucher system, the greed card had to work.

The plan’s architect, Representative Paul Ryan of Wisconsin, drew a line in the actuarial sand: Anyone born before 1957 would not be affected. They could enjoy the single-payer, socialized medical care program that has allowed millions of people to live extended lives of dignity and decent health care.

And their kids and grandkids? Sorry, they would have to take their little voucher and pay some private insurer nearly twice as much as a senior pays for basic government coverage today. In essence, Republicans would break up the population between an I’ve Got Mine segment and The Left Behinds.

Again, not a bad political calculation. Altruism is a squishy notion, hard to sustain in an election. Ryan himself has made a naked play for greed in defending the plan. “Seniors, as soon as they realize this doesn’t affect them, they are not so opposed,” he has said.

Well, the early verdict is in, and it looks as though the better angels have prevailed: seniors are opposed. Republicans: Meet the Fockers. Already, there is considerable anxiety — and some guilt — among older folks about leaving their children worse off financially than they are. To burden them with a much costlier, privatized elderly health insurance program is a lead weight for the golden years.

This plan is toast. Newt Gingrich is in deep trouble with the Republican base for stating the obvious on Sunday, when he called the signature Medicare proposal of his party “right-wing social engineering.” But that’s exactly what it is: a blueprint for downward mobility.

Look at the special Congressional election of next Tuesday. What was supposed to be a shoo-in for Republicans in a very safe district of upstate New York is now a tossup. For that, you can blame the Medicare radicals now running the House.

And a raft of recent polls show that seniors, who voted overwhelmingly Republican in the 2010 elections, are retreating in droves. Democratic pollster Geoffrey Garin says the Ryan plan is a “watershed event,” putting older voters in play for next year’s presidential election.

Beyond the political calculations, all of this is encouraging news because it shows that people are starting to think much harder about what kind of country they want to live in. Give the Republicans credit for honesty and showing their true colors. And their plan is at least a starting point compared with those Tea Party political illiterates who waved signs urging government to keep its hands off their government health care.

When the House of Representatives voted to end Medicare as we know it last month, it was sold as a way to save the program. Medicare now covers 47.5 million Americans, but it won’t have sufficient funds to pay full benefits by 2024, according to the most recent trustee report. Something has to be done.

Many Republicans want to kill it. They hate Medicare because it represents everything they are philosophically opposed to: a government-run program that works and is popular across the political board. It’s tough to shout about the dangers of universal health care when the two greatest protectors (if not creators) of the elderly middle class are those pillars of 20th-century progressive change, Social Security and Medicare.

For next year’s election, all but a handful of Republicans in the House are stuck with the Scarlet Letter of the Ryan Plan on their record. Soon, there will be a similar vote in the Senate. It will not pass, but it will show which side of the argument politicians are on.

There is a very simple way to make Medicare whole through the end of this century, far less complicated, and more of a bargain in the long run than the bizarre Ryan plan. Raise taxes. It hasn’t sunk in yet, but most American pay less taxes now than anytime in the last 50 years, according to a number of measurements. And a majority of the public now seems willing to pay a little extra (or force somebody else to pay a little extra) to keep a good thing going. Both Ronald Reagan and George H.W. Bush raised taxes, by the way.

Given a choice between self-interest and the greater good, voters will usually watch out for themselves — unless that greater good is their own family. For Republicans intent on killing Medicare, it was a monumental miscalculation to miss that logical leap.

This column appeared in print on May 17, 2011.

Just sharing…

Another great read-  Joseph Stiglitz on Project Syndicate.  This particular column is called “Gambling with the Planet” – and covers everything from the too-big-to-fail banks to the Japan tsunami/earthquake/nuclear disaster to climate change and what we are risking.  Tough read but well worth it.