How the Left Wing Created the Credit Crisis. Yes, Indeed!

James Grant is a knowledgeable student of the credit system, but today he goes off the rails, blaming the left wing for the credit crisis. Here is the most striking passage:

By and by, the lefties carried the day. They got their government-controlled money (the Federal Reserve opened for business in 1914), and their government-directed credit (Fannie Mae and the Federal Home Loan Banks were creatures of Great Depression No. 2; Freddie Mac came along in 1970). In 1971, they got their pure paper dollar. So today, the Fed can print all the dollars it deems expedient and the unwell federal mortgage giants, Fannie Mae and Freddie Mac, combine for $1.5 trillion in on-balance sheet mortgage assets and dominate the business of mortgage origination (in the fourth quarter of last year, private lenders garnered all of a 19% market share).

Grant, James. 2008. "Why No Outrage?" Wall Street Journal (19 July): p. W 1.

Would a publically owned agency have behaved the same way, lowering standards to increase share costs?

Harrisonburg, Virginia to Host an Obama Office

The front page of the July, 17 Washington Post has a story, "Obama Adds 20 Va. Offices in a Big Push To Win State," with the following later in the story: "Many offices will be in traditional Republican strongholds, such as Harrisonburg in the Shenandoah Valley and Lynchburg in southern Virginia." Many observers, both Republican and Democrat, say that this is an effort to "show momentum" and how much more money Obama is raising than McCain, with Virginia not having gone for a Democrat for president since LBJ in 1964. They say Obama will need to show up in person for these extra offices to really have an effect, although he is currently somewhat ahead of McCain in the polls statewide.

Anyway, the office here in Harrisonburg, just a couple of blocks from my house, opens up this Saturday afternoon. This evening people were working there painting and putting up all kinds of signs and stuff. I think I shall drop in for the Open House at 2 PM. Heck, maybe we will even get a visit from him at some point.

Science today - an easy way to lie to the public

“…We submit evidence on the hazards of GM to the government's scientific advisory committees again and again over the years, only to be met with bland denial and dismissal[1]. Fortunately, some good governments all over the world are taking heed, and are rejecting GM on account of uncertainty over safety…”

“…Two right-wing chemical industry supporters--Dennis Avery and Steven Milloy--have used the Public Health Service's announcement to claim that this invalidates all research on endocrine disruption. As ludicrous as that assertion is scientifically, their claims are a potential source of confusion for people who do not follow this issue closely. I have therefore posted below a detailed analysis of what they are claiming. Dennis Avery's commentary (see below) is a classic example of PR spinning that seizes upon an element of truth and then distorts it in ways to serve a larger purpose, in this case arguing to weaken standards that protect public health from pesticide exposures. Milloy is a fellow-traveler who has written similarly false assertions[2]…..”

Animal tests false reassurance[3]
“Animal tests on the kind of drug given to the six men ill in a London hospital may not be the best way of evaluating the effects in people, an expert warns. The drug they took stimulates a protein only found in humans…..”

“..No pesticide label signal word is present to guide users on toxicity, protective clothing and equipment. False and misleading statements[4] now occur on pesticide labels that confuse consumers. Labels providing the impression that the product is non-toxic are a grave concern as by default they encourage unnecessary human and environmental exposure…”

“..Also tolerated are biased viewpoints, including those linked to powerful vested interests[5]. Many scientists are employed by or receive research funds from companies or government bodies, and both expect and are expected to come up only with results useful to those bodies. Scientists receiving money from chemical companies to study pesticides seldom draw attention to the limitations or dangers of pesticides: they simply do studies within a framework which assumes that using pesticides is the appropriate thing to do. Physicists working on nuclear weapons design do not stray outside their narrow task. Engineers employed by automobile companies do not propose studies looking for safety problems or alternatives to the car [15].

[1]Puncturing the GM Myths. ISIS Press Release 08/04/04
http://www.i-sis.org.uk/GMmyths.php

[2] Analysing Dennis Avery's Misrepresentations. Our Stolen Future
http://www.ourstolenfuture.org/myths/2002-0120avery.htm

[3] http://news.bbc.co.uk/1/hi/health/4817178.stm

[4] Submission, American Association of Pesticide Safety Educators
aapse.ext.vt.edu/pdfs/25b_pos.pdf

[5] 'Scientific fraud and the power structure of science', Brian Martin
Published in Prometheus, Vol. 10, No. 1, June 1992, pp. 83-98.
http://www.uow.edu.au/arts/sts/bmartin/pubs/92prom.html

88

There are 88 keys on a piano, as many as there are years in Justice Stevens' life so far. I would ask self-styled progressives upset with Obama to reflect on this number - and, having done so, shut up and get to work!

BARRON'S ON BOARD

by the Sandwichman

"LIVING WELL IN THE 21ST CENTURY WILL REQUIRE THAT we soon begin the transition away from a capitalism driven by the quest for profit and growth," wrote James Gustave Speth in an "Other Voices" op-ed in the June 30 issue of Barron's, Changing the Object of Capitalism. Leading off Speth's prescription for transforming economic activity is a shorter work week. "The economy might even evolve to a steady state, where a declining labor force and shorter work hours are offset by rising productivity."

Gus Speth, meet Sydney J. Chapman and Ira Steward.

Mass Media’s Global Monopoly and the Legal Freedom to Lie

After the Second World War the mass media in Europe, America and Australia developed into monopolies. Generally speaking radio and television in Europe became state services and subject to heavy censorship. In the United States a few giant news services and networks emerged. The Hachette and Havas organisation in France took control of many of the small to medium sized newspapers and the conservative Axel Springer clique in West Germany gained control of nineteen newspapers with a total circulation of eighteen million. In 1970 five newspapers reached more than two hundred thousand readers each in Italy. “Many of the major British newspapers were almalgamated during the sixties by the Lord Rothermere, Lord Thomson and Cecil King groups. In the Soviet Union and Eastern Europe, all the media were state controlled. Whether privately or state controlled, however, the mass media represented a revolution in communications that enabled them to exert unprecedented influence over public opinion.” [1]

Since Robert Anchor described this process of media concentration in 1978 the mass media have meanwhile become even more monopolized. In 1983 the number of major mass media companies in the US shrank from several hundred in the 1950s to about 50. “These fifty corporations in 1984 became twenty-six in 1987, twenty-three in l990, and then less than twenty in 1993. In 1996 the number of media corporations with dominant power in society was closer to ten. Today it is at most eight…” [2]

QUESTION: In an age that witnesses (i) the proliferation of nuclear weapons and other dangerous technologies; and now (ii) the legal freedom of political candidates to lie [3]

WHERE DOES THE MONOPOLISATION OF MASS MEDIA LEAVE US?


[1] ‘The Modern Western Experience’ by Robert Anchor, University of Southern California. 1978. Prentice Hall Inc, Englewood Cliffs, New Jersey 07632. ISBN 0-13-599357-1. Pages 272-273.

[2] A thesis submitted by GRAEME CHEADLE to the European University Center for Peace Studies Stadtschlaining/Burg, Austria in partial fulfillment of the requirements for an MA degree in Peace and Conflict Studies 24,806 WORDS (91 PAGES). MAY 2005

[3] ‘Split court says candidates can lie’ by Ralph Thomas.Seattle Times Olympia bureau, Friday, October 5, 2007. http://seattletimes.nwsource.com/html/localnews/2003926782_scow05m.html

In thinking about medical care for my debate, I have been thinking about the shenanigans of the insurance companies.

The Marginal Revolution blog points to an insurance policy to cover businesses whose insurance providers refuse to pay. How long will it be before people with people will need to buy comparable policies for their medical care.

"New Product Covers Legal Costs If Buyers Decide to Challenge Claim Denial." Sclafane, Susanne. 2008. National Underwriters Property and Casualty.

The risk that a claim won’t be paid -- a potential downside that every buyer of insurance faces -- was an uninsured exposure until recently, according to the developers of a new policy to provide coverage so that risk managers can contest such rejections.

The new coverage, available to businesses of all sizes, will pay up to $250,000 in legal expenses associated with contesting the denial of an insurance claim under a commercial policy.

We know that wrongful coverage denials occur in our industry. There’s a reason coverage attorneys exist today,” Mr. White [Jason White, a managing director for Professional Services Group of Swett & Crawford, in the Los Angeles office of the Atlanta-based wholesale brokerage] said, explaining the impetus for the product launch. In fact, he noted, the idea came from a coverage law firm—Surdyk & Baker in Chicago.

Obama and GOP Energy Arguments

I am going to probably annoy all my co-bloggers and most readers as well by saying that I think that Obama should just flip flop and agree to let states allow oil drilling offshore beyond a 50 mile limit, if they want to, granting this GOP policy line. While in 1969 near inshore spills ended up on beaches in Santa Barbara (triggering the nationwide ban), and there were oil spills in the Gulf of Mexico during Hurricane Katrina, most such drilling would be relatively harmless, like that in the North Sea. Now, I am not claiming that such drilling would lower oil or gasoline prices or is any long or short term solution for US energy problems. It most definitely is not, and Obama clearly should continue to put the emphasis on conservation and better technologies as he is. However, as a strictly political matter it seems that a majority of Americans believe the GOP line on this that such drilling will help, and I fear that McCain will be able to sway some voters in certain crucial states by pushing this line, which has been picked up big time by the usual claque of commentators on Fox News and elsewhere, being endlessly and repeatedly pushed like a Big Lie.

Another line that is being pushed by these folks is that the "US has more oil than Saudi Arabia (!)" which suggests that "energy independence " might be viable, if we were only willing to go for it. The basis for such claims are the likely large amounts of shale oil the US has in western Colorado, Wyoming, and Utah. However, such oil is most likely not producible at less than $95 per barrel, and I do not see the companies viewing it as sufficiently likely the price will stay above that to do it. There is also the very serious problem of enormous water requirements (and pollution resulting of multiple sorts), which are serious problems out there. Estonia is producing shale oil to get out from under reliance on the Russians, but I saw a report that they are using 91% of their water to do so. I find that number hard to believe, especially given that they have a lot of water, but even if that number is exaggerated quite a bit, it is a sign of how water-hungry shale oil production is. So, no, I see no reason for Obama to go along with that one at all.

Spencer Ackerman is a national treasure!

http://attackerman.firedoglake.com/2008/07/13/i-fought-the-law-and-i-won/

Andrei Shleifer, Billionaire?

David Warsh has done some interesting investigative pieces about Shleifer. The link in the article below gives an update of Shleifer, but he may underestimate Shleifer's wealth by quite a bit.

http://www.economicprincipals.com/issues/2008.06.01/320.html

The article linked here suggests the wealth of Shleifer may be immense. To his credit, Shleifer still does active economics work, but still ....

Fiscal Shamity

Due to the advertising you see on the left, EconoSpeak has a karmic debt to repay concerning the Peterson Institute. In that light, please deplore with me the free pass given to Peterson’s fear mongering in today’s NY Times. All the usual obfuscations were served up: bogus projections of Social Security, the lumping together of Social Security and Medicare, the specter of a supposedly-unprecedented increase in the percentage of retirees in the population. The headline reflects the tone of the article: swallow the gunk without asking any questions.

As for the present, a fiscal deficit of 4% of GDP (first quarter 2008) is entirely reasonable for an economy sinking into a recession. (Spending priorities are bonkers, but that’s another matter.) Long term, Social Security doesn’t need to be fixed; health care does, but this is not primarily a fiscal issue. And the real monster in the closet is the current account deficit, which goes completely unmentioned by either Peterson or his interviewer.

A billion dollar PR budget can’t turn this sludge into syrup.

A Brief History of Privatization: Fannie Mae and Ginny Mae as Exemplars?

I am writing this to provoke a conversation rather than as a demonstration of my expertise. Here was one of the first New Deal agencies go under. What was the interest in privatizing Fannie Mae during the Johnson administration? Was it the Democrats close ties with the savings and loan industry?

Because these two agencies had apparent (but nonexistent) government guarantees, they apparently had an advantage over banking interests. For a long time, well before anyone fretted about housing crises, there was a great deal of antagonism toward these agencies. During that period, I was wondering what the elimination of these two agencies would mean for housing. Now that they are in trouble, the government stands ready to rescue the investors -- another instance of the Bear Stearns syndrome. But barely anything to help the poor souls who were victimized.


On a personal note, my daughter was wanting to buy a home about a couple years ago. Her friends sent her to stay broker to explain how she could fudge her nonexistent income and get a home. She was told she could create a good credit score, even as she had no credit.

Okay, here is my central question: has there ever been a privatization that has worked to the benefit of society?

Can Tax Cuts Lower Economic Growth?

Free Exchange claims tax cuts raise income growth:

Mr Drum also appears to easily reject supply-side economics. There seems to be a temptation lately to label anyone who even dares mention supply-side economics, without immediately deeming it the silliest idea born to a napkin, an economic heretic. That's unfortunate. True, with the exception of very high marginal tax rates, a tax cut will generally not pay for itself. But there exists ample empirical evidence that cutting income taxes does increase growth. Thus, the long-run impact of a permanent tax cut is still up for debate. The effect of lower-income tax rates on labour supply is mixed. But it does seem, at the very least, lower tax rates decrease the amount of tax evasion. Writing off supply-side economics as a blatant fallacy is as much of a 1990s relic as wearing a goatee.

Exuberant Rationality has one objection:

it seems wrong-headed to keep taxes this low when government debt is ridiculously high and growing faster than ever, our infrastructure is in dire need of maintenance, and fee-based services (such as publicly-provided higher education) are becoming more expensive.

Let me suggest another. The claim that tax cuts lead to more output via incentive effects presumes that we are talking about fiscally neutral reductions in taxes and government spending. What we got from the Reagan and Bush 43 administrations – and what is proposed by McCain – is a reduction in taxes that is much larger than any proposed reduction in government spending (government spending as a share of GDP actually rose under Bush43). The impact of this fiscal stimulus was a reduction in the national savings rate, which lowers long-term growth.

As Exuberant Rationality notes, fiscal restraint might entails less public investment in infrastructure and education. As a pro-growth liberal, I’m in favor of more public investment in infrastructure and education as less investment likely would hurt long-term growth.

A Little Insight into the May Trade Report

The headline in the NY Times says the improvement is the result of a weak dollar, but, as usual, we learn more from folks like Brad Setser and Menzie Chinn, along with a quick perusal of weekly petroleum delivery data from our hardworking friends at the US Energy Information Agency.



For once, oil imports are down, even on a value basis. A 10% physical decline in imports is consistent with a 6% decline in total physical consumption. A rough cut at the EIA delivery data, however, shows a decline of only about 1% from April to May. The interesting information is not the total, though, but the composition. Motor vehicle and aircraft fuel were up, but were more than offset by large declines in heating fuels. There is no evidence of seasonality in these series, so we can’t jump to conclusions, but it may not be unreasonable to suppose that this boost to the US trade position is less sustainable than a similar reduction in travel might be. Those who follow these fuel data more closely than I do should feel free to chime in.

Meanwhile, if Chinn is right and contemporaneous measures may be overstating GDP, some to all (or even more than all) of the trade improvement could be attributable to a US slowdown. This is entirely in line with economic theory, but it is not such good news: if the US has to bring down its trade deficit substantially on the back of its economic growth, we are in for one long, miserable ride.

Actually, it’s worse than that, since, in the context of existing financial fragility, a slump in the real economy portends disorder in financial markets. One reason among many: the longer and deeper the incipient recession, the further and faster housing prices will fall, and the greater will be the default risk so liberally distributed across a range of credit instruments. And to return to my repeating nightmare, it is near certain that any serious implosion of US financial markets will morph almost immediately into a dollar crisis. If I were Ben Bernanke I’d be laying in a supply of my favorite hard stuff.

Falling from the Period of Financial Distress into the Panic and Crash

In 1972, Hyman Minsky described the "period of financial distress," in a paper in a journal that no longer exists (Reappraisal of the Federal Reserve Discount Mechanism, vol. 3, pp. 97-136), "Financial Instability: The Economics of Disaster." Charles P. Kindleberger picked up on this and followed Minsky's analysis in his famous book, _Manias, Panics, and Crashes: A History of Financial Crises_, the 4th edn of which appeared in 2000 (the last one by him; he is now dead, but the pubbers have others hacking away at it for more editions, gag). The period of financial distress is a gradual decline after the peak of a speculative bubble that precedes the final and massive panic and crash, driven by the insiders having exited but the sucker outsiders hanging on hoping for a revivial, but finally giving up in the final collapse. According to Appendix B of Kindleberger's 2000 edition, 37 of the 47great historical speculative bubbles exhibited such a period before the final crash, even though all the theoretical models predict a crash immediately following the peak with no such period.

In 1991 I published the first mathematical model of such a phenomenon in my book _From Catastrophe to Chaos: A General Theory of Economic Discontinuities_ (Kluwer, Chap. 5), still my most cited work at over 150 according to Google Scholar, although nobody seems to have noticed this particular contribution in the book. In 1997, I published a paper describing this model (and related matters) in a paper that reproduced a plenary lecture given in 1996 in Berkeley, "Speculations on Nonlinear Speculative Bubbles," Nonlinear Dynamics, Psychology, and Life Sciences, Oct. 1997, vo. 1, no. 4, pp. 275-300. This paper has never been cited. More recently I have coauthored a paper that has been under long review by a journal (now under a long revise and resubmit, still waiting for an answer) with Mauro Gallegati and Antonio Palestrini, "The Period of Financial Distress in Speculative Markets: Interacting Heterogeneous Agents and Financial Constraints" (available at my website: http://cob.jmu.edu/rosserjb), that lays all this out in much more up-to-date mathematical modeling.

So, why am I boring all of you with this self-citation? Well, Dean Baker is constantly claiming credit for his forecasts of doom and gloom. It looks like we might be finally reaching the big crash in the US mortgage market after a period of distress that started last August (if not earlier). I and my coauthors are the only people to have provided actually formal models of this phenomenon, beyond the verbal and historical discussions provided by the brilliant Minsky and Kindleberger (both of whom I knew, but both of whom are now dead). I have been forecasting this in unpublished lectures all over the globe for years, but never have put it up into the blogosphere. So, I am claiming credit, to the extent it is due, although the basic ideas were clearly laid out earlier by Minsky and Kindleberger.

I will add one more story. Three years ago I presented an earlier version of the still-unpublished paper with Gallegati and Palestrini in Tokyo at Chuo University. In the middle of the presentation the biggest earthquake in 13 years hit Tokyo, in fact right at the moment I said the word, "crash." Some of the Japanese in the audience blamed me, not entirely humorously, for having caused it.