Paul Krugman has a book review on three books about the causes of the financial crisis and/or ways to get the economy going again. One of the books is by Rajan, Fault Lines, a book I commented on favorably in an earlier post. As might be expected, Krugman is critical of Rajan whereas I was not. Rajan has a response to Krugman also. Rajan's criticisms of Krugman's review I think are exactly right.
Krugman discusses four causes of the housing bubble that economists and others have identified. The first is the low interest rate policy of the Fed through most the the 2000s. Second, the "global savings glut." Third, financial innovations, and finally government programs.
Rajan cited government policy and the low interest rates in particular. Krugman rejects both, and argues instead for financial markets and a "Minsky moment."
Krugman's arguments that Fed policy and government policies were not responsible are specious, as Rajan shows. Krugman says the Fed couldn't be responsible because there were housing bubbles in Europe also and the European Central Bank was not pursuing low interest rates like the Fed. But, as Rajan notes, the Fed pushed the interest rate to 1% and the European Central Bank to 2%, so both were low by historic standards. Krugman aruges that Fannie and Freddie were not responsible for subprime mortgages, but they were part of the overall government emphasis, regardless of political party, to extend homeownership.
This review by Krugman is further evidence that Krugman has ceased to be an economist and is a political columnist instead. The evidence he cites to back his claims or refute other claims would not be accepted by most teachers if offered by their students. Krugman is so obsessed with showing that Republicans are at fault for all the ills and Democrats are not, that he seems to be identifying and interpreting evidence through biased eyes. As Rajan notes, government officals of both the Clinton and the Bush administrations were involved in policies that help bring about the bubbles and the crisis.
Tuesday, September 21, 2010
Wednesday, September 15, 2010
Some Good Articles in the Wall Street Journal
The Wall Street Journal has had a couple of interesting op-ed pieces recently. Two are somewhat related. An op-ed piece by Robert Barro discusses "Obamanomics" from an incentive point of view, and finds Obamanomics lacking. In today's journal, Alberto Alessina provides a piece that talks about research he has done on tax cuts versus stimulus. The evidence points to tax cuts being more effective than stimulus spending. (Naturally, Krugman disagrees.) Finally, and on a different note altogether, Danish statistician, writes a piece about the polarization of the debate concerning global warning. He persistently has said he believe global warming is a problem and is human made, but that solutions other than massive cut backs in carbon emissions are available. Finally some in the media have seen his recent comments but take it as a change of heart. His piece points to the problems in todays' polarized ideological environment, and I suspect they can be extrapolated to many issues today.
Monday, September 13, 2010
Basel III Accord
The news release from the Bank for International Standards concerning the new capital requirements for banks can be found here.
Wednesday, September 8, 2010
Assorted Links
Several interesting papers and articles are available.
Paper by Jeremy Stein on securitization and the financial crisis.
Bernanke's testimony before the financial crisis committee.
Interview with William R. Allen who taught at UCLA for many years about the "glory " years of UCLA. University Economics, a principles text co-authored by Allen and Armen Alchian remains the best I have ever seen, although perceived by many as too difficult for most undergraduate students. I was a for Allen at one time, along with many other grad students there.
Paper by Jeremy Stein on securitization and the financial crisis.
Bernanke's testimony before the financial crisis committee.
Interview with William R. Allen who taught at UCLA for many years about the "glory " years of UCLA. University Economics, a principles text co-authored by Allen and Armen Alchian remains the best I have ever seen, although perceived by many as too difficult for most undergraduate students. I was a for Allen at one time, along with many other grad students there.
Tuesday, September 7, 2010
$50 Billion for Infrastructure
President Obama is calling for a $50 billion transporation bill to increase spending on infrastructure. According to the Wall Street Journal article, the President said, "All of this will not only create jobs now, but will make our economy run better over the long haul."
In previous posts, I noted that much that was in the stimulus package was not really stimulus, but that infrastructure spending makes sense because it does increase the productivity of the economy over time. The original stimulus bill called for almost $50 billion for the Department of Transportation. According to the government's web page for tracking the recovery, the Department of Transportation has spent $18.5 billion so far. This is since passage of the Act in early 2009. The government has not been very quick on spending money that may actually be stimulative and a true investment.
In previous posts, I noted that much that was in the stimulus package was not really stimulus, but that infrastructure spending makes sense because it does increase the productivity of the economy over time. The original stimulus bill called for almost $50 billion for the Department of Transportation. According to the government's web page for tracking the recovery, the Department of Transportation has spent $18.5 billion so far. This is since passage of the Act in early 2009. The government has not been very quick on spending money that may actually be stimulative and a true investment.
On the Duralbility of False Statistics
Occasionally a statistic gets into the public domain through the news media that turns out to be untrue. A recent article in the Wall Street Journal illustrates this. We often hear thta the typical American will go through about seven careers in a lifetime. I have heard that claim at college graduations and from politicians. Carl Bialik explores the truth to this claim and finds that there is no support for it. Often, the source is listed as the U.S. Bureau of Labor Statistics, but the data are not tracked by the BLS.
A number of years ago I read an article in which the author searched for the source of a claim he had seen in print numerous times. The claim was that one in four coeds would be raped at a particular university in the four years they attended the school. The author said he found it hard to believe. If it were true, parents would have to be crazy to let the daughters attend the school. He tracked it down to a speech by someon who came up with the number by taking the reported number of rapes and increasing the number by some factor to account for unreported rapes.
Bjorn Lomborg, in his book, The Skeptical Environmentalist, offers another example. The press often would quote a statistic that 40,000 species are lost every year. Where did the estimate come from? Lomborg found the source in a book by Norman Myers, The Sinking Ark. Myers took a number of 100 species a year, which was a "hazarded guess," at a 1974 conference. Myers then stated that the number seemed low. He then supposes that the final 25 years of the 20th century would witness the elimination of 1 million species. This works out to 40,000 a year. But the number was not based on evidenc; it was pulled out of the air.
Too many of us assume that a number that appears in a newspaper must be true. But reporters are often not statistically trained, and apparently seldom try to find the source of a claim. Some skepticism is needed by all of us.
A number of years ago I read an article in which the author searched for the source of a claim he had seen in print numerous times. The claim was that one in four coeds would be raped at a particular university in the four years they attended the school. The author said he found it hard to believe. If it were true, parents would have to be crazy to let the daughters attend the school. He tracked it down to a speech by someon who came up with the number by taking the reported number of rapes and increasing the number by some factor to account for unreported rapes.
Bjorn Lomborg, in his book, The Skeptical Environmentalist, offers another example. The press often would quote a statistic that 40,000 species are lost every year. Where did the estimate come from? Lomborg found the source in a book by Norman Myers, The Sinking Ark. Myers took a number of 100 species a year, which was a "hazarded guess," at a 1974 conference. Myers then stated that the number seemed low. He then supposes that the final 25 years of the 20th century would witness the elimination of 1 million species. This works out to 40,000 a year. But the number was not based on evidenc; it was pulled out of the air.
Too many of us assume that a number that appears in a newspaper must be true. But reporters are often not statistically trained, and apparently seldom try to find the source of a claim. Some skepticism is needed by all of us.
Friday, September 3, 2010
The Recession and Keynesianism Once Again
Christina Romer's farewell to the National Press Club as she leaves her post as chair of the Council of Economic Advisors caught my eye because I think it might have supported some statements I made in yesterday's post. The title is, "Not My Father's Recession" and refers to the recession in the early 80s that I referred to yesterday. She correctly noted that the sources of the two recessions differed and that led to differences in the depth of the recessions and caused economists to misinterpret events in late '08 and early '09. However, I am disappointed in that she didn't take the next step. She still argues for a Keynesian diagnosis and solution. She offers some reasons why the stimulus seems to have been less effective than desired, but doesn't consider other options than increased government spending. Romer writes in Keynesian terms, "The only surefire ways for policymakers to substantially increase aggregate demand in the short run are for the government to spend more and tax less. In my view, we should be moving forward on both fronts."
Paul Krugman's most recent op-ed piece in the New York Times calls on President Obama to push for a very large stimulus package. He argued in early '09 that the stimulus plan was too small and should have been much larger. He claims that the evidence is that the stimulus worked but was too small and another round is needed.
It seems to me that the stimulus plans are similar to another program used last year--the "Cash for Clunkers" program. The program stimulated auto sales while it lasted, but then there was a big drop in car sales after the program ended. The program merely shifted the timing of auto purchases and didn't impact overall demand for cars. Similarly, increased government spending increases GDP by definition, but may not jump start the rest of the economy if there are structural problems that need to be corrected, such as too much debt on the balance sheets of households. As Krugman notes in his piece, as the stimulus plan has wound down, the impact on GDP has fallen. He says this shows we need another round of stimulus. I ask, "When will the need cease?" I think the answer is when households have repaired their balance sheets. To me, this suggests the emphasis should be on reducing the tax burden on households rather than increase government spending. The increased cash flow may not generate increased spending immediately as people pay down debt, but will get us to a point when people can feel more comfortable spending again.
Paul Krugman's most recent op-ed piece in the New York Times calls on President Obama to push for a very large stimulus package. He argued in early '09 that the stimulus plan was too small and should have been much larger. He claims that the evidence is that the stimulus worked but was too small and another round is needed.
It seems to me that the stimulus plans are similar to another program used last year--the "Cash for Clunkers" program. The program stimulated auto sales while it lasted, but then there was a big drop in car sales after the program ended. The program merely shifted the timing of auto purchases and didn't impact overall demand for cars. Similarly, increased government spending increases GDP by definition, but may not jump start the rest of the economy if there are structural problems that need to be corrected, such as too much debt on the balance sheets of households. As Krugman notes in his piece, as the stimulus plan has wound down, the impact on GDP has fallen. He says this shows we need another round of stimulus. I ask, "When will the need cease?" I think the answer is when households have repaired their balance sheets. To me, this suggests the emphasis should be on reducing the tax burden on households rather than increase government spending. The increased cash flow may not generate increased spending immediately as people pay down debt, but will get us to a point when people can feel more comfortable spending again.
Thursday, September 2, 2010
Economic Discontent as Noted by Michael Boskin
An op-ed piece in today's Wall Street Journal is of interest about the slowness of the recovery, but I think also fails in an important way. Michael Boskin argues that the recovery promised by the Obama administration has fallen short. It is hard to disagree with that. He then compares the GDP growth rate in the 4 quarters and 12 quarters after the trough of some past recessions--1975 and 1983. The growth rates were much higher in the previous two recessions than in this recession.
My concern is that not all recessions are alike and that the cause of a recession may be important in determining the pace of recovery. Both the 1975 and 1983 recessions were related to supply side issues such as rising oil prices, and a recent past of high inflation. The Fed tried to reduce inflation by raising interest rates. In the case of 1975, the Fed soon quit raising interest rates because of the recession while in the early 80s, the Fed held firm. Once inflation was reduced substantially and people recognized it, the economy was in a good position to grow rapidly.
The current recession has a different source. Fed policy was not tight; in fact it was probably too loose. Debt was the big problem. Consumers were spending beyond their means and running up debt. When housing collapsed and many households realized their wealth was not as great as they had thought, they reduced spending and worked on increasing savings and reducing debt. It takes time to do this and we cannot expect consumers to return to their old spending patterns in a short period of time. Further, as noted in Reinhart and Rogoff's book, This Time is Different, recessions that begin with financial crises tend to last longer. That is, the cause of the recession matters.
My concern is that not all recessions are alike and that the cause of a recession may be important in determining the pace of recovery. Both the 1975 and 1983 recessions were related to supply side issues such as rising oil prices, and a recent past of high inflation. The Fed tried to reduce inflation by raising interest rates. In the case of 1975, the Fed soon quit raising interest rates because of the recession while in the early 80s, the Fed held firm. Once inflation was reduced substantially and people recognized it, the economy was in a good position to grow rapidly.
The current recession has a different source. Fed policy was not tight; in fact it was probably too loose. Debt was the big problem. Consumers were spending beyond their means and running up debt. When housing collapsed and many households realized their wealth was not as great as they had thought, they reduced spending and worked on increasing savings and reducing debt. It takes time to do this and we cannot expect consumers to return to their old spending patterns in a short period of time. Further, as noted in Reinhart and Rogoff's book, This Time is Different, recessions that begin with financial crises tend to last longer. That is, the cause of the recession matters.
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