Liars

This is a follow up to my previous post.

Part 1:  Capitalism later

When I was young I believed the GOP was more supportive of small government than the Dems.  I’m not sure why I believed this; when I came of age Nixon was president, and he was arguably the most anti-libertarian president of my lifetime (with the important exception of ending the draft.)

Supporters of the GOP always used to say that the president (Nixon, Ford, Reagan) wanted smaller government, but the Congress wouldn’t go along.  When the GOP finally took Congress in 1994, the alleged roadblock was President Clinton.  Finally, in 2001 nirvana arrived for us libertarians; the GOP took all branches of government, and we got . . . one of the biggest new entitlement programs in history, a massive increase in the National Security State, and a much greater Federal involvement in education.  The fastest growth in Federal spending since LBJ was president (for several years.)

That should have ended any illusions about the GOP being the party of small government, except to the most hopelessly deluded.  But with the rise of the Tea Party movement we are again hearing this meme—the GOP wants to trim the size of government.  For instance, the GOP has spent the last two years bashing Obama for not reining in Fannie and Freddie.  And now that they have taken Congress, the Wall Street Journal says they are ready to act:

Earlier this year, leading House Republicans proposed to privatize mortgage giants Fannie Mae and Freddie Mac or place them in receivership starting in two years.

Now, as Republicans prepare to assume control of the House next week, they aren’t in as big a rush, cautioning that withdrawing government support in the housing market should be gradual. . . .

Republicans were backing a bill by Rep. Jeb Hensarling (R., Texas) to start cutting the government’s ties to the mortgage giants or begin winding them down in two years; if they were deemed financially viable, they would become fully private within five years.

“Of all the dumb regulation that caused our economic crisis, none was dumber than that which created the (Fannie and Freddie) monopolies,” Mr. Hensarling said in March. . . .

Many Republicans now concede that a speedy exit may not be practical, because Fannie Mae and Freddie Mac have such a dominant position in the nation’s housing market. Mr. Garrett said he has “not established a specific timeframe for winding them down.”

[Insert obligatory Claude Rains exclamation here.]

Some might argue that the GOP is simply facing reality, the economy is weak and a drop in the housing market might further depress aggregate demand.  But since when is the GOP worried about AD?  They have been insisting that the Fed is making a mistake in trying to boost AD with a more expansionary policy—that this would merely bail out the Obama administration’s failed big government policies.  No, the GOP is not motivated by a desire to boost AD.  And neither are they opposed to more intervention in the free market.

The mostly like explanation is that the GOP’s paymasters in real estate and banking quietly had a word with them after the election.  I’d guess it went something like this:

“We greatly appreciate the help from the Tea Party in getting you guys back into a position of power.  But now these neophytes need to step aside and let the big boys take over.”

So which is it?  Is the GOP lying when they say we don’t need more AD, and that Fed policy is too easy?

Or are they lying when they say we need smaller government, and that the housing fiasco was caused by people like Barney Frank, who promoted the GSEs? 

Part 2:  Regulation later

And then there’s the Dems.  They used the subprime fiasco to rail against unregulated free market capitalism, the so-called “market fundamentalism” of people like . . . well people like me.  Of course the true market fundamentalists were always opposed to the housing/banking system, which was riddled with moral hazard.  Unfortunately there were plenty of so-called market fundamentalists who cheer-leaded the “deregulation” of banking the the US, Ireland, Iceland, etc, thereby discrediting the entire movement.

In any case, the Dems did get around to “re-regulating” the housing mortgage system in the US.  More than a kilo-page of re-regulation.  There’s just one thing, they forgot to ban un-insured subprime mortgages.  That’s right, the alleged cause of the entire mess, which is already banned in many countries the Dems seem to hold up as models, was given a free pass.  There is no requirement that buyers put at least 20% down.  Indeed there is no requirement that they put even 5% down.  Nor are there any plans to phase in such a ban over a 5 or 10 year time frame.

So if regulation isn’t really the motivation of the Dems, what is?  The same WSJ article provides one answer:

Democrats tend to favor a more active role for the government in housing to ensure that underserved communities have access to mortgages.

So there you are.  The GOP doesn’t favor small government and the Dems don’t favor regulation.  Instead the GOP favors a bloc of people who vote for the GOP and contribute money to their campaigns, and the Dems favor a bloc of people who vote for the Dems and contribute money to their campaigns.

I’m not so cynical (yet) that I would deny there are some idealists in politics.  My hunch is that some politicians (even some I don’t like such as Barney Frank) are driven partly by idealistic motives.  After all, Frank recently mentioned abolishing Fannie and Freddie.  But whatever idealism exists is not strong enough to overcome the special interest groups. 

Fortunately, good governance is not a zero-sum game, so once and a while the two parties come together and strike a deal that is win-win (such as the 1978 deregulation bill, or the 1986 tax reform, or the 1996 welfare reform.) 

The most one can hope for is that some creative politician will be able to cobble together another such compromise sometime in the next 10 years.   Of course it would be much easier to do if we were Switzerland, Denmark, or Singapore.  Heck, if we were even Canada or Australia.  But we are a nation of 310 million people with very diverse cultural values and perspectives on economics. 

Happy New Year!


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67 Responses to “Liars”

  1. Gravatar of Alexander Hudson Alexander Hudson
    29. December 2010 at 17:54

    I think the problem is that our system of government is specifically designed to reward special interests, and to make efficient and effective government difficult to obtain. In other words, I think it’s a structural problem.

  2. Gravatar of Alexander Hudson Alexander Hudson
    29. December 2010 at 18:01

    You said: “Dems favor a bloc of people who vote for the Dems and contribute money to their campaigns.”

    I certainly don’t dispute this, but it seems out of place in the context where it appears, i.e. Democrats wanting to “ensure that underserved communities have access to mortgages.” Poor people don’t vote as often as everyone else, and they don’t have much money to contribute to campaigns. So this seems more like a case of wanting to accomplish some “liberal” goal, and failing to account for the obvious economic consequences.

  3. Gravatar of Alexander Hudson Alexander Hudson
    29. December 2010 at 18:02

    Oh, and Happy New Year!

  4. Gravatar of David L. Kendall David L. Kendall
    29. December 2010 at 18:10

    The Incumbent party is full of Democrats and Republicans. All that really changes is the relative proportions.

    Concentrated benefits financed by dispersed costs explains much of what we get from Washington. Is it really true that the latest tax bill extended ethanol subsidies another year? Just as you say; liars.

  5. Gravatar of Chris Chris
    29. December 2010 at 18:55

    Ds threatened to filibuster anything meaninful during 2001-06. GOP couldn’t even get medical malpractice to the floor of the Senate.

  6. Gravatar of Chris Chris
    29. December 2010 at 18:56

    …malpractice reform, i mean. Spending increases were the only thing Ds wouldn’t filibuster.

  7. Gravatar of Mark A. Sadowski Mark A. Sadowski
    29. December 2010 at 18:57

    Scott,
    I gather you’re referring to this Claud Rains quote:

    Captain Renault: I’m shocked, shocked to find that gambling is going on in here!
    Croupier: Your winnings, sir.
    Captain Renault: [sotto voce] Oh, thank you very much.

    Happy New Year!

  8. Gravatar of Richard A. Richard A.
    29. December 2010 at 19:00

    I remember when the GOP took over congress in 1995. I had high expectations that they would do away with the agriculture subsidies. Boy was I wrong. The GOP is a pro business party not a free market party.

  9. Gravatar of Richard A. Richard A.
    29. December 2010 at 19:09

    [Insert obligatory Claude Rains exclamation here.]

    http://www.youtube.com/watch?v=T1DEG6BWgp0

  10. Gravatar of Brett Brett
    29. December 2010 at 19:28

    when I came of age Nixon was president, and he was arguably the most anti-libertarian president of my lifetime (with the important exception of ending the draft.)

    Nixon and his people did set the stage for ending the stranglehold that the three big networks had on television broadcasting, by promoting the liberties for cable television to grow uninhibited.

  11. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    29. December 2010 at 19:50

    To be fair to Republicans, Scott, back in 2005 they had legislation that would have denied the FMs the ability to hold portfolios of MBS entirely–maybe that’s what Krugman was thinking of when he wrote in summer 2008 that it was illegal for the GSEs to hold junk mortgages–but the Senate Dems filibustered it, and it died. Today, they’re a mere minority in the Senate, so what chance is there to reform them now.

  12. Gravatar of Mark A. Sadowski Mark A. Sadowski
    29. December 2010 at 19:59

    Patrick R. Sullivan,
    You wrote:
    “–maybe that’s what Krugman was thinking of when he wrote in summer 2008 that it was illegal for the GSEs to hold junk mortgages–”

    As I recall Krugman merely made the factual observation that not one subprime mortgage was ever issued according to F&F guidelines. That’s because that’s the very definition of “subprime”.

    P.S. You’re just about the most “Republican” Republican I’ve ever had the displeasure of debating. Have you ever pulled the lever for a Libertarian?

  13. Gravatar of ssumner ssumner
    29. December 2010 at 21:43

    Alexander, I have two responses:

    The poor and lower middle class (combined) are a very sizable voting bloc. In addition, they also get money from special interest groups that provide housing to these groups.

    David, Yes, a fellow cynic.

    Chris. But that doesn’t even come close to explaining why the government grew so dramatically under Bush, or why it shrank under Clinton. Even if the Dems weren’t able to filibuster, it would have made little difference.

    Mark, Yes, I sort of assumed everyone’s heard that one. But then as time goes by perhaps the younger generation is less interested in these old B&W films than my generation was.

    I recently saw a list of “classic” romantic comedies, and they were mostly from the 1990s.

    Richard, I think we’ve all gone through that disillusionment. Of course I probably should have noted that there are public choice models that explain all this.

    Brett, Thanks, I didn’t know that. But his list of anti-libertarain accomplishments was incredibly long, and in a wide range of areas.

    Patrick, Good point, I sort of knew that, but not the specifics.

    Mark, This blog attracts people of all political viewpoints. In any case, there is plenty of blame to go around for the sub-prime fiasco.

  14. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    29. December 2010 at 22:11

    ‘As I recall Krugman merely made the factual observation that not one subprime mortgage was ever issued according to F&F guidelines.’

    Your recollection is mistaken, he said:

    ‘Fannie and Freddie had nothing to do with the explosion of high-risk lending. . . . In fact, Fannie and Freddie, after growing rapidly in the 1990s, largely faded from the scene during the height of the housing bubble. . . . Partly that’s because regulators, responding to accounting scandals at the companies, placed temporary restraints on both Fannie and Freddie that curtailed their lending just as housing prices were really taking off. Also, they didn’t do any subprime lending, because they can’t . . . by law. . . . So whatever bad incentives the implicit federal guarantee creates have been offset by the fact that Fannie and Freddie were and are tightly regulated with regard to the risks they can take. You could say that the Fannie-Freddie experience shows that regulation works.’

    At the time Krugman wrote that, Fannie and Freddie held about $1 trillion in subprime and ARMs. But, had the Republicans had their way, he could have been correct.

  15. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    29. December 2010 at 22:50

    ‘Chris. But that doesn’t even come close to explaining why the government grew so dramatically under Bush, or why it shrank under Clinton.’

    The govt didn’t grow under Bush, it was about 20% of GDP most of the time. Lower than under Reagan.

    As for it shrinking under Clinton, two things; the dot com boom accelerating GDP growth (the denominator) and the spending caps of the Budget Act of 1990 restricting spending (the numerator).

  16. Gravatar of W. Peden W. Peden
    30. December 2010 at 00:01

    Alexander Hudson,

    That’s a very good point, but although the poor are not part of the all-important Director’s Law coalition, people who want the state to do something about the poor are in the middle 55%. A lot of very well-intention, very good middle-class people want the state to take a more active role in helping the poor.

    I’m so nice about them because I’m one of them, I just think that the conventional welfare state is such an inefficient way of doing it and that it tends to get hijacked by people who don’t need state assistance, like the middle and upper class. In the UK, we even have riots when the principle that welfare exists for the poor is applied.

    Patrick R. Sullivan,

    Interesting find re: Krugman.

  17. Gravatar of Mike Sandifer Mike Sandifer
    30. December 2010 at 01:54

    Perhaps you will agree that with all the Democrats’ failings, they’ve done a better job of keeping promises than Republicans.

    I find your arguments that we should require 20% down for mortgages and more importantly, reforming monetary policy so that we usually seek to maintain NGDP compelling. The complex financial reform bill could make things worse in some ways.

    In addition to the disappointments you mention, I’d like to see complete transparency with regard to all assets owned by any financial institution, with most or all derivatives such as MBS, CDS, CDOs, etc. standardized and traded in open markets. The Democrats didn’t go far enough in this direction. I do however like the idea of a consumer protection agency.

    As I’ve said in the past, we need a more libertarian society in many ways, but we have to face the fact that there are types of decisions that consumers regularly get wrong. This is true even with respect to even basic financial decisions, such as whether to take out harsh ARMs when there are very low interest rates.

    Like many seem to want, we should have required classes in high school that seek to make soon to be financial decision makers with a more sophisticated understanding of the products and services they’ll need in the future. I think some requirements to take basic macro and micro econ, along with some American history and courses in behavioral and cognitive psychology would be helpful too.

  18. Gravatar of Mike Sandifer Mike Sandifer
    30. December 2010 at 02:13

    Perhaps you’ll also agree that Republicans have taken many of the stances they have over the last nearly 2 years simply to bring down Obama and Democrats, regardless of the negative consequences for constituents.

    For example, blocking unemployment extensions for the stated purpose of reducing unemployment is absurd considering the lack of jobs available, whatever one thinks of such benefits in general. And to me, limiting benefits to 99 weeks in many cases is indefensible.

  19. Gravatar of Lorenzo from Oz Lorenzo from Oz
    30. December 2010 at 04:11

    Gridlock is apparently great for stock market returns, unified government bad for stock market returns.

    As one would expect, the pro-business party was not quite as bad as its rival Party at unified government:
    Based on the data, the ill effects of unified government apply to both Republican (a 7.7 percent loss) and Democrat (a loss of 11.5 percent) unified governments. Since the best returns were when Clinton was President and the Republicans controlled Congress, things may be looking up.

  20. Gravatar of steve steve
    30. December 2010 at 07:14

    “At the time Krugman wrote that, Fannie and Freddie held about $1 trillion in subprime and ARMs. But, had the Republicans had their way, he could have been correct.”

    What was the date when Krugman wrote that? During the big run up in subprimes, the GSEs were losing market share. I would agree that the GSEs made a good dumping ground for the Fed/Treasury.

    Steve

  21. Gravatar of Bill Gee Bill Gee
    30. December 2010 at 07:46

    It is unfortuntate that politicians hold the levers of Monetary Policy because, as you say, their actions rarely meet their promises.

    While I’m sure there are some people in government who can see the need for creating a smaller government in order to save it from the economic abyss, the Republicans have already expressed their desire to do nothing of the sort. The Tea Party candidates who were lucky enough to get elected are being ignored by their Party, and those who were unlucky enough to be not elected are being politically assasinated so as to prevent them from ever running again. (Not that it makes me unhappy to see that happen, but it’s sad nonetheless.)

    Democrats, in the meantime, are adjusting to their new role as the “Party of NO” as the Republican majority tries to dismantle everything they’ve accomplished in the last two years.

    Economic policy? We’ve got more important things to think about – after all, there’s another election less than two years away.

  22. Gravatar of Indy Indy
    30. December 2010 at 07:59

    Let’s rephrase this question probabilistically. If I want “smaller government” (I put quotes around it because, in my experience, people mean very different things when they say it), under which party am I more likely to get it?

    You can say “It makes no difference whatsoever” which is kind of a common joke made by those estranged by the activities of the mainstream political organizations, but not at all an actual true statement about reality. So let’s be realistic.

    So, “Liars” and “Do it Later” parties they may be. But juxtaposing two centrist-compromises with (or capitulations to) political reality (and shared vulnerability to special interests) does not negate the notion that the parties will try to achieve as much of what they want as they can – and that they do, actually, want very different things and have very different visions of the role and size of government. See, e.g. Obamacare.

    So, again if one wants “smaller government with less regulation” where is one, especially a pragmatist that wants to support something with a shred of a chance of real success, supposed to go? A betting man trying to pick the best option among two bad choices holds his nose and goes with the party that, at least, pays lip service to the idea (even if they don’t live up to that promise), over the one that is constantly mocking the notion (even if they occasionally observe the rules of their ideals in the breach).

  23. Gravatar of Blackadder Blackadder
    30. December 2010 at 08:40

    The Incumbent party is full of Democrats and Republicans. All that really changes is the relative proportions.

    That sounds a lot like the Swiss concordance system, where the major parties have all been in coalition with each other since 1959.

  24. Gravatar of David L. Kendall David L. Kendall
    30. December 2010 at 08:46

    Indy, where does one go, indeed. I refuse to vote for the “lesser of two evils.” If a libertarian is on the ballot, I vote for the libertarian. If not, I vote a write in.

    The whole institution of voting is flawed to its core, in any case. It’s simple, really. As the professor in Heilein’s “The Moon Is A Harsh Mistress” asked, (more or less), under what conditions do two people (or 200 million people) have the right to do to another person what everyone agrees one person has no right to do to another?

    From my perspective, voting is a political charade that pacifies the masses into supporting the compulsion of the many by the few.

    Scott, if a “cynic” is one who believes that people make choices and take actions they believe will advance their personal goals, then yes, I am a cynic. It’s hard for me to imagine people choosing actions they believe will deter them from achieving their goals.

    Given the negative connotations most people have for the word “cynic,” though, I tend to avoid using it. “Cynic” is pretty much in the same camp as the word “greed;” mostly just a verbal bludgeon that people use to denigrate choices of others that don’t match up with their own preferences and values.

  25. Gravatar of Mark A. Sadowski Mark A. Sadowski
    30. December 2010 at 09:09

    Patrick R. Sullivan (and Steve),
    Now that you’ve quoted the article it’s easy to see what you’re referring to:

    http://www.nytimes.com/2008/07/14/opinion/14krugman.html

    (It’s also now clear you’re referring to the secondary market and not to the actual issuance of mortgages.)

    I don’t see anywhere in that article where Krugman wrote “that it was illegal for the GSEs to hold junk mortgages.” So what you said earlier is flatly untrue.

    What Krugman wrote was that “Fannie and Freddie, after growing rapidly in the 1990s, largely faded from the scene during the height of the housing bubble.” This is a verifiable fact.

    Between 2004 and 2006, when subprime lending exploded, F&F went from holding a high of 48 percent of the subprime loans that were sold into the secondary market to holding about 24 percent (according to Inside Mortgage Finance). So Krugman is on solid ground when he made that claim.

    I don’t care if F&F is privitized. It probably should be done someday. But if the Republicans did it right now the truth is there probably wouldn’t be any mortgage industry to speak of in this country for years to come. (No doubt the big boys with cigars pointed this out to them).

  26. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    30. December 2010 at 09:46

    ‘(It’s also now clear you’re referring to the secondary market and not to the actual issuance of mortgages.)’

    That wasn’t already clear because you didn’t know Fannie and Freddie don’t ‘issue mortgages’?

    ‘I don’t see anywhere in that article where Krugman wrote “that it was illegal for the GSEs to hold junk mortgages.” So what you said earlier is flatly untrue.’

    Didn’t you see: ‘they didn’t do any subprime lending, because they can’t . . . by law. . . .’? That’s the opposite of the truth, it took law (GSE Act pf 1992) to get them involved in the first place. This is a very well known Krugman gaffe, Mark.

    ‘Between 2004 and 2006, when subprime lending exploded, F&F went from holding a high of 48 percent of the subprime loans that were sold into the secondary market to holding about 24 percent (according to Inside Mortgage Finance). So Krugman is on solid ground when he made that claim.’

    Wrong again, those claims of Krugman have also been thoroughly refuted. For instance by Russ Roberts (responding to a Krugman sock puppet):

    http://cafehayek.com/2010/12/brad-delongs-analysis-of-the-housing-crisis.html

    Or, more specifically, by Ed Pinto, here:

    http://www.aei.org/docLib/Pinto-Government-Housing-Policies-Crisis.pdf

    ————quote—————
    By limiting the GSEs’ business to just their own securitizations, their share is substantially understated, particularly for the Professor Krugman’s key years of 2004-2005.
    Instead of dropping below 30% as Chart 48 shows, it averaged about 42% for these two years.

    This is because:

    1. Fannie, and to a lesser extent Freddie, purchased whole loans that were not ultimately securitized by them. These loans are included in the “non-securitized” category, but should be added to the GSEs’ total share.

    2. The GSEs were substantial purchasers of “non-agency securitized” subprime (see Chart 33 above) and Alt-A MBS. Over 2003-2007 their purchases totaled $641 billion for subprime and $154 billion for Alt-A, representing 33% and 12% of all such
    subprime and Alt-A issuances. These securities need to be added to the GSEs’ total share and deducted from the “non-agency securitized” share.
    ——————endquote—————–

    Krugman is either a very lazy columnist, or he’s grasping at straws.

  27. Gravatar of Benjamin Cole Benjamin Cole
    30. December 2010 at 10:26

    Another insightful column by Scott Sumner.

    Well, at times it is depressing–but remember, democracy is a lousy system, until you try the second-best system.

    As long as we have a free press, and a large part of our economy in the private sector, I think we will thrive.

    The last 20 years are riddled with all the problems mentioned by Sumner and commenters. Yet our (USA) economy grew by 150 percent (and only 15 percent in Japan).

    That says to me monetary policy is even more important than Sumner says (hard to imagine) and that we Americans sometimes do not give ourselves enough credit.

    Prosperity next year to our host and all readers. Carry on–we have yet to ensure a robust QE2 prevails!

  28. Gravatar of ssumner ssumner
    30. December 2010 at 10:37

    Patrick, I agree about F&F, but strongly disagree about Bush. At the end of his first term a study (I think by Cato) found the fastest growth in federal spending since LBJ. And that didn’t even include a 1.2 trillion dollar Medicare expansion, which had been passed but hadn’t kicked in yet. Education spending grew at an extremely fast rate, as did defense and “homeland security.”

    Mike, You may be right about the Dems keeping their promises mror often—unfortunately. :)

    People make mistakes, but the government is in no position to prevent that from happening. The ARMS might have been very smart choices for some people, it’s just a bad break that housing prices plunged so sharply. That doesn’t mean they made a bad choice, ex ante. To some extent it was “heads I win, tails the taxpayer loses.” The real problem isn’t ARMS, it’s moral hazard. Get the government out of housing and banking and the banks would be unlikely to make idiotic subprime loans.

    I don’t see anything “absurd” in believing UI increases unemployment, I think it is quite likely the case.

    Lorenzo, But I wonder how statistically significant that was. Stocks didn’t do well under Nixon.

    Steve, I think Krugman was flat out wrong, and later admitted as much. It doesn’t matter when F&F bought that junk, what matters is the cost to the taxpayers–which is huge relative to the cost of bailing out the private banks.

    Bill Gee, I agree.

    Indy, You said;

    “Let’s rephrase this question probabilistically. If I want “smaller government” (I put quotes around it because, in my experience, people mean very different things when they say it), under which party am I more likely to get it?”

    I’ve seen studies that show government grows just as fast under GOP presidents, even domestic spending grows just as fast.

    You said;

    “and that they do, actually, want very different things and have very different visions of the role and size of government. See, e.g. Obamacare.”

    Didn’t Bush also pass a expansion of medical entitlements that is just as costly as Obamacare? Isn’t the GOP frontrunner for 2012 someone who passed an Obamacare in his own state even before Obamacare was passed? Didn’t the Heritage Foundation endorse this earlier version of Obamacare?

    Blackadder, Good point, but the difference is that Switzerland is a democratic country. The Swiss basically get the goverance they want. (Not exactly, but roughly.)

    David, I also vote libertarian.

    Mark, There is no point in trying to defend Krugman, he was clearly wrong, and to his credit he admitted he was wrong. F&F definitely encouraged subprime lending by buying up huge amounts of subprime debt.

    I’m to the left of you on privatization. That would put us right back in the same place were were in 2006, when they had been privatized. Pivate gains socialized losses. I want them both abolished. Many other countries do fine without that sort of quasi-government institution.

    F&F will cost the taxpayers over $150 billion, whereas the big banks all repaid their TARP loans, or are planning to repay them. That tells me all I need to know about who was most deeply involved in the subprime fiasco.

  29. Gravatar of ssumner ssumner
    30. December 2010 at 10:39

    Thanks Benjamin, BTW, I think democracy is a great system, I wish we’d try it here. That would involve radical decentralization, a la Switzerland

  30. Gravatar of Mark A. Sadowski Mark A. Sadowski
    30. December 2010 at 10:40

    Patrick R. Sullivan,
    Let me try and be more clear.

    “Subprime” means loans which do not meet F&F underwriting guidelines. So not one subprime loan was ever originated according to F&F underwriting guidelines by definition. That is clearly what Krugman is referring to (unless you’re suffering from KDS [Krugman Derangement Syndrome]).

    The GSE Act of 1992 merely made it possible for F&F to buy subprime loans. It did not alter their underwriting guidelines.

    Chart 48 in Pinto’s paper refers to market shares of *all* loans, not market shares of *subprime* loans. I was referring to subprime loans which as we all know were the *far* more likely to go into default.

    Putting the data from Inside Mortgage Finance together with Chart 48 only strengthens the case that F&F’s portfolio of loans increased in quality during 2004-2006 relative to the market as a whole.

  31. Gravatar of Mark A. Sadowski Mark A. Sadowski
    30. December 2010 at 11:01

    Scott wrote:
    “There is no point in trying to defend Krugman, he was clearly wrong, and to his credit he admitted he was wrong.”

    I’d be surprised if Krugman ever admitted he was wrong about anything. ;)

    But I’m interested in what he admitted to specifically in this case. Show me the link when you get the time.

  32. Gravatar of Mark A. Sadowski Mark A. Sadowski
    30. December 2010 at 11:35

    Scott,
    I think I know what you’re referring to:

    “So, first of all, the first time I wrote about FF, I got something wrong — I was unaware of their late in the game rush into subprime.”

    http://krugman.blogs.nytimes.com/2010/09/21/fannie-freddie-further/

    I’m sorry, but I don’t think this qualifies as a big admission. He may have not known that F&F’s share of subprime mortgages increased after 2006 but I knew it and anyone who has researched the issue carefully knew it.

    It wasn’t so much that F&F “rushed” in as Krugman puts it as everyone else rushed out. (Sort of like the Three Stooges running for the exit.) Moreover, how does this at all matter, as the damage had clearly already been done.

    One of the key points that Edward Pinto and other demagogues have tried to make with respect to the housing “bubble” is that F&F drove the demand for subprime loans during its peak. But the data just isn’t there.

  33. Gravatar of Jon Jon
    30. December 2010 at 11:41

    One of the prescient ideas in Austrian thought was the absence of aggregate preferences. This has been formally realized, e.g., through the Arrow impossibility theorem, but not widely internalized.

    There are no aggregate preferences, and therefore there is no one best unitary solution. This is one of the strong arguments in favor of the free-market. We get billions of simultaneous solutions.

    So it goes with the political parties–although we might still consider than in the context of the rules we do have, certain outcomes can be affected by empowering one party over another.

    Nixon? Authoritarian.

    Reagan? No so much. No doubt he, along with Goldwater, shaped your image of Republicans.

    Bush? Elected by way of Reagan. Everyone was really disappointed afterward. Read my lips!

    Republican Congress: Had a backbone for a while, but that government shutdown was bruising. They gave up under Clinton.

    Bush II? The man ran on a platform of compassionate conservatism and was elected narrowly. So you’re surprised you go the medicare drug benefit? Hahaha. Are you stupid?

    You must be wondering why the party put Bush II or Nixon up. Well, see the problem of aggregate preferences and political structures.

  34. Gravatar of Morgan Warstler Morgan Warstler
    30. December 2010 at 12:28

    Until Democrats accept in their own best interest a Balanced Budget Amendment, the best republican strategy will be to spend all the money, so Democrats cannot reward their constituencies.

    Repubs != Dems. And it is impossible to discuss actions without discussing strategy without admitting there is a larger, long term game afoot.

    So, I think it is VERY intellectually dishonest, to not start the discussions with, “when the republicans worried about deficit spending from 1913-1979, they got their asses kicked.”

    Democracy is fad started in 1913 and is now coming into its death throes… we will devolve power back to states, we will gut public employee unions, and there’s really not much anyone can do to stop these future trends…. and that is happening because the bastard Republicans keep cutting taxes and spending money on guns and big pharma so Dem voters grow disillusioned with the opportunity to get free stuff, and stop letting unaccomplished losers (Dems) screw around with the work of their betters (business owners).

    Friedman was of course right, and I’d go further, the REASON to have open borders is that it ensures the safety net will never be too large… it can’t be.

  35. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    30. December 2010 at 12:28

    Mark, if you’d actually read the Pinto paper, you’d have learned:

    ‘National People’s Action (NPA) and ACORN, along with other community and consumer advocacy groups concluded that Fannie and Freddie’s underwriting requirements were to blame for the failure of the Community Reinvestment Act of 1977 (CRA) to gain traction. In about 1986, NPA began to meet separately with Fannie and Freddie in an effort to get them to adopt more flexible underwriting standards in an effort to expand CRA lending.’

    And, further reading will teach you that in 1992 they succeeded in getting the FMs to loosen their underwriting standards. This was the sine qua non of the housing bubble. Your quibbling is nonsense that even Krugman wouldn’t be brazen enough to try.

  36. Gravatar of Indy Indy
    30. December 2010 at 14:22

    I stand by my claim. My friends who tend to vote Democrat are fundamentally different in their ideology from my friends who tend to vote Republican. That should shock no one. It is completely fair to call the former more supporting in general of higher taxes and higher spending and more regulation, and the latter more supportive of lower taxes and lower spending and less regulation. Both sides would happily describe their own political views that way.

    Members of both groups almost always prefer to call themselves “Progressive Liberals” or “Conservatives” respectively, since disgust with the compromises and inconsistencies of the parties that represent their sides seems quite universal. I’m increasingly coming to the belief that our political-ideological distribution is more bi-modal than Gaussian, and with a growing gap between modes.

    These are general trends, not perfect absolutes, certainly not perfectly aligned with Libertarian preferences, but they are real distinguishing factors and it would be unrealistic to make decisions that pretend there’s just no real difference when it comes to size and scope of government. I will say that almost all my Republican friends are fond of and influenced by Libertarian thought, while almost none of my Democrat friends take it seriously. Why should that be if there’s no practical or ideological difference?

    I read a lot of Libertarian writing online, and among the “elites” (I hate that word, but what’s my alternative?) – I will say it’s obvious that most are plainly uncomfortable with the notion of being thought of as “somewhat ideologically closer” to the Republican/Conservative than Democrat/Liberal position. There’s also a social factor, and anyone who wants to be “taken seriously” in intellectual circles, (dominated, in my impression, by those who vote for Democrats), will feel an extra urge to distance themselves from the Republicans.

    I totally understand that discomfort and disgust and desire to transcend and remain above the petty fray, but I don’t think those desires supports a “they’re all just the same” conclusion.

    The pragmatic types among my friends almost all claim they have to “hold their nose and vote” for the party they identify as being most likely to represent their preferred vision of the size and role of government, even if those parties are only barely-reliable in actually executing their purported positions (hence all the anecdotes you can marshal showing blatant inconsistency). This is my impression of how most informed, educated people vote – doing the best they can with what they’ve got. Are they really all wrong in making that identification and choosing that strategy?

  37. Gravatar of Doc Merlin Doc Merlin
    30. December 2010 at 14:31

    @Alexander:
    “I think the problem is that our system of government is specifically designed to reward special interests, and to make efficient and effective government difficult to obtain. In other words, I think it’s a structural problem.”

    The european system is like this on steroids. Hence their much higher levels of farming protectionism and subsidies.

  38. Gravatar of Richard W Richard W
    30. December 2010 at 15:41

    Doc Merlin, as much as the generally hated EU common agricultural policy subsidises inefficient farming. Especially French and to a lesser extent German farming. I doubt even they come close to the 62 cents in every dollar subsidy that US farmers enjoy.

    http://www.theglobeandmail.com/report-on-business/economy/economy-lab/daily-mix/for-us-farmers-subsidies-the-best-cash-crop/article1813425/

  39. Gravatar of Mark A. Sadowski Mark A. Sadowski
    30. December 2010 at 16:29

    Scott wrote:
    “I’m to the left of you on privatization. That would put us right back in the same place were were in 2006, when they had been privatized. Pivate gains socialized losses. I want them both abolished. Many other countries do fine without that sort of quasi-government institution.

    F&F will cost the taxpayers over $150 billion, whereas the big banks all repaid their TARP loans, or are planning to repay them. That tells me all I need to know about who was most deeply involved in the subprime fiasco.”

    The first part of this has more than one problem with semantics.

    When I said privitized, I meant it, not restoring them to GSE status. Abolishing them (in the long run) would be fine as well, especially if it is more practical.

    As for which is “left” or “right” you have my head spinning (and in the final analysis I don’t worry too much about unidimensional political spectrum categorizations).

    The second part of this has me thinking. Are part of the bank’s losses purposefully being realized in Fannie and Freddie? (And aren’t another part going to be eventually realized on the Fed’s balance sheet?)

    Normally I would agree with you in “following the money” but in this case it borders on the ridiculous. TARP only looks like a success if you turn a blind eye to the myriads of ways we socialized the banks losses through the Fed, the GSEs and the Treasury.

    A quick google turned up this TechTicker interview of Barry Ritholtz and Dean Baker essentially making this very point:

    http://www.businessinsider.com/henry-blodget-heres-the-real-reason-fannie-and-freddie-are-losing-so-much-money-its-2010-5

    If you watch it you’ll see that Ritholtz thinks it’s a given that F&F are purposefully being used as a backdoor TARP. Baker is somewhat more equivocal.

  40. Gravatar of Joe C Joe C
    30. December 2010 at 16:58

    This is exactly the reason why the Republican and Democratic parties top my list of hated and dangerous organizations. (also the NCAA)

    I believe we dont get good legislation, not because we are a diverse country, but because we have two dominant parties that are so ingrained in our political system that the goal of regulation has become to perpetuates party power rather than protect our liberties.

    Proposal: eliminate the parties and eliminate the practice of placing party affiliation on ballots and voter registration cards. Last time I checked no reference to “political parties” is nowhere found in the US Constitution.

    Maybe this is too much to ask, but hey, Im an idealist.

  41. Gravatar of Morgan Warstler Morgan Warstler
    30. December 2010 at 20:03

    Mark,

    That’s WHY we have to gut F&F… so unless the banks loan, housing prices fall and screw them with their pants on. Either way, they eat it.

    Look, either we (the good guys) going to pay or they (banksters) are going to pay, and you don’t get to pretend for a second you aren’t on the wrong side here.

    YOUR SIDE gets it money from Wall Street. Your side can’t let go of housing as a right for lower middle class. My side has little truck with either of them.

    Own it.

  42. Gravatar of Mark A. Sadowski Mark A. Sadowski
    30. December 2010 at 20:10

    Morgan wrote:
    “…screw them with their pants on.”

    Sounds painful.

  43. Gravatar of ssumner ssumner
    30. December 2010 at 21:52

    Mark, The timing is irrelevant. All that matters is that taxpayers like me have to spend $160 billion bailing out F&F, and approximately zero bailing out the big banks. Nothing else matters in my view, because I view the house price bubble as a trivial event of no importance. The bailout costs are everything. So the timing around 2006 is irrelevent.

    But I still don’t agree with the numbers, as F&F were also heavily involved in the period around 2003, as I recall. So even if I did care who inflated the bubble, I would not consider F&F innocent just because their share dipped somewhat around 2005-06.

    Jon, Yes, I’m stupid.

    Morgan, You said;

    “Democracy is fad started in 1913 and is now coming into its death throes… we will devolve power back to states”

    If I wanted to be sarcastic I’d say democracy ended in 1913. Giving power back to the states would make the US much more democratic.

    Regarding open borders, it won’t happen, but a greatly increased rate of immigration would have probably prevented the recession, as it did in Australia (where the population growth rate is about 2%, vs. our 1%.) That would have made the housing crash much smaller.

    Indy, I certainly didn’t mean to suggest “they are all the same.” I think Republicans favor much higher spending on Medicare than Dems (who favor rationing.) And I think Republicans favor far higher spending on the military than Dems. So there are differences. Dems support the teachers unions and the GOP supports oil companies. I could go on and on. There are lots of differences. I don’t have any problem with a libertarian supporting the GOP.

    One problem here is that it isn’t clear what the key issues really are. Both parties may want to convince us that the key issues are wht they debate (entitlements, war in Iraq, etc.) But perhaps the key issues are not even being addressed:

    1. The War on Drugs
    2. The level of LEGAL immigration
    3. The National Security State

    So then where does libertarian go? In his heart Obama’s views are much closer to mine on those issues than Bush’s views. But Obama won’t speak out or act on those views. The things he will act on I don’t like at all.

    Mark, I’m not convinced that privatization would be any different this time than last time. Last time there was no formal government guarantee–the problem is too big to fail–and it’s not solved by privatization. They must be destroyed. We don’t need them.

    Regarding loss shifting, I’m not convinced. The Fed is doing well so far. We might even make a profit on AIG. The losses to F&F were because they made a lot of horrible investments in MBSs. I don’t see major backdoor bailouts–these transactions tend to occur at market prices. But I’ll keep an open mind until all the evidence is in. But whatever the outcome it wouldn’t change my mind that they should be abolished, as I disapprove of backdoor bailouts, if that’s what is occurring.

    Joe, I don’t like the 2 party system either, but the main problem in my view is over-centralization. Would any other country be so inefficient as to spend $15,000 insuring each Medicare recipient in a county of a million people where income is $14,000 per capita. (McAllen Texas.)

  44. Gravatar of Mike Sandifer Mike Sandifer
    31. December 2010 at 04:50

    Scott,

    You replied: “Thanks Benjamin, BTW, I think democracy is a great system, I wish we’d try it here. That would involve radical decentralization, a la Switzerland.”

    Speaking of decentralization, how about states developing their own central banks, a la North Dakota?

  45. Gravatar of John Papola John Papola
    31. December 2010 at 07:29

    “1. The War on Drugs
    2. The level of LEGAL immigration
    3. The National Security State”

    Dead on, Scott. So long as we have the war on drugs and the terror state, this country operating under a form of fascistic rule.

  46. Gravatar of Joe C Joe C
    31. December 2010 at 08:10

    Scott:

    I agree completely: over-centralization goes against the original intention of the Constitution. I think this process has been happening since the late 1800s when parties started gaining more influence. However, it is possible to have the parties and de-centralize; I just dont know if that will happen.

    I worked for state govt for a while where the problems of centralization are clearly evident. Well, at least to some. The states cant do much to change their own medicare policies without bowing down to the all mighty federal government.

  47. Gravatar of Russ Anderson Russ Anderson
    31. December 2010 at 08:55

    Years ago a friend referred to the Democrats as the stupid party and the Republicans as the evil party, with bi-partisan agreements as both stupid and evil. An overstatement to be sure with a small amount a truth.

    Regardless of their underlying ideology, but parties are skewed by money. Wealthy Republicans control the Republican party and wealth Democrats control the Democratic party. Bi-partisanship is when they both agree to help (or bailout) the wealthy.

    For years I wondered if the Republicans call for “small government” was just another political lie (like the way they lead on pro-lifers and tea partiers) or whether they actually believe it (hard to believe after 8 years of Republicans questioning the loyalty of anyone that disagreed with George W Bush) . They want “small government” when the Dems have a majority and “big government” when they run the show. What they really seem to be saying is they want to get the government off their back and onto yours. They have no problem with the War on Drugs as long as the government is going after other people.

    A good example of the difference between the two parties is Fed leadership. Carter named Volker to head the Fed, which was continued by Reagan. Reagan later picked Greenspan, which was continued by Bush I and Clinton. Bush II picked Bernanke, who is continued by Obama. As far as Fed leadership, the difference is pretty much no difference. Almost looks like one party rule when it comes to the Fed. (While I disagree with some specific Fed policies, I will take them over the Sarah Palin type critics any day of the week.)

    In fairness to the politicians, for the most part they are doing what the voters want. The voters have repeatedly made it clear they want:
    1) lower taxes.
    2) more spending (on Defense, Social Security, Medicare, education, national security and anything that effects them).
    3) a balanced budget.
    The voters are mad as heck at the politicians for not doing all three.

    Have to add a big “Thank You” to Scott for this website. It is one of the best I’ve found for having a rational discussion of economic issues. To a large degree I agree with much of what Scott writes. Even when there are specifics that I disagree with it is usually a matter of degree. For example, I agree with the need for more quantitative easing, though I’m less optimistic that is will be effective. I hope Scott is right in that regard.

  48. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    31. December 2010 at 10:34

    ‘Have to add a big “Thank You” to Scott for this website. It is one of the best I’ve found for having a rational discussion of economic issues.’

    Ditto! The percentage of commenters who can walk, chew gum and explain the laws of supply and demand is higher here than almost any other econblog. Happy New Year to all (even the Housing Cause Denialists).

  49. Gravatar of Jim Glass Jim Glass
    31. December 2010 at 11:09

    “Liars … I probably should have noted that there are public choice models that explain all this.”

    It is always shocking to find by how much politicians are driven by politics.

    I’d put a smiley there, except that it *is* so often shocking.

    I double-ditto the previous comment: Thank you for this web site which really does have about the best cadre of commenters anywhere (a reflection of the host, no doubt) … and Happy New Year.

  50. Gravatar of Mark A. Sadowski Mark A. Sadowski
    31. December 2010 at 15:36

    Patrick R. Sullivan wrote:
    “Happy New Year to all (even the Housing Cause Denialists).”

    Er, Thank You (I think). My earlier Happy New Year wish
    (29. December 2010 at 18:57) likewise included even the Promoters of Zombie Myths.

  51. Gravatar of Mark A. Sadowski Mark A. Sadowski
    31. December 2010 at 19:00

    Scott wrote:
    “All that matters is that taxpayers like me have to spend $160 billion bailing out F&F, and approximately zero bailing out the big banks. Nothing else matters in my view, because I view the house price bubble as a trivial event of no importance. The bailout costs are everything. So the timing around 2006 is irrelevent.”

    Well, we’re seemingly in agreement Scott because Ed Pinto doesn’t seem to care about taxpayer expense either.

    The bailout costs are currently a function of the backdoor bailout (F&F) which evidently you’ll have to pay for as I haven’t paid personal income taxes for several years now (I have a good accountant in addition to me being too poor).

  52. Gravatar of Mark A. Sadowski Mark A. Sadowski
    31. December 2010 at 21:41

    Scott,
    As a fellow B&W movie fan I thought you might like this:

    http://www.dailymotion.com/video/x27b6g_groucho-marx-everyone-says-i-love-y_music

    Happy New Year!

  53. Gravatar of scott sumner scott sumner
    1. January 2011 at 08:39

    Mike, I think I’d stick with the dollar—it simplifies transactions.

    John, I wouldn’t go that far, but it certainly reduces our freedom—much more than many social programs.

    Joe, I agree.

    Russ, Thanks. Those are good points.

    Thanks Patrick.

    Thanks Jim.

    Mark, It’s good to see you and Patrick being polite to each other, even if only for New Year’s Day. :)

    Thanks for the Marx Brother link–I am a fan.

    I’m still not convinced on the F&F issue, but as I said it doesn’t really matter either way–as the solution is to abolish F&F.

  54. Gravatar of Lorenzo from Oz Lorenzo from Oz
    1. January 2011 at 16:24

    Russ Anderson: I believe the original version of your friend’s comment was (Bagehot?) referring to British politics as being divided between the stupid party (Tories) and the silly party (Liberals). I have long found that division a useful one :)

    Krauthammer has amusingly argued that (US) liberals think conservatives are evil and that conservatives think (US) liberals are stupid. Which fits in with your friend’s division. There is even some social science research which seems to give some support to Krauthammer’s amusing dissection, on the grounds that the larger and more diverse friendship networks of conservatives lead them to signal competence while the tighter and more homogenous friendship networks of liberals leads them to signal trust. The implication being that liberal trust looks stupid to conservatives and conservative concern for competence looks unfeeling to liberals.

  55. Gravatar of Lorenzo from Oz Lorenzo from Oz
    1. January 2011 at 16:46

    Patrick: if Fannie, Freddie and the CRA caused the housing bubble, why did it happen in some states and not others? Why did Ireland, the UK and Spain have housing bubbles, but Germany did not?

    I think the housing bubbles were caused by restrictions on supply, whether coming from Zoned Zone regulatory control over land use (usually) or land cartel (Ireland).

    The vulnerability of the financial system due to way dodgy mortgage finance, that can reasonably be significantly blamed on Fannie, Freddie and the CRA. Part of what Russ Roberts called so aptly the destruction of prudence. But the housing bubbles themselves? Nope. Just like they cannot be blamed on monetary policy either.

    (I have blogged about housing prices a fair bit, my posts have other useful links.)

    And I have just agreed with Krugman, Bernanke and Scott in the same comment: clearly the season of good will is upon us. Happy new year to the readers of this excellent blog (whose merits I also spruiked) and particularly our host.

  56. Gravatar of John Papola John Papola
    2. January 2011 at 05:52

    Scott,

    I think the victims of the war on drugs experience this country as an entirely different place… a fascistic place. If jackbooted paramilitary thugs crash in your door, shoot your dogs, terrorize your family and then jail you or your kids for have a little baggy of pot… that’s fascism. That doesn’t mean that the US is just like Mussolini’s Italy or Nazi Germany… but it does mean that it’s much closer to those two nightmares for the victims. What good is rule of law when the law is terrible? Racial tension and inequality in this country is in no small part perpetuated and magnified by this insanity as well.

    If I live a peaceful, relatively free life, but entire families are being destroyed just 10 miles away because of this “war”, I don’t think there’s a good way to average our two situations into some net level of overall freedom. One is free(ish), the other has been enslaved.

    Here’s to progress in 2011, though this new congress doesn’t seem interested in the issue. Here’s hoping I’m wrong.

  57. Gravatar of John Papola John Papola
    2. January 2011 at 06:20

    @Lorenzo,

    I think you’re right that the differences in housing bubble by state in the US and nation in the EU most likely have to do with the local regulations but also economic conditions which lead each area’s one-size-fits-all monetary policy to be reasonable for some areas (like germany) and excessively loose in others.

    Or, it could just be a relative price story. The housing sector started inflating in the mid 1990s and when monetary policy kicked into excessive easy town, it makes sense that people with cheap dollars seeking yield as an investment would look at the best opportunities and then jump in, magnifying the relative price distortions.

    Trusting Bernanke when he claims that his/Greenspan’s monetary policy didn’t cause the bubble is, in my opinion, dubious. Of COURSE The Bernanke is going to exonerate himself.

  58. Gravatar of Mike Sandifer Mike Sandifer
    2. January 2011 at 07:25

    Scott, you replied:

    “Mike, I think I’d stick with the dollar—it simplifies transactions.”

    The Bank of North Dakota transacts in dollars.

  59. Gravatar of scott sumner scott sumner
    2. January 2011 at 15:25

    Lorenzo, That’s interesting research on ideology. All I can say is that it doesn’t mesh with my life experience.

    Regarding your question to Patrick, I’d say that F&F were contributing causes, but that you also need building restrictions.

    John, I completely agree regarding the war on drugs.

    Mike, The Dakotans can’t legally produce dollars, it’s counterfeiting. Perhaps you mean they produce dollar credit?

  60. Gravatar of Mike Sandifer Mike Sandifer
    2. January 2011 at 17:59

    Right Scott.

    For example:

    http://motherjones.com/mojo/2009/03/how-nation%E2%80%99s-only-state-owned-bank-became-envy-wall-street

  61. Gravatar of Lorenzo from Oz Lorenzo from Oz
    4. January 2011 at 00:38

    JohnP: I wasn’t trusting BB’s claims, he does actually argue for them and provide evidence. Regarding monetary policy and housing bubbles, Australian house prices are well into the amazing, but our monetary policy was generally a bit “tighter” (in that our base interest rates were persistently higher), it was just much more even. The variation in our amazing house prices can be explained by local supply/demand interactions: monetary policy does not seem to me to provide much of an explanatory role at all. If one is reduce to argue it is “enabling” well yes, it “enabled” lots of things. But that is not a useful sense of ’caused’.

    What one needs for a bubble is systematic discounting of downside risk. Monetary policy can be as “loose” as it likes, it will not generate that. A long term pattern of destroying/undermining prudence in the financial system will, however (see Russ Roberts analysis, which I discuss here). As will retarding the ability of supply to respond to demand generating self-perpetuating expectations of capital gains.

    Scott: Yes, I am sure they did make it worse by driving up demand and worsening the general quality of credit. Aggravating is not, however, causing.

    As for ideology and your experience, I am not sure it covers folk of libertarian bent and am fairly confident that libertarian-inclined academics are very much not representative of conservatives/Republicans :)

  62. Gravatar of Lorenzo from Oz Lorenzo from Oz
    4. January 2011 at 00:44

    Mike: After the State Bank of South Australia and Tricontinental fiascos, Australians are not likely to be impressed by a lonely example of a well-run government bank.

  63. Gravatar of scott sumner scott sumner
    4. January 2011 at 09:50

    Mike, Yes, they can do that, but the Fed still determines their monetary policy.

    Lorenzo, I also know many “regular people” who are conservative Republicans.

    A contributing factor is a cause, just not “the” cause.

  64. Gravatar of Lorenzo from Oz Lorenzo from Oz
    4. January 2011 at 22:00

    Scott: A contributing factor is a cause, just not “the” cause. But does it cause there to be a given housing bubble, or merely the housing bubbles to be as intense as they were? I vote for the latter but not the former.

    And I take back any slight on your social networks :)

  65. Gravatar of ssumner ssumner
    5. January 2011 at 17:13

    Lorenzo, There is no way to answer that question, as we don’t really know what a bubble is.

    1. If it is price above correct value, then roughly 50% of the time there will be bubbles, if only 0.001% above fair value.

    2. If bubble is defined as a “big” rise and fall in price, then it will sometimes turn a moderate rise into a big rise, and sometimes turn a big rise into a very big rise (the case you envisioned.)

    But if you think hard about what your asking me, it will become obvious the question is too vague to be answered without more info.

  66. Gravatar of Lorenzo from Oz Lorenzo from Oz
    6. January 2011 at 21:14

    Scott: surely there is a difference in before and after here. Before the case, no we don’t know: at the very least, we have no idea about when (in time) or at what level (in price) any tipping point will occur. Expectations about expectations just collapse into expectations.

    After all, it is all very well to say that prices have diverged from the value of expected income from said asset but that says nothing about how long they will continue to do so, or how far they will diverge. And while they do so diverge, the expectations of capital gains will continue to be realised. It is all very well to say that its value “should” be determined by its expected income, but capital gains based on expectation of capital gains are very real: people can borrow against it, they can realise it by selling the asset. The capital gain is real – until it is not.

    After the fact, however, surely there is much more we can say about causation. How something ends tells you a lot about its nature: one of the benefits of history.

  67. Gravatar of ssumner ssumner
    10. January 2011 at 19:31

    Lorenzo, We must be talking past each other, as I don’t see how your reply addresses my question. I still don’t know what you mean by “bubble.” If you mean a price higher than it should have been, besed on what we now know, then I’d say F&F contributed to the bubble, and perhaps turned a trivially small bubble into a big bubble. Or maybe they didn’t.

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