The alternative to monetary stimulus

Just when you think Washington DC cannot get any more clueless, President Obama appoints Mel Watt to oversee the GSEs.  From the Wall Street Journal:

WASHINGTON””The Obama administration and federal regulators are reversing course on some of the biggest postcrisis efforts to tighten mortgage-lending standards amid concern they could snuff out the fledgling housing rebound and dent the economic recovery.

On Tuesday, Mel Watt, the newly installed overseer of Fannie MaeFNMA +3.94% and Freddie Mac, FMCC +5.35% said the mortgage giants should direct their focus toward making more credit available to homeowners, a U-turn from previous directives to pull back from the mortgage market.

In coming weeks, six agencies, including Mr. Watt’s, are expected to finalize new rules for mortgages that are packaged into securities by private investors. Those rules largely abandon earlier proposals requiring larger down payments on mortgages in certain types of mortgage-backed securities.

The steps mark a sharp shift from just a few years ago, when Washington, scarred by the 2008 crisis, pushed to restrict the flow of easy money that fueled the housing bubble and its subsequent bust. Critics of the move to loosen the reins now, including some economists and lenders, worry that regulators could be opening the way for another boom and bust.

“Some?”  Are there any economists who support this garbage?

For the past year, top policy makers at the White House and at the Federal Reserve have expressed worries that the housing sector, traditionally a key engine of an economic recovery, is struggling to shift into higher gear as mortgage-dependent borrowers remain on the sidelines.

Both Treasury Secretary Jacob Lew and Federal Reserve Chairwoman Janet Yellen last week noted the housing market as a factor holding back the economic recovery.

So let’s see, we have to taper QE because otherwise the economy will “overheat.” After all, unemployment has fallen to 6.3% and many of the remaining unemployed are supposedly unemployable.  And yet we need to go back to the subprime mortgage economy to juice the economy.  Is that the view of the Fed? Forget about “getting in all the cracks,” can we stop opening up new cracks as wide as the Grand Canyon?

Mr. Watt, the former North Carolina congressman who took over as the director of the Federal Housing Finance Agency in January, used his first public speech on Tuesday to lay out the shift in course for Fannie and Freddie, and pegged executive compensation at the companies to meeting the new goals.

The more corrupt you are, the more Uncle Sam will reward you with top 0.001% salaries.  Where does one even begin?

Fannie and Freddie, which remain under U.S. conservatorship, and federal agencies continue to backstop the vast majority of new mortgages being issued.

Wait, didn’t all the liberals tell us back in 2008 that the crisis was caused by evil Republicans who believed in “deregulation,” and that we needed to get progressives in there to prevent these sorts of abuses?  Just as we needed to stop the evil Republicans from letting the NSA trample our civil rights?

The FHFA has recently attempted to lure private investors back into the housing-finance market””and reduce the Fannie and Freddie footprint””by raising the cost of government-backed lending.

With few signs that private investors are returning on a large scale, Mr. Watt signaled a clear break with his predecessor, Edward DeMarco, who left the FHFA last month after nearly five years as its acting director.

“I don’t think it’s FHFA’s role to contract the footprint of Fannie and Freddie,” Mr. Watt said during a discussion at the Brookings Institution in Washington. Winding down the companies without clear proof that private investors are willing to step back in “would be irresponsible.”

His comments signal a move away from treating Fannie and Freddie as “institutions in intentional decline” towards “institutions that should be better prepared to form the core of our system for years to come,” said Jim Parrott, a former housing adviser in the Obama White House.

Mr. Watt’s remarks are significant, given legislation to overhaul the mortgage-finance giants and replace them with a new system that reduces the government’s role in housing appears headed for a dead end in the current session of Congress.

Mr. DeMarco in a separate speech at a banking conference in Charlotte, N.C., on Tuesday, urged restraint: “Do not confuse weakening underwriting standards and underpricing risk with helping people or promoting market efficiency.”

The new steps are the fruit of three years of strenuous pushback by those opposed to tighter lending standards.

In the wake of the 2010 Dodd-Frank law, regulators proposed a spate of new rules intended to eliminate questionable mortgage products and remove any incentive banks had to make loans unlikely to be repaid.

Among the biggest changes that were proposed: Borrowers would either have to put 20% down, or the bank would have to retain 5% of the loan’s risk once it was sliced, packaged and sold to investors.

The March 2011 proposal triggered a huge outcry from lawmakers, affordable-housing groups and the real-estate industry, all of whom said it would put the brakes on homeownership for millions of credit-worthy borrowers, particularly first-time buyers and minorities.

I sort of knew this was going to happen, just as I knew Obama would continue with the Bush “war on terror.”  But it’s still something of a shock when you see it in black and white.  Here’s my prediction.  All of those who moaned about “deregulation” back in 2008 will go silent, just as the Dems in Congress who criticized Dick Cheney either ignored Edward Snowdon’s revelations, or said he should go to jail.



51 Responses to “The alternative to monetary stimulus”

  1. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    14. May 2014 at 10:32

    This is where I came in. Housing Cause Denialists, unite!

  2. Gravatar of Becky Hargrove Becky Hargrove
    14. May 2014 at 10:38

    So many ways that people could live well, without traditional housing, if only innovation were loosed in this area. Even a fraction of the innovation that other fields have received, would do the trick.

    So many special interests who don’t want to give up the gravy train of traditional housing, that they keep making the same monetary mistakes all over again.

  3. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    14. May 2014 at 10:43

    Read it and weep;

    ‘The Fateful History of Fannie Mae: New Deal Birth to Mortgage Crisis Fall’
    by James R. Hagerty

  4. Gravatar of Aidan Aidan
    14. May 2014 at 10:54

    A minor point, but your portrayal of congressional Democrats and NSA reform is wildly oversimplified. Leadership may have opposed Amash-Conyers (there’s a Democrat!), but House Democrats voted in favor of it by a margin of 111 to 83, while Republicans voted against it 134 to 93. There was an alternative to ignoring Snowden’s revelations or wanting to send him to jail that many Democrats voted for!

  5. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    14. May 2014 at 11:00

    Cecchetti and Schoenholtz had a post on the GSEs;

    ‘Collectively, federal agencies – including the GSEs, the Federal Housing Administration (FHA), and the Department of Veterans Affairs (VA) – backed 87% of mortgages issued in 2012, up from 35% in 2006 and 47% in 2000….’

  6. Gravatar of cthorm cthorm
    14. May 2014 at 11:04


    Someone needs to start making luxury manufactured homes (not mobile homes). Use more durable steel, concrete glass, synthetic materials. Its crazy that we still build single family homes individually out of wood. In the 1950s they revolutionized home building by using standardized designs, yet we’ve never managed to use standardized materials.

  7. Gravatar of benjamin cole benjamin cole
    14. May 2014 at 12:41

    Special programs to help people buy housing are probably a bad idea. Not sure this has to end in ruin—if the Fed goes to NGDP targets then the busts might be ameliorated.

  8. Gravatar of Morgan Warstler Morgan Warstler
    14. May 2014 at 12:47

    It’s horribly rigged.

    Ackman acquired 11% of Fannie at sub $4.

    Frankly, the fact that shit happens and I STILL have to listen to libertarians complain that I want to intentionally make 2M SMB owners into millionaire rent seekers via GI/CYB – is the worst part.

    Many, like Scott, understands political power comes from rent seeking groups, but there’s no willingness to get simply play the game to the advantage of our team.

  9. Gravatar of ssumner ssumner
    14. May 2014 at 12:48

    Patrick, This certainly supports the argument you’ve been making.

    Aidan, If 81 Republicans voted to increase the minimum wage I’d be trashing them. It’s a given that the GOP is bad on the war on terror, but weren’t the Dems supposed to be opposed to Bush’s policies?

    If 93 Republicans voted in favor, then the Dems could have easily passed it. Shame on them.

    BTW, the GOP is also horrible on the GSEs, it’s not just the Dems.

    Everyone, If I ever again hear someone claim “deregulation” caused the 2008 crisis I’m going to go crazy. This is what regulators do—they encourage bankers to be reckless.

  10. Gravatar of TallDave TallDave
    14. May 2014 at 12:51

    Four legs good, two legs bad better.

  11. Gravatar of TallDave TallDave
    14. May 2014 at 12:52

    Four legs good, two legs bad better.

  12. Gravatar of Morgan Warstler Morgan Warstler
    14. May 2014 at 12:53

    We do the same thing on Security / Privacy.

    Everybody sees Snowden and blah, blah and nobody has any damn idea, and I say, “hey let’s have a $1K annual tax credit to divert $20B a year out of taxes to private companies that surveil our government for us – let’s subside technical versions of 1st and 2nd amendment”

    And its frigging crickets.

  13. Gravatar of Joseph Tucker Joseph Tucker
    14. May 2014 at 12:55

    Regarding the coming policy/regulation change mentioned in blog post:

    Will this create an incentive for banks to make more loans?
    Will that in turn expand credit thereby increasing the money supply (M2/M3)?
    Will that increase then begin to push up the interest rate banks charge as the money supply in circulation grows since the anticipated future value of money would decrease relative to current value?

    If all that is plausible/probable then would property prices over that time period in turn rise?
    Would all prices in general rise in over that time period?
    Would we see a growth in NGDP over the period?

    Please understand my line of questions is not political or pointed I just want to fit my understanding of the system we live in against the understanding in other minds.

  14. Gravatar of TallDave TallDave
    14. May 2014 at 12:55


    “Heads I win, tails the taxpayers lose” is the new economic model for everything from housing to green energy to pensions to healthcare.

    Not a coincidence this maximizes the power of politicians, regulators and their friends.

    Congress is the only group of investors who can consistently beat the market (with a truncheon, if necessary).

  15. Gravatar of Mark A. Sadowski Mark A. Sadowski
    14. May 2014 at 13:55

    Off Topic.

    A couple of weeks ago Cullen Roche wrote the following:

    “NB – Sumner’s figures in his congratulatory comment are also wrong. The consensus was not “well above 3%”. That figure was the Q2 figure referenced in this WSJ piece which Sumner linked to. The consensus for Q1 was 1.1% in RGDP and 1.7% on NGDP. The actual came came in at 0.1% on RGDP and 1.3% on NGDP. The blog commenter Sumner congratulates called for -1.4% RGDP and 0.5% NGDP which means that he was much more wrong than the consensus. Maybe market participants don’t digest information all that efficiently after all – including GDP articles that were published three weeks ago?”

    As evidence of the consensus Roche cites the following:

    Note that according to this, the consensus RGDP forecast was 1.1%, and the consensus forecast on the GDP price index was 1.7%, meaning that the consensus forecast on NGDP was actually 2.8%. Either Roche doesn’t know that the GDP price index is not the same as NGDP, or he can’t read. Given his past performance I honestly can’t tell.

    Incidentally some of Roche’s commenters are similarly challenged. If you read the comments you’ll note one of them says:

    “30+ comments on the Sumner post and none of them pointed out that the 3% RGDP consensus quote is wrong. Maybe Market Monetarists aren’t very efficient market thinkers?”

    Of course the 3% figure referred to is NGDP, not RGDP, and the consensus NGDP forecast in Roche’s link is actually quite close to 3%. So this is clearly a case of the pot calling the kettle black.

    Now the link shows that the forecast range for RGDP was from 0.5% to 2.0% and the forecast range for the GDP price index was from 1.4% to 2.5%. I happen to know that the 0.5% RGDP forecast was made by Macroeconomic Advisers. I don’t know what their GDP price index forecast was, but let’s assume for the sake of argument it was the lowest possible, or 1.4%. If that’s the case, then their NGDP forecast was for a 1.9% increase.

    Well, new trade and business inventory figures are coming in, and it turns out that RGDP probably contracted in the first quarter after all:

    “Incorporating the new data, J.P. Morgan Chase on Tuesday estimated GDP contracted at a 0.8% rate in the first quarter. Macroeconomic Advisers put the contraction at 0.7%. Barclays Capital predicted a 0.6% decline. Pierpont Securities estimated output fell at a 0.4% rate. Action Economics estimated a 0.2% decline.”

    The average of the five estimates reported is a decline in RGDP by 0.6% at an annual rate. Assuming that the preliminary GDP price index estimate does not change (actually I think it will increase), if RGDP actually declined by 0.6%, then NGDP increased by 0.7%.

    Now recall that my NGDP forecast was for a 0.5% increase, and that Macroeconomic Advisers’ NGDP forecast was for at least a 1.9% increase. If NGDP actually grew by 0.7% that would mean my NGDP forecast was only off by 0.2%, and Macroeconomic Advisers, whose forecast was lower than any of the other economic forecasters, was off by 1.2%.

    Also recall that my RGDP forecast was for a 1.4% decrease, and that Macroeconomic Advisers’ RGDP forecast was for a 0.5% increase. If RGDP decreased by 0.6% that would mean my RGDP forecast was only off by 0.8%, and Macroeconomic Advisers, whose forecast was lower than any of the other economic forecasters, was off by 1.1%.

    This would of course also imply that my 2014Q1 forecast of both NGDP and RGDP was more accurate than Goldman Sachs, RBS, Morgan Stanley, Barclays, Credit Suisse, BOA, JP Morgan, IHS Global Insight, Wells Fargo, etc.

    Now, when I started doing my nowcasts it wasn’t to demonstrate my forecasting ability. I personally think forecasting is one of the lowest forms of endeavor, not much better than tasseography. One of my objectives was to demonstrate that a single individual armed with an economics education, a Dell computer and Eviews could easily do as well as the major economic forecasters. Now that the results of four of my nowcasts have come, or are coming in, in I think I honestly say this is true.

    With the exception of 2013Q3, all of the final BEA RGDP estimates have moved closer to my nowcasts, and so far all of the final BEA GDP price index estimates have moved closer to my nowcasts. More importantly, twice now I’ve gone out on a limb, one time on the optimistic side, and this time on the pessimistic side, and each time my simple nowcast model has outperformed every single one of the major forecasters.

    And that ought to tell you more about the nature of forecasting than it does anything about anything else.

  16. Gravatar of Morgan Warstler Morgan Warstler
    14. May 2014 at 15:00


    Say that today the fed announced 3% NGDPLT with no make up, and then enforced it with monthly changes in buying / selling, always with the intent of hitting the next months number dead solid perfect. So it isn’t a long lag of make up.

    At 6 months, 1 year, and 5 years later, what do you think is the state of:

    1. US Economy
    2. Fiscal Spending
    3. Global Economy

  17. Gravatar of Lorenzo from Oz Lorenzo from Oz
    14. May 2014 at 15:38

    First, Patrick O’S is right, everyone should read Fragile by Design. (I have done a series of posts prompted by the book and there is more to come.)

    From the perspective of Downunder, this whole US policies to support home ownership just seems utterly mad. We have comparable levels of home ownership without this nonsense. (We have other housing madnesses–land rationing via bureaucratic approval–but we stole them from the Old Country.)

    When Oz federal governments wish to boost home ownership, they do the First Homeowners Scheme which gives a grant to new home buyers. As Calomiris & Haber point out, it lowers the loan to value ratio, it does not boost it.

  18. Gravatar of Aidan Aidan
    14. May 2014 at 15:44


    Considering you called out Krugman yesterday for ignoring a small handful of Republicans who changed their mind on inflation, I thought you might want to be a precise as possible when talking about other people’s intellectual consistency.

  19. Gravatar of Mark A. Sadowski Mark A. Sadowski
    14. May 2014 at 16:38

    A 3% NGDPLT growth rate target is too low.

    I believe an average inflation rate of 2% is optimal:

    If RGDP growth averages 3%, that means the NGDPLT growth rate target should be 5%.

    A 3% target would Nipponize the US economy.

  20. Gravatar of Joel Aaron Freeman Joel Aaron Freeman
    14. May 2014 at 16:42

    Scott, you don’t understand the liberal interpretation of the financial collapse. It is fully consistent. To put it simply: regulation is good, deregulation is bad. There is no contradiction between Obama in 2008 and Obama in 2014.

    What Obama is doing in the mortgage market is increasing the state’s role in that industry–he is not decreasing it. It may be the case that this new laws will incentivize stupid behavior, but that doesn’t matter.

    No liberal thinks that the GSE’s were big factor in the financial collapse. Instead, they think that the GSE’s were chugging along smoothly for 70 years, and then along come the selfish privately-owned Banks to wreck everything. The GSE’s and the regulators were motivated by helping people, and continue to do so. But the private firms, by contrast, are only in it for profit, and that is why they are dangerous, and we need more state involvement to moderate them. I don’t think you fathom the distance between your understanding of causality and their understanding of causality.

  21. Gravatar of Major_Freedom Major_Freedom
    14. May 2014 at 18:26

    “Some?” Are there any economists who support this garbage?”

    It is GARBAGE to believe printing more paper will solve the problems.

  22. Gravatar of TallDave TallDave
    14. May 2014 at 19:02

    I’m interested to see where Krugman stands on this, though I suspect I can guess. No one has been more adamant that government intervention was innocent of all blame.

    This is probably the definitive explanation of how the government pushed bad loans through CRA. Spoiler: the GOP looks almost as bad as the Democrats on this.

  23. Gravatar of TallDave TallDave
    14. May 2014 at 19:17

    I believe an average inflation rate of 2% is optimal

    Lately I wonder if a 3% rate isn’t healthier given the uncertainties in calculating inflation. When you look at inflation-adjusted living standards on a dollar for dollar basis they seem to underestimate the improvement over time.

    Of course I’d happily settle for a CB that did NGDPLT with an implicit 2% target, especially if it actually understands what is loose monetary policy and what isn’t.

  24. Gravatar of Edward Edward
    14. May 2014 at 20:52


    Would a positive deflationary productivity shock, like a genius at MIT at Cal Tech inventing super-batteries that last for years on end, cold fusion(?) 3-D printing at the molecular level mass distributed to people’s homes (so they can “beam” whatever they need from air molecules), and quantum computers, since that would lift RGDP enormously, would that force the Fed (since the productivity growth would run so far and so fast above NGDP it would cause massive deflation in energy costs, the price of food, raw materials.) since the Fed is targeting inflation, to release more monetary stimulus? Normally, that would be a bad thing, as George Selgin and David Beckworth believe, but since we are so below target, would the Fed stupidly over-reacting to benign deflation actually be a GOOD thing? Is doing the right thing for the wrong reasons better than doing nothing?.

    I’ve become convinced that an entrepreneurial superhero and major innovator needs to create an economy wide “game-changing disruptive technology” to save us all

  25. Gravatar of Edward Edward
    14. May 2014 at 20:55

    Speaking of which, if there is one nasty regulation that does THE MOST damage you could telepathically manipulate members of Congress, which would it be? Occupational licensing? Immigration Laws? The Minimum Wage? The Drug War?

  26. Gravatar of Edward Edward
    14. May 2014 at 21:07

    Telepathically induce members of congress to abolish.

  27. Gravatar of A A
    14. May 2014 at 22:19

    Joel Aaron Freeman, that is a rather cartoonish assessment of the debate over the role of GSEs. The GSEs did as much damage as they could given their constraints, but given their constraints, they lost market share in the mortgage market. So the question of whether the GSEs played a significant role in the housing crash is distinguishable from the utility of GSE existence.

  28. Gravatar of Brett Brett
    14. May 2014 at 22:35

    I’m pretty skeptical of any sort of “unemployable” claim, too, short of the person being dead, paralyzed, or in a coma. Get unemployment down to 4% with a rising employment ratio, and suddenly a lot of “unemployable” workers seem all right.

  29. Gravatar of Morgan Warstler Morgan Warstler
    15. May 2014 at 06:53


    Would 3% NGDPLT Nipponize the US economy?

    I know you prefer more, but is Mark right about Woolsey’s 3%?

  30. Gravatar of ssumner ssumner
    15. May 2014 at 07:17

    Joseph, Anything is possible, it all depends how the Fed reacts.

    Mark, You said;

    “Either Roche doesn’t know that the GDP price index is not the same as NGDP, or he can’t read. Given his past performance I honestly can’t tell.”

    Cullen Roche has misinterpreted the data? That can’t be right, he’s never done that in the past.

    And yes, I saw that WSJ story on the revisions as well. We’ll have to revisit this question next month.

    Lorenzo, Good point.

    Aidan, Actually a lot of Republicans have changed their minds on inflation. In any case, I wasn’t specifically talking about Republicans. But yes, I should have been more precisely and said “many Dems”. If I left the impression that they all opposed Snowden that was wrong.

    Mark, Japan has had negative NGDP growth, so a 3% target would still be much better than Japan.

    Joel, I’m fully aware that many liberals define anything good as “regulation” and anything bad as “deregulation.” My post was addressed to people who still have at least half a brain. I’ll never be able to convince those who assume by definition that any and all economic problems are caused by not enough regulation.

    For normal people, loosening the regs to allow banks to make more risky loans counts as “deregulation.”

    TallDave, The GOP is also heavily involved in promoting home ownership.

    Edward, It’s no longer clear to me that we are far below target. The Fed certainly doesn’t think so.

    I’d end the war on drug using Americans.

    Then I’d relax immigration laws.

    Morgan, No, I don’t agree on that, although I’d prefer a slightly higher trend rate.

  31. Gravatar of TallDave TallDave
    15. May 2014 at 07:39

    The GOP is also heavily involved in promoting home ownership.

    Yep, Bush was as bad as anyone. I really liked Lorenzo from Oz’s comment though, simple grants just make so much more sense than the morass of contradictory regulations we’ve been doing here.

    Also have to agree on the Drug War being the #1 example of something Congress should stop doing, so much wasted productivity there.

  32. Gravatar of Morgan Warstler Morgan Warstler
    15. May 2014 at 08:34

    I wish we could see this discussion really fleshed out.

    To me it gets to very deep issue around why MM works in first place.

    If it is able to work magic at 5%, compared to today, but at 3% compared to today, we go down in flames, it’s not as big a tool…

  33. Gravatar of dw dw
    15. May 2014 at 09:33

    i thought we learned that the private sector mortgages (aka private label) dont work. they only worked for a while as long as investors (suckers) bought the securities that were built using them. well as we have learned since, the sellers basically rigged this market, and didnt even follow the contracts that were let to sell them. and basically those sales were all that made the private market. as at no time in the past before the GSEs were created did a 30 mortgage exist. most mortgages that predated them were 10 years notes that could be rolled over. because lets face no bank wants to have a 30 mortgage on its books, because nobody can predict whether such a mortgage will make money (and lets face it that is what they have to have) and since the collapse of the mortgage backed securities ‘market’, there is no longer some one to sell those ‘securities’ too (seems investors have learned to not be suckers for now. give them a few decades they might come back to them).

  34. Gravatar of Tom Brown Tom Brown
    15. May 2014 at 09:49

    Scott, did you see this?:


  35. Gravatar of TravisV TravisV
    15. May 2014 at 10:23

    The Net Neutrality issue seems to be heating up.

    Who are the best experts on this issue? Yglesias? Anyone else?

  36. Gravatar of TravisV TravisV
    15. May 2014 at 10:56

    Morgan Warstler,

    Bonnie Carr,

    You two should educate me on how (Timothy B. Lee and Yglesias in particular) are wrong about Net Neutrality…..

  37. Gravatar of TravisV TravisV
    15. May 2014 at 11:00

    What news is driving the S&P 500 down (0.9% so far today)?

    This news?

    “CPI Posts Biggest Gain in 10 Months; Real Average Earnings Decline”

  38. Gravatar of LVG LVG
    15. May 2014 at 13:33

    Mark Sadowski,

    I think Roche’s point was that Scott Sumner was wrong to claim that the consensus was “well above 3%” (which it was not) and that your forecast was actually well off the mark. Your comments show that the consensus was actually closer than Roche claimed. Therefore, it appears that not only does Scott Sumner have reading comprehension problems, but no one should bother listening to your worthless forecasts.

  39. Gravatar of Mike Rulle Mike Rulle
    15. May 2014 at 16:23

    We killed the securitization market because a bunch of banks sold too much junk because regulators incentivized other banks to buy senior tranches and the marks caused losses. But the losses ended up never being as big as originally thought, nor could they have ever reasonably been as big as the regulators feared. I always use the LTCM example as the model of how all of this should have been handled. The GSE’s were always corrupt and corrupted. Why do we have them? Our banking system feels like it has Vulcan mind merged with the government. I think there will be disintermediation as we figure out how to work our away around the global banks—-they will get smaller.

  40. Gravatar of Morgan Warstler Morgan Warstler
    15. May 2014 at 20:05


    Net Neutrality is a scam.

    You can see me and Fred’s crowd here:

    The guy who has the same kind of nuanced view, as I do, on this stuff is Andreessen. I’ve done digital video longer than almost anybody, and been involved with both Internet and cable architecture. Here’s a good kind of factoid people don’t get:

    In 99-2000, nearly a billion dollars got put into creating online video content when nobody had broadband. And nobody saw any of it.

    The internet crashed (because of Marc Cuban who I count as a friendly) and the true floor of the crater was the $2 CPM for “pop ups” – remember those? they saved the independent publishing online – what became blogs.

    Then for almost no reason anyone publicly talks about – broadband usage exploded 2001-2005 globally, remaking the trend line. No YouTube. No video standard. Web pages are all the same – but everybody wants MOAR DATA!

    Why? Janus and Niklas who created Joltid (Kazaa) before they reused code and made skype.

    See Kazaa let you spend a couple years at home during down economy building a massive personal collection of MP3s.

    Another obscure note: technically, Kazaa’s required flood call search approach would be impossible unless the average user (node) had like 80 songs. In order to satisfy user experience, you need to return positive results 80-90% of the time. You can only search 500+ or so users, there are x # of known popular songs in music history, so you need Y # of songs per user for that tech to “work.”

    So kazaa wasn’t possible until everybody got 80 songs apiece. WHERE did they get them? Napster. Napster as central server search could satisfy when everybody only had 1 song.

    So Napster stealing music seeded the users / nodes enough that Kazaa could move in stealing music and take over without central search.

    Those $2 pop ups were the only thing feeding Kazaa too.

    You know who GOT FAT?

    The cable companies. Kazaa was their only real broadband up-sell for 4 years. And since you only needed to have 500 users using Kazaa to satisfy their searches…. if you took the average cable head end with 50K homes, and 1% 500 of them got Kazaa, basically NONE of the “traffic” of moving those fat files around EVER left the local headend. Think of it like a LAN in your office where everybody shares music files.

    No peering fees, no real cost of bandwidth whatsoever. Kazaa was basically a file sharing app you bought broadband so you could share music with your neighbors.

    And once everybody has 500+ songs = iPod!

    Everything I just explained is the “smart take” – it is complicated and weird, and based on a couple lines of code, and giant multinational industries all f*cking one another into oblivion with it.

    And the one thing we know for sure is, if the govt. had been involved, they would have been using everything I just said to do more than just send Bois out to LA to chase Janus and Niklas around. They would have stomped the whole thing out. Ruining history.


    1) The real gig on NN is “Sponsored Bandwidth” – you get a device, and the data is free forever – this architectur took a long time to build, and has been in place since Amazon Kindle Whispernet.

    2) “pretty good” smartphones are becoming a $25 commodity. As soon they will be a civil right. ANYTHING behind the .GOV domain will be FREE data paid for by sender. Think libraries.

    3) Google and Apple and MSFT with those giant cash piles everybody talks about the only real way they will spend them is if the cable and wireless guys get to start screwing them hard.

    4) I’m a big fan of HAV blimps / drones. Basically unmanned vehicles at 70K feet covered in solar cells on top and satellite antennas on the bottom, bc all of a sudden the Ka band of spectrum works like regular broadband – so you can light up a MSA or thousands of square miles rural Montana with fat data communications.

    5) right now the local govts. all have little monopoly payments with cable companies and expensive union labor that get in the way of google Fiber being rolled out super aggressively.

    6) right now Google isn’t DESPERATE because the cable guys are screwing them to go build out Google Fiber super fast.

    So as nuts as it sounds, I am generally OK with Comcast trying to screw everybody, bc Apple and Google ought to be forced to blow $100B providing fiber.

    And I am sad to see VC crowd frog marching us into a a Ma Bell future of broadband utilities – after the most amazing invention in humans history (Tyler is an idiot) has taken root and conquered all in just 15 years time.

  41. Gravatar of Mark A. Sadowski Mark A. Sadowski
    16. May 2014 at 03:50

    “Mark, Japan has had negative NGDP growth, so a 3% target would still be much better than Japan.”

    Potential RGDP growth averages 1% in Japan. The Japanese economy also seems to cope with very low inflation rates surprisingly well. Consequently an NGDPLT growth target of less than 3% (perhaps even 2%?) might be optimal for Japan.

    However I think there’s considerable evidence that neither of these things are true for the US. With all due respect to Mayor Bill Woolsey a 3% NGDPLT target is simply too low for the US.

    “If it is able to work magic at 5%, compared to today, but at 3% compared to today, we go down in flames, it’s not as big a tool…”

    I suspect you’re referring to the fact that an NGDPLT monetary policy regime is a way of getting around the zero lower bound in policy interest rates. Of course, I agree that it does, but I also believe that is a relatively minor virtue compared to the benefit of a level target and of a target that isn’t subject to aggregate supply shocks.

    I believe there’s considerable evidence that the optimal average rate of inflation in the US is between 0% and 4% and it is probably most optimal at the center of that range. Why target something that’s less than optimal?

  42. Gravatar of Mark A. Sadowski Mark A. Sadowski
    16. May 2014 at 04:22

    “I think Roche’s point was that Scott Sumner was wrong to claim that the consensus was “well above 3%” (which it was not) and that your forecast was actually well off the mark. Your comments show that the consensus was actually closer than Roche claimed. Therefore, it appears that not only does Scott Sumner have reading comprehension problems, but no one should bother listening to your worthless forecasts.”

    The evidence that Scott pointed to (the WSJ) said that the consensus RGDP growth forecast was 1.5%. It doesn’t say what the consensus GDP price index forecast was, but even Roche’s evidence acknowledges that the GDP price index forecasts were in the range of 1.4% to 2.5%. So given the evidence that Scott cited, it seems highly plausible that the consensus NGDP forecast was “well above 3%”.

    If Roche’s only problem were with reading comprehension then that would be very gratifying. But I strongly suspect he believes that the GDP price index and NGDP are the same thing, and indeed there’s absolutely nothing in his post that indicates that he doesn’t think that is the case.

    Nobody reads the Money Illusion for the investment advice, just as nobody should be reading Cullen Roche vainly hoping to learn something about economics.

  43. Gravatar of ssumner ssumner
    16. May 2014 at 04:44

    Morgan, The exact number isn’t that important.

    Tom, The goal of QE is to encourage more spending and more saving.

    Travis, I assume that Tabarrok and Cowen are also good people to check out on that issue.

    Mike, Yes, the GSEs were a big mistake.

    Mark, I agree that 3% may be too low for the US. But again, actual Japanese NGDP growth has been negative for decades. So it would still be considerably higher than in Japan. But yes, it SHOULD be higher in the US than in a country with a falling population. I’ve always felt that targeting NGDP per capita, or per working age population, is slightly better than overall NGDP.

  44. Gravatar of LVG LVG
    16. May 2014 at 09:24

    Mark Sadowski,

    I agree. Roche is a market practitioner and Sumner is an economist. They have totally different areas of expertise. But I think Roche’s point was that Sumner shouldn’t be saying his blog “consistently offers good investment tips.”

    This blog doesn’t offer good investment tips just like Roche’s blog doesn’t offer economic tips. In fact, I’ve seen Roche repeatedly tell his readers never to take investment tips from the internet – even his own site. That seems like pretty prudent advice if you ask me.

  45. Gravatar of TallDave TallDave
    16. May 2014 at 11:37

    If it is able to work magic at 5%, compared to today, but at 3% compared to today, we go down in flames, it’s not as big a tool

    You might just as well ask what the difference would be between a 0% Fed inflation target and a 2% target. In a given year, the impact might not seem very significant, over decades the cumulative difference might begin to seem “magical.”

  46. Gravatar of TravisV TravisV
    17. May 2014 at 07:21

    Marcus Nunes reviews a new National Review piece by Ponnuru and Beckworth (gated):

  47. Gravatar of ssumner ssumner
    17. May 2014 at 11:13

    LGV, You said:

    “But I think Roche’s point was that Sumner shouldn’t be saying his blog “consistently offers good investment tips.”

    That was a joke, I’m constantly advocating the EMH over here, indexed funds, etc.

  48. Gravatar of John Carney John Carney
    18. May 2014 at 10:19

    Here’s how I put it:

    “On the plus side, we’ll never have another fight about whether the government pushed banks into riskier mortgages.”

    It’s amazing how much time and energy was spent arguing over whether government & GSEs had a decisive role in lowering mortgage lending standards. Here we have a clear declaration by the government that it is actively working to lower standards. Let’s not let this fall into the memory hole.

  49. Gravatar of Major_Freedom Major_Freedom
    18. May 2014 at 12:10

    John Carney:

    Somewhat related: It’s funny that when we find out banks in the LIBOR market have been lowering rates through non-market means for years, it’s the biggest scandal ever.

    Central banks do it, and it’s “policy.”

  50. Gravatar of theyenuy theyenuy
    18. May 2014 at 15:48

    The age of stimulus is gone forever.

    The paradigm and age of liberalism featured nation state economic stimulus, but the paradigm and age of authoritarianism features regional fascist mandates.

    The age of currencies, was fathered by Milton Friedman with his Free To Choose Manifesto, and the age of credit was fathered by Ben Bernanke with his QEs, Mario Draghi with his LTRO1, 2, and OMT, and Hiroki Kuroda, with this Abenomics.

    Each genius provided his own credit stimulus for trust in risk on investing; these birthed and defined the investor as the centerpiece of economic activity. Their provision of credit centered on providing seigniorage, that is moneyness, for investment gain, and very little stimulus for recovery in the Great Recession, and have resulted in peak moral hazard.

    Beginning the week ending May 16, 2014, an unwinding of the Euro Yen Currency Carry Trade, that is EURJPY in nation investment in Ireland, EIRL, Greece, GREK, Italy, EWI, and Eurozone Stocks, as well as a derisking out of the European Financials Debt Trade, EUFN, introduced the age of debt servitude and terminated all liberal things worthy of trust, such as a university education, home buying, and fiat wealth investing.

    Out of soon coming economic chaos, people will come to trust in new monetary and economic policies of regional economic governance and schemes of debt servitude to establish regional security, stability, and sustainability, where the debt serf is the centerpiece of economic activity.

    Under liberalism bankers, corporations, government, entrepreneurs, and citizens of democracies were the legislators of economic value and the legislators of economic life that shape one’s means and one’s ends.

    Now, under authoritarianism, currency traders, bond vigilantes, and regional fascist leaders working in public private partnerships and in regional governance, are the legislators of economic value and are the legislators that shape one’s means and one’s ends.

  51. Gravatar of ssumner ssumner
    19. May 2014 at 05:21

    John, Unfortunately it will fall down the memory hole.

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