October 28, 2011

"Four Reasons Keynesians Keep Getting It Wrong."

Allan H. Meltzer in the WSJ:
First, big increases in spending and government deficits raise the prospect of future tax increases...

Second, most of the government spending programs redistribute income from workers to the unemployed....

Third, Keynesian models totally ignore the negative effects of the stream of costly new regulations that pour out of the Obama bureaucracy....

Fourth, U.S. fiscal and monetary policies are mainly directed at getting a near-term result....

106 comments:

madAsHell said...

the prospect of future tax increases...

They aren't "tax increases"....They are revenue enhancements.

Please adjust your paradigm!

Curious George said...

One reason why Allan H. Meltzer doesn't understand Keynesians:

Those aren't bugs, they're features.

Scott M said...

They aren't "tax increases"....They are revenue enhancements.

They aren't "revenue enhancements"...they are refund adjustments.

FloridaSteve said...

All I can visualize is a room full of Keynesians with their finger in their ears and their eyes tightly shut screaming LA LA LA LA I'M NOT LISTENING TO YOU LA LA LA..

Scott M said...

LA LA LA LA I'M NOT LISTENING TO YOU LA LA LA

You obviously know very little about Keynesian models, although you did get the fingers in the ears right. Anyone that knows anything about Keynesian economic models knows the chant would be LA LA LA MULTIPLIERS LA LA LA

Tank said...

No no.

Not wrong.

Just not big enough.

Or they didn't do it right.

Or not enough infrastructure.

Or not enough spending by banks.

Or not enough bank regs.

Something.

Anything.

But not wrong.

Say it ain't so.

Damn, they coulda been a contender.

Econophile said...

Fifth, Keynesian models are not methodologically individualistic--like the rest of economics--but rather start from aggregate accounting-like definitions, treating national income Y as if it is a volitional actor.

Sixty Grit said...

"Fourth, U.S. fiscal and monetary policies are mainly directed at getting a near-term result."

And the results, so far, have been fabulous.

virgil xenophon said...

"Those aren't bugs, they're features."

Curious George is on tgt here. All one has to do to confirm the soundness of that statement is visit the lefty group academic blog Crooked Timber--a blog dominated by lefty economists--to see the truth of that statement..

Shouting Thomas said...

Unintended consequences.

Liberals love to fix things. When the unintended consequences manifest themselves, that is just another problem to fix.

Repeat... repeat... repeat.

Full employment for bureaucrats, regulators and lawyers is always the result.

traditionalguy said...

The oldest bunko trick was a new machine just invented that would take a dollar bill in at the top and produce a hundred dollar bills at the other end.

Greed being a powerful instinct, the bunko man would easily sell his machine for thousands of dollars.

Voila, we have John Meynard Keyene's new machine sold complete with Treatises by Economists.

There are no new tricks under the sun. Just the old ones repackaged.

And now let me sell you a CO2 Credit Machine that I just bought from a fat guy named Gore.

Original Mike said...

I've read, more than once, that Keynes wouldn't agree with what we're doing today. Apparently, he taught that in good times you run a budget surplus, or at least a budget in balance, so that you had the headroom to run a deficit in the bad times. He didn't call for piling debt on top of debt.

Seeing Red said...

Vodkapundit did a roundup of what's going on in the world:

Here in the US, we’d never cripple our energy sector — unless, you know, we would:

• Shell recently announced it would scrap efforts to drill off the coast of northern Alaska; the EPA withheld critical air permits.

• A proposed EPA regulation would force the coal industry to install special materials inside smokestacks to clean carbon particles. It’s estimated this requirement would cost the industry $180 billion, causing the closure of coal energy producing plants resulting in the loss of hundreds of thousands of jobs.

• The Interior Department recently blocked plans for Mountain West oil shale development because it needed to study its effect on water, power and land-use issues.

It’s so bad, that even a slumping economy and a prolonged employment crisis can’t keep gasoline prices from near-record highs. Think about this: Demand is in the toilet while prices are in the stratosphere. Go on and blame the free market for that, twinkles.

Can’t anyone, anywhere, do just one damn thing right in this global crisis?

EDH said...

Curious George said...
One reason why Allan H. Meltzer doesn't understand Keynesians:

Those aren't bugs, they're features.


Another way of saying that:

"You might be a Keynesian if..."

Actually, some might argue that Kaynes himself would not be accepted as a full-throated Keynesian today.

And to Curious George's point, Keynes would almost certainly look at each of Meltzer's points as "bugs" or at least tradeoffs, whereas many of today's ostensible Keynesians do indeed view at least some of those aspects as actual "features".

Seeing Red said...

Greg Mankiw's blog:

A smart friend recommends this article by Yale economist Bill Nordhaus. The Pigou Club endorses the conclusion:

The need for taxes on energy externalities such as carbon emissions is central to our ability to reduce the harmful side effects of economic growth. It is striking how the political dialogue in the US has ignored a policy that has so many desirable features. Perhaps, in the near future, faced with the deadline of a dire economic situation, negotiators will formulate such a policy. It would generate substantial revenues while bringing so many long-run economic and environmental benefits. Simply put, externality taxes are the best fiscal instrument to employ at this time, in this country, and given the fiscal constraints faced by the US.


-----------------

I think I'll start stocking up on candles.

Seeing Red said...

When I start reading all this stuff, I just think POOF!

Robert Cook said...

Gee...what a surprise. An op-ed in the Wall Street Journal calls for tax cuts, reduced govt. spending, and a reduction of regulations on business.

I guess they'll frontpage the next story of a dog biting a man.

Original Mike said...

We tried your way, Robert. It's not working.

Bruce Hayden said...

I think that one problem with the way that "Keynesian" economics is practiced by the Dems running esp. the 111th Congress was the assumption that any government spending was equivalent. (And, then, they would make up multipliers, vying with each other to make up the biggest one). So, much of the Keynesian multiplier money went as political payoffs to favored constituencies, contributors, families, and friends.

Maybe infrastructure spending might increase national wealth, but, as President Obama pointed out later, there is no such thing as a shovel ready project.

So, where did they end up spending all that money? Bolstering unionized goverment workers' pension; Green Energy subsidies and loans to friends, families, and benefactors; Cash for Clunkers; extended unemployment benefits, etc.

In short, much, and probably most, of the money spent in the name of Keynesian stimulus turns out to have been redistribution from the productive to the non-productive parts of the economy.

Now, maybe transferring wealth from the productive to the non-productive segments of the economy might work over a very short timeframe, it does not work long term, because the segments from which wealth is taken are, by necessity and definition, the ones most likely to invest well and hire.

But, that is what has happened here in the name of Keynesian economics - the diversion of wealth from the productive to the non-productive sectors of the economy has been made semi-permanent, with the portion of GDP being spent by the federal government having risen from maybe 19% when the Dems retook Congress in 2006 to 24-25% currently.

Keynesian economics might work if done for a very short period of time. But, shortly, if tried too long, the drag on the economy caused by this diversion and misallocation of wealth and resources will inevitably result in lowered GDP and increased unemployment.

In other words, Keynesian economics only works as a very short term boost, if it works at all, but Congress has used it as an excuse to greatly increase long term government spending, at the expense of the private sector, which ultimately must pay for it.

Which is why the 1930s were so bad, and why unemployment remains so high today, long after we should have started our recovery.

machine said...

Mike, you mean we tried the republican way (tax cuts for the wealthy, de-regulation of financial industry)for 8 years and ended up with the Great Recession, and then tried the Democratic way and began to climb out of it in spite of republicans in Congress doing everything they can to prevent recovery? Is that what you mean? Because that is what happened...

Chris Phelan said...

Seeing Red. Nordhaus and Mankiw are not proposing energy taxes in addition to all of this regulation regarding energy. They are proposing energy taxes as an ALTERNATIVE to all of the regulation. Stop all subsidies to green energy. Stop all general carbon regulation. Don't do anything in terms of regulation to hinder domestic energy production. But tax energy consumption.

This IS a good way to raise revenue. Here's why: If we put a $5 tax per barrel of oil or equivalent, one effect of this would be to drive down the world price of a barrel of oil from lower US demand. (We are a big part of world demand). If the world price is driven down $x, then the net increase in cost to U.S. consumers is $(5-x) per barrel. Basically, the Saudis and Venezuela would be paying part of the tax. We could then use the $5 per barrel revenue to lower other taxes.

Bruce Hayden said...

The need for taxes on energy externalities such as carbon emissions is central to our ability to reduce the harmful side effects of economic growth. It is striking how the political dialogue in the US has ignored a policy that has so many desirable features. Perhaps, in the near future, faced with the deadline of a dire economic situation, negotiators will formulate such a policy. It would generate substantial revenues while bringing so many long-run economic and environmental benefits. Simply put, externality taxes are the best fiscal instrument to employ at this time, in this country, and given the fiscal constraints faced by the US.

You obviously either make this sort of stuff up, or copy from someone else who does.

The idea that taking money out of the productive sector and spending it however it seems most useful for the politicians will grow the economy is, simply put, ludicrous. And, that is what you are essentially claiming.

Oh, and apparently, you think that the best time to increase the wealth transfer from the more productive segments of the economy to less productive segments is in the midst of the biggest recession of our lifetimes.

BTW, what externalities? Ones you make up? And, please don't jump into AGW here, unless you really want to look silly.

Scott M said...

and then tried the Democratic way

If you mean "the Democrat" way, and by that I assume you mean flatly denying there was any looming housing problem despite multiple warnings, I might tend to agree with you.

machine said...

Do you mean the "looming housing problem" that was a result of republican de-regulation of the mortgage industry...that problem?

Original Mike said...

@machine - Our recession is, first and foremost, the result of a disasterous government housing policy, coupled with the Fed opening the spigot.

Pookie Number 2 said...

Do you mean the "looming housing problem" that was a result of republican de-regulation of the mortgage industry...that problem?

No. It's the "looming housing problem" caused by legislation (the Community Reinvestment Act) forcing banks to lend to people that couldn't repay the loans. That act meant that the information normally captured by housing prices was materially distorted, leading to a wide array of impaired decision-making.

Bruce Hayden said...

Mike, you mean we tried the republican way (tax cuts for the wealthy, de-regulation of financial industry)for 8 years and ended up with the Great Recession, and then tried the Democratic way and began to climb out of it in spite of republicans in Congress doing everything they can to prevent recovery? Is that what you mean? Because that is what happened...

You have your timing off a bit. For one thing, the Dems took over Congress, and therefore control of spending, in 2006. And, not surprisingly to many of us, the economy did not drop off the cliff until after that.

Secondly, the trigger for the recession was the bursting of the housing bubble - caused in great part by lending practices strongly pushed by Congressional Dems - failure of subprime loan tranches started the economic crash, and these loans were primarily given to people who had no real ability to repay them.

And, if there is much recovery, it is minimal, when we should be coming roaring out of the recession. We aren't, thanks to the "Keynesian" policies of the Democrats who ran Congress from 2007 through 2010. Instead, we are mired in the deepest recession of our lifetimes (ok, there may be some here who remember the Great Depression, but likely few).

Shouting Thomas said...

machine, you are absolutely full of shit. The mortgage industry was not deregulated.

It was regulated to the hilt. The Community Reinvestment Act directed banks to make loans to uncreditworthy borrowers in pursuit of the great Utopian goal of Diversity.

Canuck said...

It's more complicated then yes Keynes or no Keynes. In any case, I do think the USA is in a liquidity trap and won't get out anytime soon due to a population that is overleveraged with debt.

And, of course, the on-coming euro-train blow up isn't going to help.

But I'm more Northwestern U. then University of Chicago in my macro.

Chicago people can be so theoretical they leave the earth.

EDH said...

machine said...

Mike, you mean we tried the republican way (tax cuts for the wealthy, de-regulation of financial industry)for 8 years and ended up with the Great Recession

Actually, you mean the across-the-board tax cuts, where most of the aggregate "revenue loss" to the government went to lower income earners?

What deregulation? Most of the financial deregulation was initiated under Clinton-Rubin. Even Sarbanes-Oxley was under Bush, probably a regulatory overreach. Bush attempts to reign-in FM-FM through Treasury were thrwarted; see Barney Frank and other Dems ridiculing OFHEO regulators in hearings.

then tried the Democratic way and began to climb out of it in spite of republicans in Congress doing everything they can to prevent recovery?

Democratic congress starting in 2006 until 2010, am I wrong? We started climbing out in 2006?

Canuck said...

"We aren't, thanks to the "Keynesian" policies of the Democrats who ran Congress from 2007 through 2010."

Not to be a pedant, but those weren't Keynesian policies.

EDH said...

Moreover, only the House of Representatives went Republican in 2010.

Scott M said...

Do you mean the "looming housing problem" that was a result of republican de-regulation of the mortgage industry...that problem?

Show me, machine, where I defending the GOP. You can't, but it's apparently all you've got. I notice you're not disputing that, whatever the cause, the Democrats (not the Democratics) were completely negligent and, seemingly, willfully so in their handling of the situation.

edutcher said...

Meltzer is somewhat wrong on number 3 - the "the negative effects of the stream of costly new regulations" was a feature of the New Deal, too.

Most of it only was repealed during the Reagan years.

And, in addition to econophile's fifth reason, don't forget number six:

Keynesians are never wrong, at least as far as they see it. The idea that there might be a few things wrong with the model after 80 years of try and fail just doesn't compute as far as they're concerned.

Shouting Thomas said...

machine, you are absolutely full of shit. The mortgage industry was not deregulated.

It was regulated to the hilt. The Community Reinvestment Act directed banks to make loans to uncreditworthy borrowers in pursuit of the great Utopian goal of Diversity.


This was Willie's idea, aided and abetted by those giants of high finance the Friend of Angelo and Slobbering Barney.

And Dubya tried for almost a decade to get Congress to reverse it, but it was always killed in the Senate; thanks in no small part to Dodd's handmaiden, GodZero.

Peter said...

One reason why Keynesianism may have worked better (to the extent it worked at all) when FDR was president is because the USA still had a mostly national economy then.

In today's globalized economy, increasing aggregate demand is as likely to stimulate China's economy as to stimulate ours.

But even public works projects worked better back then, in that taxpayers got far more public works for their dollars. For example, a standard CCC outhouse cost $18.00; today it'll cost at least $400,000. to build a two-holer.

Which is to say, even if a governmental economic policy was effective in 1935 (if it was), it won't necessarily be effective today.

Original Mike said...

"And Dubya tried for almost a decade to get Congress to reverse it, but it was always killed in the Senate;:

I do fault Bush for not trying harder. At one point they didn't even introduce it in the Senate because the Dems told them they would kill it. Bad move, IMO. They should have brought the bill up every freaking week, so that people like my machine couldn't get away with his whitewash.

edutcher said...

Apparently, it's the way Senate rules work.

Dodd was very good at getting Zero to be his point man in that.

Something that ought to be brought up this time around.

J said...

Hayden as usual makes up economic history as needed, forgetting that the great Depression was a direct result of laissez-faire GOP-robber baron policies--ie, letting speculators do what they want to with little or no govt. regulation--buy on margin,etc. FDRs' recovery team (with Keynesians..but not all) realized banks' borrowing habits would have to be controlled. The protectionism was not a cause but reaction to the stock market crash.

Robert Cook said...

"The Community Reinvestment Act directed banks to make loans to uncreditworthy borrowers in pursuit of the great Utopian goal of Diversity."

This, of course, is a common slander proffered by the right wing to cast blame on Democratic policies for the housing collapse.

In fact, the blame lies with both parties, insofar as the removal of Depression-era regulations on the financial industry, (such as Glass-Steagall), and the refusal by Congress to exercise its oversight functions on the banking and financial industry were and are bipartisan failures.

The Community Reinvestment Act is intended to eliminate discrimination by banks against lower income borrowers who wish to purchase home mortgages, and to encourage lenders to service such borrowers...consistent with safe practices.

In other words, the legal mandate to fairly serve a previously ignored segment of the populace does not require the banks to make loans to uncreditworthy borrowers that the banks know the borrowers cannot afford and will not be able to repay.

http://en.wikipedia.org/wiki/
Community_Reinvestment_Act

Any banks who knowingly and heedlessly made such unsafe loans did so of their own initiative purely to exploit borrowers who wished to own homes. The banks didn't care, as they sliced up the mortgages and repackaged them and sold them to other entities as good financial instruments.

In short, the banks defrauded both their low-income borrowers and the third parties to whom they later sold the repackaged mortgages. The banks are criminally liable for their behavior and cannot honestly be excused as simply having done what was "required" of them by the government in general, (or the Democrats, in particular).

Indigo Red said...

Keynesianism doesn't work because people like to own stuff.

J said...
This comment has been removed by the author.
Pookie Number 2 said...

Two thoughts for Robert Cook:

The Community Reinvestment Act is intended to eliminate discrimination by banks against lower income borrowers who wish to purchase home mortgages, and to encourage lenders to service such borrowers...consistent with safe practices.

1) Legislation doesn't "encourage", of course, it "forces". Fitness coaches "encourage". Weight Watchers "encourages".

In this particular case, banks were forced to lend to people that were not able to pay the competitively-determined appropriate risk adjusted interest rate. That artificially boosted the demand for housing, leading all sorts of analytical types to draw erroneous conclusions from the data.

2) The fact that banks are greedy (which is true) has no bearing on the fact that well-meaning government interference in the marketplace is inherently distortive. It does suggest that when governments ignore human nature in setting policies, it's likely to get unanticipated results.

wv: reitann - I'm looking for confirmation from the Blogger lady.

edwardroyce said...

The biggest reason why Keynesians get it wrong:

Government is an expense, not an asset.

edwardroyce said...

@ J

"But a plot featuring bipartisan villains (including GOP) is too confusing for the teabugs and libertarian zombies."

You have a joyful incoherence that brings a happy to every occasion.

However the problem with that statement is that conservatives, libertarians and TEA party members are fully aware that liberals & moderates, of BOTH parties, are entirely to blame for the housing fiasco.

Glad you finally arrived.

jeff said...

"The banks didn't care, as they sliced up the mortgages and repackaged them and sold them to other entities as good financial instruments. "

This is a bit simplistic, isnt it? Didnt the bank slice up mortgages and the bundle slices of both secure mortgages and shaky mortgages together and then the rating firms classified them as good financial instruments? There are a lot more people to blame than just the evil bankers.


"Mike, you mean we tried the republican way (tax cuts for the wealthy, de-regulation of financial industry)for 8 years and ended up with the Great Recession, and then tried the Democratic way and began to climb out of it in spite of republicans in Congress doing everything they can to prevent recovery?"

Also way too simplistic. Most revenue in taxes is contained in the middle, not the wealthy or the poor. If you are claiming the economy went south due to tax cuts (????) then you must want the 20%-80% to pay more in taxes since that's where the money is. The financial industry went in the direction that the regulations pointed it in. You regulate one thing, they will make money doing something else. You regulate that and they make money somewhere else. And then you remove the de-incentive for wild bets by bailing out companies without much penalty. Something both Democrats and Republicans have done. The current Democratic way to get out of the recession was to throw a ton of money at its supporters and wait for the recession to cycle back to growth and declare victory. It didn't cycle back. So cynically they are proposing to do the same thing again, figuring that the natural recovery must be close at hand and they have one more chance to throw money away and then claim they fixed the economy. But anyone who thinks that the economy is this way because of tax cuts and deregulation certainly explains the economic illiteracy of the OWS movement.

edwardroyce said...

@ Robert Cook

"In other words, the legal mandate to fairly serve a previously ignored segment of the populace does not require the banks to make loans to uncreditworthy borrowers that the banks know the borrowers cannot afford and will not be able to repay."

1. Wikipedia is not a source.

2. If Wikipedia is your source ... *laugh*.

3. The other half of the CRA problem is that the federal lending standards were severely relaxed allowing the use of the CRA as a club to beat the bankers.

4. The same relaxation of standards enabled Fannie Mae/Freddie Mac to then buy the obscenely worthless loan paper.

J said...

insofar as the removal of Depression-era regulations on the financial industry, (such as Glass-Steagall)

That had something to do with it, Cookie (or is it Bubba-troll with his wikis open?)--Clinton, the great demopublican, was following orders from Gingrich and Gramm mainly to give finance people more rein (to make C-paper loans, invest with securities,etc (ie using Ma and Pa McTurnipseeds's mortgage at the casino--the New Deal was aimed to prevent that). But a plot featuring bipartisan villains (including GOP) is too confusing for the teabugs and libertarian zombies. Redux!




Eddie troll--you don't know a multiplier from yr mama's speenkta but like spew some pseudo-WSJ investor BS and like maybe some of klanhouse regs will take you seriously. You haven't arrived--no blog, no info. nothing to say. Maybe link to some of yr Heroes of LDS t-shirts, little man--priced to move

J said...

You mean the easing of quals--Eddie-troll--which the financiers wanted, and most GOP (ie Gramm), Eddie-dumbass, and the privatization/FHLMC program, which Nixon started? YOu don't know fuck about the secondary mortgage market either little man.

Original Mike said...

"In other words, the legal mandate to fairly serve a previously ignored segment of the populace ..."

Question: Why did the banks ignore that segment of the populace?

EDH said...

Robert Cook said...
The Community Reinvestment Act is intended to eliminate discrimination by banks against lower income borrowers who wish to purchase home mortgages, and to encourage lenders to service such borrowers...consistent with safe practices.

When CRA enforcement policy rejects actual loan default rates of similar loan products to measure fairness in bank lending, but instead substitutes as the metric of discrimination the racially disparate impact of loan issuance to a "community", you have effectively abandoned "encourag[ing] lenders to service such borrowers...consistent with safe practices."

jamboree said...

I've collected unemployment once in my life. It instantly went straight back to either the government for various fees, taxes or the banks/insurance companies. So the loop actually goes from the employed to the government and banks no matter what way you look at it.

And there you are.

There's a flow problem, but it's got more than one step. It's like you have a plugged up drain in your shower and a leak in your sewer pipe and up the water pressure to fix it, then wonder why it's not getting fixed.

It's not really because you are taking water from the productive areas of the plumbing and redistributing it to the unproductive area (with all the blessed v cursed, good v evil duality of that), it's because the system is not only damaged, but badly designed and is suffering an ingrained flow problem.

Robert Cook said...

"Question: Why did the banks ignore that segment of the populace?"

Ask the banks.

Prejudice? A decision that loans to lower income borrowers would be insufficiently profitable--not unprofitiable, just insufficiently profitable--for them to bother with? I can only speculate.

Nevertheless, the Community Reinvestment Act did not require banks to make unsafe loans to borrowers who would not be able to meet their obligations. Banks who did so acted outside the requirements of the CRA, impelled by greed, unconcerned that they would be stuck holding the losses, as they knew they would not be.

In short, the banks committed fraud.

Chip S. said...

@RCook--Do you really believe that the correct way to assess the effects of any piece of legislation is to read its statement of intent? That's hilarious.

In a previous thread you cited "basic civics" as the basis for your stated views. Now I believe that you may actually have been sincere.

Someday, when you get to college, you'll have an opportunity to learn real policy analysis. You'll find it exhilarating.

Robert Cook said...

Chip S., I guess you're talking about the "X factor," the unpredictable wild card of human behavior.

Still and so, banks were not required under the law to make bad loans; they did so of their own iniative for their own (self-serving) purposes.

Robert Cook said...

Eddieroyce:

"1. Wikipedia is not a source."

Can you find language in the law that requires the banks to make loans they know to be unsafe to borrowers they know to be incapable of meeting their loan obligations?

Pookie Number 2 said...

Prejudice? A decision that loans to lower income borrowers would be insufficiently profitable--not unprofitiable, just insufficiently profitable--for them to bother with? I can only speculate.

I'd love to see the details of your analysis that suggests that banks were sacrificing products for some unknowable nefarious motive.

You sound like a (somewhat more polite, to be sure) version of the lunatics suggesting that Obama's goal is to destroy the U.S. It strongly suggests that your impression of bankers owes more to supposition than observation

Original Mike said...

"Prejudice?"

LOL. They'd loan money to the devil if there was a profit.

"A decision that loans to lower income borrowers would be insufficiently profitable--not unprofitiable, just insufficiently profitable--for them to bother with?"

Why would they be less profitable? Only reason I can think of is a higher risk of default. (And, how can you claim they'd be "not unprofitiable, just insufficiently profitable". You made that up. You got nothin' to back it up with).

"I can only speculate."

No speculation necessary. It's as plain as the nose on your face. The banks didn't want to lend to people who they feared wouldn't pay them back. The government focred them to, and now we have record defaults and a whole lot of liberals making lame excuses.

Seeing Red said...

We tried your way, Robert. It's not working.


Hasn't worked for 80 years or so.

Seeing Red said...

“You don’t make the poor rich by making the rich poor.”

A. Lincoln

Chip S. said...

RC-- No, I'm talking about things like this:

You begin by accepting the premise that lenders were discriminating prior to the CRA. AFAIK, the entire evidence for that was a widely-read FRB of Boston study that was roundly and persuasively criticized. There was, in fact, no reliable evidence of discriminatory lending.

If lenders were not discriminating, and yet the CRA presumes that they are, then it follows that the new standards under the CRA are very likely to induce reverse discrimination. This is in fact what happened. The CRA's performance standards are inane quotas based on nothing more than crude demographics. They are in no way reliable indicators of the presence or absence of discriminatory lending.

The CRA created a demand by banks for increased loans to minorities as a share of their portfolios. They bought some of these from outfits like Countrywide, and they originated some themselves. They didn't have to worry about the quality of these loans--or so they thought--because Fannie and Freddie assured them that they'd backstop them. Then some very clever Wall Street guys came up with a way to repackage these loans that might have worked out fine if housing prices hadn't collapsed in such high concentrations. The mis-assessment of the riskiness of these assets by S&P and Moody's was the fatal error committed by Wall Street.

The propagation mechanism was the creation of ultimately toxic MBS's, but the initial impulse was the CRA. The nobility or foolishness or cravenness of the intentions of its crafters is irrelevant.

Seeing Red said...

No speculation necessary. It's as plain as the nose on your face. The banks didn't want to lend to people who they feared wouldn't pay them back. The government focred them to, and now we have record defaults and a whole lot of liberals making lame excuses.




Hello, student loans. When Deep Pockets Uncle Sam guaranteed little risk, we now pay $50k/yr for stupidity.

Seeing Red said...

Housing sounds like the S&L debacle.

I had a friend working at a bank back then and she told me they were forced to make those loans by guess who?

ken in sc said...

The banks responded to the incentives they were given by legislation. The dangers of the Community Reinvestment Act were well known and well publicized. I read articles about it in Forbes years ago. Yes, some Republicans went along with it, but it was mostly a Democrat idea.

Robert Cook said...

"I'd love to see the details of your analysis that suggests that banks were sacrificing products for some unknowable nefarious motive."

Haven't you been reading the news these past three years? The banks sliced up and repackaged their mortgages with other amalgams of financial instruments and sold them off to investors. They made their profits and the investors were left holding valueless pieces of junk. The motives were certainly nefarious, but they are absolutely not unknown.

J said...

The mis-assessment of the riskiness of these assets by S&P and Moody's was the fatal error committed by Wall Street.


No, the politicians who created the situation (ie, via de-reg, ending Glass-Steagall act, easing of quals, allowing swaps, etc) are the guilty parties --Clinton, Gramm,Gingrich and the other demopuglicans who voted for de-reg policies. And...really blame should be placed on the Nixonians and Raygunites who insisted on the privatization of FanMae/FredMAc (wasn't allowed initially). History's a byatch eh Chipster.

Robert Cook said...

"The banks didn't want to lend to people who they feared wouldn't pay them back. The government focred them to...."

Can you show where or how the banks were forced by law to make unsafe loans?


The guilty will always make excuses and cast blame on others when caught...then banks are no different.

Original Mike said...

"The banks sliced up and repackaged their mortgages with other amalgams of financial instruments and sold them off to investors."

Gee, if this was all some nefarious plot, how is it that the banks themselves were the biggest losers (until we bailed 'em out)? I've got no love for the banks and Wall Street, but I do love theories that actually fit the facts. I find your theories wanting.

Chip S. said...

The motives were certainly nefarious...

Oh, please!

First of all, you're being incredibly sloppy in thinking that "banks" are some homogeneous category. It was commercial lenders who originated the mortgages, GSE's that supported a secondary market in them, and investment banks that created the MBS's.

Second, risk spreading is pretty much the chief function of Wall Street. The fact that in this particular case the risk was mis-assessed and therefore mis-priced is in no way evidence of "nefarious" intent. The feds pressured the system to create crappy loans; investment bankers looked for the best way to pass the crap through the system.

Chip S. said...

Can you show where or how the banks were forced by law to make unsafe loans?

Can you not read? Are we all just wasting our time trying to educate you on this point?

Pookie Number 2 said...

Robert - I typed "products" instead of "profits", but my point was that your assumption that the banks ignored potential profits prior to the CRA is quite naive.

The guilty will always make excuses and cast blame on others when caught...then banks are no different.

Neither are politicians, other than the fact that successful politicians are better at confusing intent and outcome, and shifting the blame to faceless corporate entities.

It's nice to want to provide housing to poor people, but it's impossible to do it sustainably without incurring disproportionate costs.

PaulV said...

J, the multiplier for the Stimulus has been calculated at 0.7. It destroyed 10 jobs for every 7 created. No wonder Obama's recovery failed.

Pookie Number 2 said...

Haven't you been reading the news these past three years? The banks sliced up and repackaged their mortgages with other amalgams of financial instruments and sold them off to investors. They made their profits and the investors were left holding valueless pieces of junk. The motives were certainly nefarious, but they are absolutely not unknown.

Do you see any significance to the fact that the banks chose not to engage in what you're terming nefarious behaviour prior to the CRA?

Robert Cook said...

"Gee, if this was all some nefarious plot, how is it that the banks themselves were the biggest losers (until we bailed 'em out)?"

Like all persons or entities motivated by greed, they were reckless and assumed they would never pay any consequences for their wanton behavior. And, as it turned out, they didn't lose at all...as you point out, they got bailed out. So, where is the disincentive, even now, for their behavior?

J said...

The feds pressured the system to create crappy loans

Including many GOP politicians--at least urbanites. The GOP-TP hayseed types from flyover-land may not have--but NY-GOP did. So,bipartisan, not just yr usual demo whipping boys (tho the Pelosicrats did little about it). Loan sharks don't have a problem making crappy loans, as long they get paid upfront--and wit the "swaps" allowed by Grammonomics, they can keep selling crappy loans to different underwriters. A bit too complex for ya Chipster--yr about Monet ,not money, right

PaulV said...

Cook. GSEs owned 71% of the subprime mortgages while Financial institutions own 29%. Should you not blame the GSEs who created the paradigm then?

Original Mike said...

"So, where is the disincentive, even now, for their behavior?"

I agree with this. Firms that are "too big to fail" should not be allowed to exist.

J said...

PaulV --take it up with Krugman & Co. He says the stimulus worked to some degree--the problem being insufficient stimulus funds. Anyway, not all non-conservatives are Keynesians, Bubba-Paul--but insofar as Maynard argued for govt. intervention at times, he deserves some respect (ie,the usual armchair econo-dweeb doesnt understand JMK's General theory and his points on aggregate demand which are rather complex (and not without flaws).

Original Mike said...

"GSEs owned 71% of the subprime mortgages while Financial institutions own 29%."

Yeah, I thought Fannie and Freddie owned most of them.

Chip S. said...

A bit too complex for ya Chipster--yr about Monet ,not money, right

Well, sure. Monet appreciates; money depreciates.

As to the rest of your comment, what part of "the feds" says "Democrats only" to you?

Freder Frederson said...

J, the multiplier for the Stimulus has been calculated at 0.7. It destroyed 10 jobs for every 7 created. No wonder Obama's recovery failed.

This statement is nothing but a bald faced lie. What is your source for it.

Alex said...

As usual Robert Cook assumes the WORST intentions from capitalists. Of course he assumes the BEST intentions from the ivory tower bureaucrats Obama, Warren, Krugman.

J said...

Well, you were at least suggesting...the Demos were to blame for the entire mortgage crisis when that is not the case(e.g., de-reg BS of Clinton-Gramm era responsible)..

Assuming that...western-capitalism holds up, yes Monet & CO could be a good investment (for the ostentatiously wealthy at least)s. Tho...in a real crisis--Malthusian-like, or a riot--might not be too valuable. Were you dying of thirst, hunger, ..or out of gas, a mahsterpiece wouldn't be of much use, eh. Nor would a pile of gold bars, either.

Michael said...

Robert Cook: The government, of course, did not condone the making of bad loans. It did mandate that a percentage of loans be made to customers who would not satisfy customary credit requirements. In the end it is a distinction that is without a difference.

The bundling of loan tranches into various pieces did not render the tranches worthless it was the premise that a hundred, or thousand, bad pieces could not all go bad at once. That is for the most junior tranches. That logic, of course, proved to be spectacularly wrong.

Lefties, who always claim to know every fucking thing about every fucking thing, could have made a lot of money had they acted on how flawed the premise was.

Michael said...

J is correct on the matter of gold bars. It is a preposterous concept that come Armageddon the very lucky will be lugging around gold which they will exchange for grits and spinach. Gold plated gat would work much better.

Robert Cook said...

"As usual Robert Cook assumes the WORST intentions from capitalists. Of course he assumes the BEST intentions from the ivory tower bureaucrats Obama, Warren, Krugman."

Anybody with any damned sense must expect the worst from capitalists.

I don't assume the best from elected officials or government bureaucrats...they also must be suspected of bad intentions unless proved otherwise.

The difference is, we have--purportedly--some control over the behavior of our government, given that we, the people are the government. (Self-rule, and all that.)

On the other hand, we have little to no control over the actions of powerful and wealthy private actors.

You must have never read any of my pasts comments on this blog if you think I have even the least positive regard for Mr. Obama. I didn't vote for him in 2008 and he still performed below my expectations. I certainly won't vote for him in 2012.

Robert Cook said...

"Robert Cook: The government, of course, did not condone the making of bad loans. It did mandate that a percentage of loans be made to customers who would not satisfy customary credit requirements. In the end it is a distinction that is without a difference."

Where did it mandate that?

Scott M said...

Anybody with any damned sense must expect the worst from capitalists.

The alternative to capitalism is...? What, Cook?

Canuck said...

"The bundling of loan tranches into various pieces did not render the tranches worthless it was the premise that a hundred, or thousand, bad pieces could not all go bad at once. That is for the most junior tranches. That logic, of course, proved to be spectacularly wrong."

"Lefties, who always claim to know every fucking thing about every fucking thing, could have made a lot of money had they acted on how flawed the premise was."

well, you did need a fund, like Michael Lewis, to short it big time.

But people did see it coming -- Robert Shiller, Nouriel Roubini. I wouldn't necessarily call them leftists -- don't know their politics. But if we want to be honest, Krugman called it ahead of the crash.

People who listened to Roubini did well. It was clear in late '07 that a hard or soft landing was coming.

And word to the wise - the Euro is in big trouble. China isn't going to save the world. They can't and everybody else has their head up their arse. There will be issues. Look to your investments.

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Alex said...

Cook, if you have such negative expectations about all capitalists, all the time, what system do you favor instead?

He's obviously a Communist.

PaulV said...

Freder Frederson said...
J, the multiplier for the Stimulus has been calculated at 0.7. It destroyed 10 jobs for every 7 created. No wonder Obama's recovery failed.
This statement is nothing but a bald faced lie. What is your source for it.

Not it is the sad truth.
The failed recovery proof enough for you? Shame that Christina Romer went back on her prior work to be part of this failure.

Canuck said...

"The failed recovery proof enough for you? Shame that Christina Romer went back on her prior work to be part of this failure."

Her models were right once they were readjusted for the larger credit/GDP shock.

People did not follow Christy Romer's advice. The policy plan was not her plan. She was shut down in policy meetings, as Althouse showed in a recent post about how women were treated in the white house.

Nobody was listening to her. Mine was well go back to the university.

Freder Frederson said...

The failed recovery proof enough for you?

No, it isn't. The economy was shedding jobs before the stimulus. It added jobs (albeit not at a rate fast enough to significantly lower unemployment) after the stimulus. That trend is slowing as the stimulus expires--and the loss of government jobs advocated by the Republican Congress is negating much of the anemic private sector growth.

And I asked you specifically where you got the .7 multiplier figure. You still haven't provided a link, so I suspect the monkeys flying out of your butt gave you that figure.

Alex said...

Freder - what is the value of government jobs? Pleaes explain that to me.

Jay said...

machine said...

Do you mean the "looming housing problem" that was a result of republican de-regulation of the mortgage industry...that problem?


You can't name a single example of "de-regulation" enacted by Republicans in the last 20 years.

Not one.

Jay said...

Freder Frederson said...



No, it isn't. The economy was shedding jobs before the stimulus. It added jobs (albeit not at a rate fast enough to significantly lower unemployment) after the stimulus


The unemployment rate increased after the "stimulus" was passed.

You are an idiot and a liar.

Canuck said...

"The failed recovery proof enough for you?"

This is what I do not understand. Roubini, Krugman, ect. were all saying that the stimulus plan was not going to work. They said why it wasn't going to work. Krugman had models of why it wasn't going to work.

Then it didn't work.

QED.

Then people decided they were wrong. But they've called it every. single. time. I listened and saved a lot of money.

Now people aren't listening to them about the euro-crisis. Or, rather, North America has its head in the sand and the Europeans are a mess.

Ah well.

Here is a fabulous picture in lego of the euro-crisis.

http://blogs.reuters.com/felix-salmon/2011/09/06/jp-morgan-explains-the-euro-crisis-with-lego/

Bruce Hayden said...

Hayden as usual makes up economic history as needed, forgetting that the great Depression was a direct result of laissez-faire GOP-robber baron policies--ie, letting speculators do what they want to with little or no govt. regulation--buy on margin,etc. FDRs' recovery team (with Keynesians..but not all) realized banks' borrowing habits would have to be controlled. The protectionism was not a cause but reaction to the stock market crash.

Seems to be an attempt to change the debate. I never even hinted at the cause of the Great Depression, but your suggestion that laise faire was the cause ignores the protectionism that was started under Hoover, not FDR.

Nevertheless, that is totally irrelevant to the present debate - of Keynesian economics. My point, which you seem to have intentionally ignored, is that a lot of research supports the theory that the Great Depression was greatly extended and deepened by the Keynesian policies practiced by FDR. Instead of a normal recession that might have ended in two or three years, it extended from 1929 up until we entered the war at the end of 1941, with some of its deepest points in the mid-1930s, well after we would typically have been recovered.

The problem there though is that the other things that FDR did through that time may have also deepened and greatly extended to financial downturn. For one, FDR makes Obama look like he has a steady hand on the economy. FDR apparently would switch policies overnight on a whim. And, we now know that uncertainty is bad for economic recovery. He also, relatedly, engaged in abrogating the rule of law, as Obama has done (such as with the GM and Chrysler bankruptcies) to the disadvantage of lenders.

I think that the best theory is that FDR's Keynesian policies combined with the uncertainty caused by his almost random seeming switches in economic policy are primarily what caused the Great Depression to last 12+ years, instead of just a couple.

Of course, libs ignore the facts and come up with their own theories, such as sun spots and the like.

Bruce Hayden said...

Cook - you may be correct that the CRA did not mandate lending to people who could never repay their home loans. But it is well documented that it was utilized by bank regulators, under pressure from community organizers and pressure groups to pressure banks into making these loans.

The way that it would work is that when their charters came up for renewal, they would be asked by the regulators how much lending were they doing in minority, etc. communities. The threat was that if they weren't lending enough in those communities, their charters might not get renewed.

Turns out that the Dems in Congress, lead by Barney Frank, were the ones pushing the regulators to push making these loans.

Then, you have Fannie and Freddie stepping in to buy up a lot of the loans, including a lot of the bad ones. Turns out that those organizations had been turned into sinecures for Dem politicians out of power during the Bush Administration. They made millions in bonuses for purchasing all these bad loans, and when the Bush Administration tried to rein them in, the same Dems (both Dodd and Frank in particular) in Congress pushing for the sub-prime lending stepped in to prevent reform of these organizations and their lending practices.

Yes, Wall Street had their part in this too - inventing a way to actually sell the sub-prime loans by chopping bundles of securities into tranches of various levels of security.

And, a lot of this was supposedly protected by insurance, which is where AIG comes in - it got TARP money so that Goldman Sachs (big Democratic contributors since FDR) wouldn't lose on the (supposedly) insured home loans that it was holding, many of which were sub-prime.

Jay said...

Hayden as usual makes up economic history as needed, forgetting that the great Depression was a direct result of laissez-faire GOP-robber baron policies--ie, letting speculators do what they want to with little or no govt

You can present no facts supporting this stupid assertion.

Robert Cook said...

"Cook, if you have such negative expectations about all capitalists, all the time, what system do you favor instead?"

Why do you assume I must prefer an entirely different system? Why would it not occur to you that the problem may be less in the particular system--be it capitalism or socialism, say--than in the way the system is ordered and managed and regulated, and in the degree of and potential for fairness to flourish or unfairness to exert itself?

Any system will be as good or as bad as the means devised (and the persons in place) to manage it, and tolerable or intolerable to the degree the system is responsive to the citizenry and subject to their oversight and control...and to the extent those who manage the system are as much subject to the law as are the citzenry.

The founders had negative expectations of any who would assume the reigns of power--as they knew power, whether conferred by public office or amassed along with wealth, and whether in the public or the private sphere--would corrupt all who held it, to greater or lesser degree. The Constitution, and the Bill of Rights, particularly, was written to check or impede the evil that even supposedly well-meaning persons might do once armed with great political power. The laws that we write through our representatives in Congress should, similarly, be intended to check or impede the evil that private entities might do once armed with great economic power.

For the people at large to accept or champion the excuses offered by the powerful as to why the people's check on their power is too burdensome and should be loosened is for the citizens to submit to the usurpation of their power and to welcome their diminution from citizens to subjects.

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