Arnold Kling

Derek Thompson refers to an analysis by David Leonhardt (it is David, by the way, not Richard) of the New York Times. Leonhardt writes,The story of today's deficits starts in January 2001, as President Bill Clinton was leaving office. The Congressional Budget Office estimated then that the government would run an average annual surplus of more than $800 billion a year from 2009 to 2012. Today, the government is expected to run a $1.2 trillion annual deficit… More »

James Kwak discusses the issue of credit cards and consumer exploitation.From my personal perspective, credit cards are a lot better than twenty years ago, but that's because I pay no annual fee and I get rewards (cash back). This is pure reallocation of money, since all that has happened is that the interchange fees charged to merchants are now going to fund my rewards, and those interchange fees get passed on to consumers as higher prices. More generally,… More »

Fans of scapegoating can applaud the SEC's assault on Angelo Mozilo, the former CEO of Countrywide Funding. My guess is that Mozilo, like many mortgage industry executives, was conflicted during the late stages of the housing bubble. On the one hand, they knew that lowering lending standards was imprudent. On the other hand, the loans were performing too well to justify reversing course. More »

Reading Noam Scheiber and Willem Buiter (I found the links at the WSJ blog) and then reading Nouriel Roubini, I think it is fair to doubt the credibility of the bank stress tests. Roubini writes,The FDIC and Treasury used assumptions for the macro variables in 2009 and 2010 that are so optimistic that the actual data for 2009 are already worse than the adverse scenario...Put plainly, the results of the stress test--even before they are published--are not worth the… More »

It has taken me considerable effort to unravel the financial crisis. Here is a video of Peter Schiff telling a story that is very close to mine--except that the video is shot in 2006, before the crisis hit. The video breaks the speech into segments, and the segment to which I linked is in the middle of the speech.People have been mentioning Schiff to me for quite some time in comments on my analysis, saying things like, "You and he are on the same page." That's… More »

The Wall Street Journal reports that Ben Bernanke made these mildly optimistic remarks:Recently we have seen tentative signs that the sharp decline in economic activity may be slowing, for example, in data on home sales, homebuilding, and consumer spending, including sales of new motor vehicles. A leveling out of economic activity is the first step toward recovery.My guess is that the second quarter of 2009 will not look as bad as the previous two quarters. … More »

Conor Clarke gets at a really fundamental issue. One's political views depend in part on one's view of human nature.In my view, people on the left slip too easily into the implicit assumption that the move from business to government somehow cleanses people of their selfishness and irrationality. With this magic cleansing of individual frailty, government will be wise and benevolent, as opposed to the greedy and mistake-prone private sector.In my view, humans… More »

Felix Salmon says that credit default swaps are just like bonds. Charles Davi says they are just like futures and forwards (actually, they are most like options), which are derivatives that provide liquidity. But CDS are different from either of these. More »

Charles Davi and I agree for the most part. For example, I share his dim view of Hernando de Soto's recent op-ed. However, he linked to an older piece where he criticizes my view of credit default swaps, and I wish to defend that view. More »

He writes,I don't think the Obama administration can bring securitization back to life, and I don't believe it should try.Paul writes this sentence at the end of a long column bashing the market. My view is that securitization of mortgages would never have emerged in a free market. Instead, it came from our country's industrial policy supporting housing. Every major advance in mortgage securitization was a regulatory/accounting gimmick, encouraged or created in… More »

The lead paragraph of the top front-page story in the Washington Post this morning.Treasury Secretary Timothy F. Geithner is proposing a sweeping expansion of federal authority over the financial system, breaking from an era in which the government stood back from financial markets and allowed participants to decide how much risk to take in the pursuit of profit.I am surprised to see this narrative presented as fact. As far as I know, banks have not been allowed… More »

Conor Clarke writes,Decisions about what will make our community better should be made communally -- by pooling revenue and making collective decisions about where and how it should be spent.Let me fix that sentence. It should read, "At the margin, even more decisions about what will make our community better should be made by Congressmen, and fewer decisions should be made by other members of the community."To me, the institutions of the state do not represent a… More »

He writes, The Geithner Plan is a trillion-dollar operation by which the U.S. acts as the world's largest hedge fund investor, committing its money to funds to buy up risky and distressed but probably fundamentally undervalued assets and, as patient capital, holding them either until maturity or until markets recover so that risk discounts are normal and it can sell them off--in either case at an immense profit.Brad is not just swallowing the Kool-Aid. He's… More »

A rather desultory opening to what is billed as a celeberity death match featuring Brad DeLong and Luigi Zingales on whether we are all Keynesians now. Luigi writes,I do not think that any economist would dare to say that the current US economic crisis has been caused by underconsumption. With zero personal saving and a large budget deficit the Bush administration has run one of the most aggressive Keynesian policies in history. Not only has adherence to Keynes's… More »

Bloomberg writes,More than $1.6 trillion has been erased from U.S. equities since Jan. 20 as mounting bank losses and rising unemployment convinced investors the recession is getting worse.Let us say that 50 percent of the loss in wealth reflects the market's reaction to the stimulus plan. That would be $800 billion. A standard assumption is that the marginal propensity to consume out of wealth is 5 percent. That would mean $40 billion less in spending. Then… More »

Simon Johnson writes,Boris Fyodorov, the late Russian Minister of Finance who struggled for many years against corruption and the abuse of authority, could be blunt. Confusion helps the powerful, he argued. When there are complicated government bailout schemes, multiple exchange rates, or high inflation, it is very hard to keep track of market prices and to protect the value of firms. The result, if taken to an extreme, is looting: the collapse of banks,… More »

John D. Geanokoplos and Susan P. Koniak write,The plan announced by the White House will not stop foreclosures because it concentrates on reducing interest payments, not reducing principal for those who owe more than their homes are worth. The plan wastes taxpayer money and won't fix the problem.I predict that in 2015 we will still be reading op-eds with suggested refinements to the housing bailout. That is because the whole concept of bailing out mortgage… More »

Freddie Mac and Fannie Mae are limited to purchasing loans of a certain size, called conforming loans. Larger loans are called "jumbo" mortgages. Traditionally, the spread between the interest rates on jumbo loans and conforming loans was about one quarter of one percentage point. Lately, it has been well over one percentage point.The standard view is that the wide spread demonstrates market failure in the mortgage market. That is, the private sector cannot… More »

One of them still has work to do to win the Nobel Prize. He interviews Phelps and Prescott. "There's a chance that some of the infrastructure spending will do the job of creating more work for earth-moving equipment and construction workers, Phelps noted. "I said, 'a chance'," he continued. "Now, there's also a chance that the perceived increase in the role of government of this sort will have some unanticipated effects on the animal spirits of entrepreneurs.… More »

Richard Florida's cover story in the latest Atlantic is interesting throughout, but this paragraph struck me in particular.Thirty years ago, educational attainment was spread relatively uniformly throughout the country, but that's no longer the case. Cities like Seattle, San Francisco, Austin, Raleigh, and Boston now have two or three times the concentration of college graduates of Akron or Buffalo. Among people with postgraduate degrees, the disparities are wider… More »