Bubblicious

Dean Baker blogs about the housing bubble very well so I'm going to reproduce this post in its entirety.

The WSJ is effectively covering up for the Fed and the economics profession by implying that there was something difficult about recognizing the 70 percent jump in real house prices as a bubble or realizing that its collapse would lead to serious economic damage. The bubble was not difficult to spot for any serious analyst of the economy. The run-up was a sharp divergence from a 100-year long-trend that could not be explained by any change in the fundamentals of the housing market. It also was not accompanied by any notable increase in rents.

It also should have been evident that the bursting of the bubble would devastate the economy. This article wrongly focuses on the financial aspects of the collapse. While this is important for Wall Street, the real aspects are far more important for the economy. The bubble added more than 3 percentage points to GDP in the form of excess housing construction and another 4 percentage points of GDP in the form of excess consumption driven by bubble generated housing wealth.

This demand was absolutely certain to disappear when the bubble burst. The Fed has no mechanism that can readily replace a drop in annual demand equal to 7 percent of GDP or more than $1 trillion. (The downturn was exacerbated by the collapse of a bubble in non-residential real estate which is still in process.)

This is all very simple. None of this requires complex economic analysis, just competent economists.

It is also worth noting that the WSJ refuses to discuss what could be one of the Fed's most important tools against an asset bubble: talk. If the Fed had devoted its enormous research capacities to documenting the existence of a bubble and the likely implications of its bursting, and the Fed chairman used his enormous megaphone to widely disseminate this information at congressional testimonies and other public appearances, it would have almost certainly been sufficient to burst the housing bubble.

While economists question this possibility, since the cost is trivial (talk is cheap), there is no excuse for the Fed not following this route in addition to whatever other measures it may take.

 As George Harrison says, "with every mistake, we must surely be learning." And Ben Bernanke did thoroughly study the Great Depression and based his policy responses on what he had learned. And it worked this time around. Unlike Baker, I think Bernake did pretty well given the circumstances and given the natural inclinations of conventional wisdom. He thought outside the box in other words.

Andrew Ross Sorkin, author of Too Big To Fail, argues that Treasury Secretary Paulson was more the main driver, but I havn't read the book yet.

Baker writes of the popping of the bubble: "The Fed has no mechanism that can readily replace a drop in annual demand equal to 7 percent of GDP or more than $1 trillion." The popping of the bubble also caused the Great Panic as credit markets froze and overleveraged, ginormous financial institutions collapsed. (Seems the so-called Free Market/Insvisible Hand of Capitalism isn't very nimble or resilient, which is Krugman's point about the "efficient-market hypothesis" and freshwater economists.)

Via Ezra Klein, how Washington Mutual failed:

Within two hours of the call, regulators took control of a company with $307 billion in assets and sold it to rival JPMorgan Chase & Co. for $1.9 billion, a fraction of what the New York powerhouse led by Jamie Dimon had offered just months earlier.

With these swift actions, tens of thousands of shareholders and bondholders lost billions of dollars, and Washington Mutual became known as the largest bank failure in U.S. history -- nearly eight times larger than the Federal Deposit Inurance Corp.’s previous record failure, set during the savings and loan crisis of the 1980s.

Yet despite the size and significance of this event, much of what happened to WaMu has never been reported.

 There was a lot going on at the time. The housing bubble caused the collapse of Bear Stearns, Lehman Brothers, WaMu, AIG, Iceland, etc. Bank of America who was in bad shape just paid back its TARP money even though that leaves it in a weaker position. Via James Kwak at Baseline Scenerio, "From a liquidity perspective, it now has about $20-25 billion ($45 billion minus $19 billion raised from new equity minus a few billion from other asset sales) less cash than it did before paying the money back." Why did they do it? To avoid executive compensation caps. Kwak writes "Update: Ted K. pointed out to me that Wells Fargo, which is generally considered less of a basket case than Bank of America, is not paying back its TARP money yet."

 Obama has been very lucky in some ways (mostly during the campaign like when the financial system imploded) and unlucky in others (once in office he had to deal with all of the messes Bush and the Republicans had left). On the radio I heard Christine Romer describe how she told him that that job market lost only 11,000 jobs this past month and he responded "you mean 110,000?" So, finally there's been a pleasant surprise of good news.

Ahmed Rashid blogs about Afghanistan and Pakistan at the New York Review of Books.

(via Majikthise)

Zero-Sum Thinking
(or thinking like an insurance company actuary)


The human species is still relatively unevolved. Our adrenal glands are too big and our frontal lobes are too small. So, when pundits try to stoke tribal thinking and fear and paranoia, as Yglesias and Steve Walt do here, it usually works.

But it’s not as though the United States hasn’t started some big public works projects over the past decade or so; it just hasn’t been doing them here at home. We’ve spent billions constructing military bases in Iraq and Afghanistan, for example, and another billion or more on a giant embassy in Baghdad and another one in Pakistan. Needless to say, those "public works" projects are a drain on the U.S. economy rather than a source of additional productivity.

Likewise I guess foreign humanitarian aid is a total waste down the rat hole. Dark skin foreigners will never change. (or maybe they will)

Analysts say the deals on three of the country’s top fields show that Iraq, after an embarrassing start, may be on a path to joining the world’s major oil-producing nations, which could in turn upset the equilibrium in OPEC and increase tensions with the neighboring oil giants Iran and Saudi Arabia. Adding to those strains, development rights to 10 other Iraqi oil fields will be offered to foreign companies at a public auction in Baghdad on Dec. 11.

And then Yglesias writes

It seems I should write my official What I Think About Obama’s Escalation in Afghanistan post. Mostly the whole situation makes me want to sigh. I don’t think the kind of effort that as best I understand it we’re undertaking in Afghanistan meets any kind of plausible cost benefit test.

And yet he offers no cost-benefit analysis, not even a heavily spun - i.e. full of lies and ommissions - one.  The main point is that Walt and Yglesias aren't worried about costs, they're not that conservative. No they're just focused on opposing Republican foreign policy whatever that may entail.

I just don't believe Obama is so cynical that he would surge in Afghanistan without believing it was the right thing to do from a security perspective. Granted he is enough of a realist to formally recognize  fraudulent elections in Iran and Honduras as somehow legit, so as not to upset their newly "elected" governments.

Yesterday Yglesias linked to the even worse Alex Massie. Who links to the even worse right-wing Daniel Larison. Who I won't link to because he doesn't deserve the traffic. Massie opines:

To take but one obvious example: if US foreign policy is "largely dedicated to rescuing Muslims" or freeing them from tyranny, then why, the Muslim Street might reasonably ask, does the US support repressive dictatorships in Egypt and Libya and Saudi Arabia and elsewhere?

Is Massie really that stupid? Libya was for a long time a pariah, but now the US "supports" Libya by lifting sanctions b/c they gave up their nuclear program. Egypt is supported along with Israel, because essentially we are buying them off from killing each other and blowing up the Middle East. Same with Saudi Arabia, one of the worlds largest oil-exporter. Also the Saudis don't talk about wiping Israel from the map on daily basis as Iran does. Seems like Massie prefers Iran to these Arab countries who receive favorable treatment? Or maybe he doesn't like Israel. Or the US. He certainly attempts to ventriloquize the "Muslim Street" in an anti-American fashion.

But basically Yglesias and Massie misquote Tom Friedman and omit some of the column which proves their theses wrong. The main subject of his column was Major Hasan who shot up Fort Hood. Yglesias and Massie don't even mention that.

Hitchens in Slate:

When the throat-slitters and school-burners and woman-stoners come to the villagers of Pakistan and Afghanistan at dead of night, they have one great psychological advantage. "One day, the Americans and the Europeans will go," they say. "But we will always be here." There's some truth in this: Most of the talk in this country is now of an "exit strategy," and for all the good they are doing, most of the other NATO contingents might as well have shipped out already.

Massie, Yglesias, Walt, and Larison want to divide the world up between the Evil US Empire and the rest of the world. But I see the Afghans and Americans as inhabiting the same planet. We are all residents of Earth and the more privileged among us shouldn't leave the less fortunate in the hands of the  thoat-slitters and school-burners and woman-stoners.