Archive for the ‘Economic follies’ category

Bitter Lemons

March 22, 2013

From Paul Murphy, writing at the Financial Times Alphaville blog (h/t and lifted bodily from Krugthulu).

Big depositors in Cypriot banks stand to lose circa 40 per cent of their money here, which has drawn plenty of fury and veiled threats from Russia.

Victor_Dubreuil_-_Barrels_on_Money,_c._1897_oil_on_canvas

But what exactly can the Russians do about this? Sell euros? Tear up double taxation agreements? Murder Cypriot bankers? Medvedev and co could not have played a worse hand during this crisis — and it’s not immediately clear why.

Cyprus now has a binary choice: become a gimp state for Russian gangsta finance, or turn fully towards Europe, close down much of its shady banking sector and rebuild its economy on something more sustainable.

The choice is obvious.

Forgive me if I’m just too dense to live, but isn’t this how capitalism is supposed to work?  Yo! Russian travelers:  that citrus you just sucked may be bitter indeed, but you put a bunch of money at in play, and sometimes you lose it.  That has a lot to recommend to our banking sector, of course, but really, if we are ever to have a financial sector that does what it is supposed to do (allocate capital within the real economy and hedge –insure — risk) then we kind bankers to actually bank, and not view themselves as money lenders and casino operators.  I’ve sat in on quant conference tasks (ever want to learn how to trade on derivatives of volatility measures?  Me either), and it’s all fun and games until someone loses an eye.  Cyprus and naughty Russians are just far out enough on the periphery to stand at ocular risk.  But I do think we would be better off if our galtian overlords had just a bit of healthy fear back-crossed into the breed.

Image:  Victor Dubreuil, Barrels of Moneyc. 1897  And yes, I have used this one before.  Works here too.

McArdle Mini-Me Follies, Real Estate Economics Division

May 25, 2012

Blogger’s note: You’ll find below that I use an anonymous source to support my attempt to dissect Someone [who] is wrong on the Internet.™  As always, anonymous sources are only as trustworthy as the writer who deploys them.  You have been warned.  (BTW — I do know that it’s cheating to do even minimal reporting on a blog post.  Sue me.)

Dr. Manhattan is one of the McArdle guests feeding the wire whilst that blog’s proprietor is preparing what will no doubt be a never-before equalled work of economic and/or culinary erudition. His is the nom de blog of someone described as “a lawyer…who represents, among others, clients in the investment industry” — a connection that may prove significant below.

Up for dissection today: his post titled “A Modest Proposal” in which he promotes the idea of killing what he alleges to be the lead culprit in the crash of 2007-8:  Mortgage Backed Securities.

What’s fishy here?  Well — lots.

I’m not going to go full metal blogpocalypse on this, in part because life is too short, and in part because Dr. Manhattan gets props in my book for having written clearly and unequivocally against the vaccine-autism claimed link on his (now dead) personal blog — from the perspective of a parent of an autistic child.  That kind of writing in that community takes courage, so this brush with the McArdle empire will be as free of my usual attitude in that direction as I can make it

That said, here’s the passage that set me wondering about this post:

…killing MBS will likely kill the 30-year fixed-rate mortgage with no prepayment penalty, which, in the words of Raj Date, “does not flourish in the state of nature.”  And right now very few people can get one of those anyway, which is not a coincidence.

Hmmmm.

One of the benefits of hanging out at a place like MIT is that there is almost always someone around who actually knows stuff on just about any subject you’d care to check…and so it is with the economics of real estate.  I dropped a line to a colleague up the street, and got confirmation of the obvious:  the 30 without a pre-payment penalty (the clause that makes refinancing mortgages so straightforward) significantly predates the rise of mortgage backed securities (by decades).  Such mortgages start to appear in the 30s; MBS start to become significant in the marketplace after 1970.  That the end of the latter would kill the former is, as we say, an assumption not in evidence.

Oh well.  And that “very few people can get one…” claim.  I’m filing this in the life-is-too-short category to check fully, so I’ll just note that (a) 30 year mortgages remain by far the most common housing loan out there — roughly three quarters of all mortgages as of the most recent Census report (2011, on 2009 data).

Also, being as I’m someone refinancing for the third time a loan first taken out in 2009, I can in my anecdotage* attest that the no-prepayment-penalty mortgage is both alive and trivially easy to obtain.  (At least in my market, it remains the default option.)

What bothers me about this passage is just the garden variety flaw behind so much glibertarian and/or right econ blogging:  what they know** requires no actual data to confirm.  This is kind of what you’d expect at a McArdle-branded blog:  that which ought to be true need not be checked.

But the tricky bit is that plausibility is all; the moment the reader’s willing suspension slips  — then you read everything else in the piece with attenae quivering.  Hence, I was ready when I took a second look at this gem:

 CDOs and credit default swaps don’t kill financial systems, mortgages kill financial systems.

Uh.  No.

As it happens, I’m not operating out of my usual sea of ignorance on this point, as my current project involves a deep dive into the first debt-for-equity swap in financial history.  The key fact most often ignored from that early period of finance is that though plenty went wrong, usually in ways that, frankly, aren’t materially different from the ways folks game and/or fail to grasp the system now, the core financial act of abstracting things into numbers is an enormously useful trick.  It is, truly, an engine of wealth.  See, e.g. Adam Smith, chapter IV of Book I of Wealth of Nations on the importance of a medium of exchange; currency is just the first step in the process by which finance mediates transactions.

In that vein, mortgage backed securities are like any tool; you can build a house with a hammer; you can also crush a harp seal’s skull.  It is all a matter of the user and the constraints that user’s society places on the deployment of such tools.  As my correspondent at MIT put it, there are three clear points of vulnerability inherent in the process of packaging individual mortgages into a big clump:

1). Originators do not have skin in the game and may try to pass off bad loans as good.
2). Rating agencies are paid by the pool creators rather than the investors (who are unknown at the stage when ratings must occur).
3). Special servicing needs a better business model. (TL: I.e., those who handle troubled or in-foreclosure mortgages need to do it right, which isn’t happening)

All of these are known flaws.  All of them are subject to regulatory responses.  My interlocutor again:

Until the 100 year flood #3 was never problematic. As for #1 and #2 as long as F&F were functioning as a public entity they monitored and disciplined originators and rating agencies with bad records. 800 lb gorillas can do that.  So a huge monopsonistic mortgage conduit actually overcame the intrinsic problems with MBS – and in my view should simply be turned into a non-profit public utility!

The alternative to MBS is to return to individual loan underwriting, retention and servicing.  We could certainly choose to say hello to all that, but at a cost — not a trivial one — that in the end would make the price of money for housing detectably higher.

This isn’t a terrifically complicated idea:  from its emergence in the 18th century, the bond market has lowered the cost of capital applied to all kinds of stuff in the real world, beginning, more or less, with the British Empire.  (See, for example, the brief essay buried about 2/3rds of the way through Volume II of Fernand Braudel’s Civilization and Capitalism, which gave me my first glimpse of the role of liquid capital markets and Britan’s rise to world-power.

All of which is to say that the derangement of the mortgage market in the United States was indeed a major and growing problem through the ‘oughts, compounded by an ideological commitment that prevented regulation everyone with an economics IQ higher than a plant’s understood to be necessary.  But even if the collapse of the housing market provided the spark for global financial disaster, the fuel for that inferno came not from the securities constructed directly out of home loans, but from their derivatives.  And as it is in derivatives that a whale’s share of the money can be made (at least until the music stops) those on Wall St. resisted and still resist not just regulation of those instruments, but any real discussion of their significance.

But here’s the blunt reality of modern finance: the scale of the derivatives market vastly exceeds that of the real economy that underlies it.  The leverage — the number of dollars at risk  in excess of the value of the real assets from which such bets are derived — is what makes for catastrophe.  Dr. Manhattan’s airy confidence, as quoted above, that ” CDOs and credit default swaps don’t kill financial systems,” is more than wrong.  To the extent that it reflects accurately what folks on Wall St. actually believe, it’s terrifying.

Or, as my MIT wise man says, more gently:

Not sure your writer fully understands how CDO and CDS markets work, and how counter party risk is basically unmeasurable – making them horribly subject to a systemic meltdown.

I’m betting none of this comes as a surprise to anyone reading this; reality based communities tend to be able to count on both fingers and toes.  And I guess I’ve committed my usual sin of John Foster Dulles-ing what was, after all, a throwaway of a line and a thought.

But I do think it important to try to push over and over again one basic point: financial markets are essential; they fund real lives.  They are also prone to failure in ways that are unsurprising, and are, at least in part, subject to constraint by design.  To pretend that failure is at once impossible and inevitable, just one of those things (like cancer) that attends the messy business of being alive, is merely to ratify the transfer of wealth from most of us to those with their paws on the capital spigots.

Dr. Manhattan might say that he is merely directing our attention to the root cause of our ills — but it is to me notable that the instrument he wants to do away with is the one that lowers the cost of a mortgage to you and me, and those he wants leave untouched are what buys as 2008.

If it were McArdle herself who had written this, I’d add snark here.  But as I said up top, Dr. Manhattan is someone who has earned some benefit of the doubt.  He may simply have gotten this one wrong, which is a state that comes to us all; me certainly.  So I’ll leave it here….

Over to you all.

*Credit for that coinage (at least in my first hearing) to the king of the three dot columnists, the gone but by no means forgotten Herb Caen .

**In the Mark Twain sense of knowledge.

Images:  Frans Snyders, The Fishmonger, first half of the 17th century.

Benjamin West, The Death of General Wolfe, 1770.

How’s That Austerity Thing Working For You?

February 15, 2012

Just to remember how bad Republican notions that we should cut spending in the midst of a recession, this latest from the Eurozone:

The euro zone economy shrank slightly less than expected in the last three months of 2011, but five countries including Italy fell into recession as the sovereign debt crisis discouraged consumers from spending and businesses from investing. sovereign debt crisisdiscouraged consumers from spending and businesses from investing.

Growth in the 17 countries that make up the euro zone fell 0.3 percent, Eurostat, the European statistics agency said [PDF] Wednesday. But the pain was most acute among smaller countries and in southern Europe — ground zero of the debt crisis.

…“It could have been worse,” Martin van Vliet, an economist at ING Bank, said in a note to clients. The figures “clearly indicate that ‘core’ euro zone economies generally were less affected by the escalating debt crisis than peripheral economies, which seems to make sense given that the financial turmoil and austerity efforts are concentrated in the latter part of the region.” (Emphasis added.)

In case you were wondering whether even hobbled stimulus efforts matter, here’s the context with which Eurostat framed its update:

During the fourth quarter of 2011, GDP in the United States increased by 0.7% compared with the previous quarter (after +0.5% in the third quarter of 2011)…Compared with the same quarter of the previous year, GDP rose by 1.6% in the United States (after +1.5% in the previous quarter)…

There’s lots of specific issues hidden within the aggregate data, so it would be an error to overclaim.  But yeah, as far as the data do go, the real world is reiterating a verdict to be read over and over in the historical record.  Despite what the Republican presidential field will tell you, or Paul Ryan, or just about anyone in a leadership position over in GOP land, slashing demand in a recession is an astonishingly stupid thing to do.

Just ask these guys. Or these. Not to mention these. (Via KThug.)

Image:  Gong Kai ,Emaciated Horse, before 1307

By The Way, David Brooks Is Still Always Wrong

November 13, 2011

I know this is already long since fishwrap, but amidst the many disembowelings of David Brooks discovery that he has always been at war with Eurasia   always  loved Mittens, I have to rage, rage, at the relentless, endless, fetishization of the deepest, most degrading fantasy of the right.  No, not that one.  Nor that one either.  Nor this.

No it’s the almost touching faith evinced by Mr. Brooks and the entire GOP presidential field in the existence of a free market in health care.  So, just to flagellate a truly dead horse, let’s take a look at one specific passage from Our Lady of Perpetual Broderism’s Romney tongue-bath:

True Medicare reform replaces the fee-for-service system with premium support. Government gives people money, rising slowly over time, to shop around for their own private insurance plans. The system would reward efficiency and quality, not just quantity. Competition between providers would unleash a wave of innovation.

The only problem is that the marketplace for health care that exists in the world real people inhabit bears little or no resemblance to Brooks’ pleasant vision of informed consumers, with full information in hand, shopping around for the perfect combination of benefits and price they need — not just now, but through the life (and death) cycle all of us endure.

 

That is: most evocations of the free market in just about anything call up spherical cows, simplified (and dangerously convincing) models of what actually happens in the world.  But to imagine a genuine Ec. 101 free market in health care — and to praise someone as “serious” for building policy on the assumed reality of such delusion — that takes real effort, a true commitment to avoid knowing inconvenient facts.

At least, so says such a DFH as Daniel McFadden.  That would be the 2000 Nobel laureate in economics who has taught at such dens of raving lefty lunacy as USC, UC Berkley, and (ahem) MIT.  And that would be the same fellow who has spent quite a bit of time analyzing the notion of consumer driven health care.  Here’s what he had to say in 2008 in a working paper co-authored with Joachim Winter and Florian Heiss:

Most, but not all, consumers are able to make health care choices consistent with their self-interest, even in the face of novel, complex, ambiguous alternatives. However, certain predictable irrationalities appear – excessive discounting of future health risks, and too much concentration on dimensions that allow easy comparisons, such as current cost and immediate net benefit. Some consumers are inattentive, particularly when prior choices or circumstances identify a default “Status quo” alternative.

These behavioral shortcomings imply that some degree of paternalism is essential if Consumer Directed Health Care is to allocate resources satisfactorily. Health care markets need to be regulated to keep out bad, deceptive products, particularly those that offer “teaser” current benefits but poor longer-run benefits. Consumers need good comparative information on products, and they need to have this information brought to their attention. Consumers appear to underestimate the probabilities of future health events, [or] anticipate the resulting disutility, and as a result they systematically underspend on preventative or chronic care. Socially optimality will require that these services be subsidized, or choices regarding them be framed, to induce desired levels of utilization.

[From the second paper listed on McFadden’s website, linked above: “Consumer-Directed Health Care: Can Consumers Look After Themselves?” pp. 19-20]

Note what McFadden et al. do not say.  They don’t say market mechanisms can’t work.

They do say that human beings display predictable behavior that makes it impossible to rely on an unregulated market to deliver health care.  They point out that those irrationalities fall most heavily in the area of guessing what you or I might need some years down the road…i.e. when we are likely to need good care the most.*

Hence, the need for what the authors above call “paternalism,” and what I would term the normal function of the concept of universal insurance — mandated if necessary under the particular policy choice — against risks all members of a society face.

McFadden and his colleagues are hardly the only ones who get this.  This paper is exemplary, not determinative.  And again, it’s not that these writers represent some radical wing of anti-classical economics clinging to the margins of the profession.  In fact, McFadden and his co-authors display some familiar, reflexive thinking.  I’d argue with the Nobel laureate in his offhand dismissal of a different approach, what he terms “a government single payer/single provider program.”

Partly, the difficulty I have with the expert here is that single payer is not the same as single provider.  Conflating the two allows one to damn one with the flaws of the other — which is hardly cricket in a serious policy discussion.  And when anyone — even a distinguished fellow like McFadden — says that he “believes” the problems of such a system will be the same as for private plans, then I become an honorary Missourian: “Show me.”

But that’s an aside.  The core point is that even folks with a deep institutional and disciplinary engagement with the idea of markets understand that you can’t run health care on the principle that the customer knows best.  We don’t — we can’t, really.  And that’s why Romney, and Ryan, and all the other GOPsters trying to transfer risk to the American people and profits to American insurers are never, ever “serious.”

Which is just another long way round to repeating the obvious. David Brooks is always wrong.  He kind of has to be, given how he has dedicated his career to the notion that Republicans belong in power, no matter what.

*Brooks — like the GOP candidates — might argue at this point that they never have contemplated an unregulated private market in health care.  Which may be accurate, but not true (to channel my inner Sally Field).  That is — the degree of regulation in the market to which all calls to repeal Obamacare would return us was the one in which a host of problems along the lines McFadden et al. point out, and many more besides.  More broadly — even if you take the GOP as sincere in its stated principles, they oppose “paternalism” in individual decisions.  Which means they oppose exactly what is needed in the delivery of health care.

Images:  Edouard Manet, The Dead Bullfighter, 1864-1865

Pompeo Batoni, Time Orders Old Age to Destroy Beauty, c. 1746

You Can Always Tell A Harvard Man (And Woman)…

September 16, 2011

…You just can’t tell how much damage they will do.

The reality-based community took it on the chin again this week in a whole bunch of ways.  One that caught my eye came in this exchange, reported in TPM:

“[I]f you want a role that has benefit programs for older Americans, like the ones we’ve had in the past, and that operate for the rest of the government like the ones we’ve had in the past, then more tax revenue is needed than under current tax rates,” [Congressional Budget Office chief Doug]Elmendorf said. “On the other hand, if one wants those tax rates, then one has to make very significant changes in spending programs for older Americans” or all the rest of the government’s functions.

Given where Congress finds itself — a separate story that began over a year ago — that’s the debate Democrats want to be having. Should we roll back safety net programs in order not to increase taxes on the wealthy?…And it’s precisely the debate Republicans do not want to have. So they spent Tuesday trying to reorient the conversation: instead of arguing in favor of their preferred and informed decisions about the future of the country, they posited a scenario where crisis is upon us already and the only plausible way to avert fiscal catastrophe and help the country end its economic slump is to cut, cut, cut right now.

“There’s a recent report by Alberto Alesina of Harvard University,” noted Sen. Rob Portman (R-OH), “showing that the most successful and pro-growth deficit reduction took place in countries that relied chiefly on austerity programs, spending cuts. And nations that relied more on tax increases were less successful in reducing the deficits and had slower economic growth.”

Ah, one more zombie lie — or rather an error, or failed analysis turned into a public lie by those who repeat it.

Alberto Alesina and Silvia Ardagna published this paper in 2009.  Portman accurately described what it claimed to demonstrate.  To say, as Brian Beutler does in the TPM piece, that this work is controversial is surely true — just as remarking that a blue whale is large is a valid statement.  Here’s Krugman discussing it shortly after publication, capturing the flavor of informed (as in, statistics-competent) criticism.  There are, of course, a wealth of other takes a google’s length away.

But the real problem is that Krugman’s and others’ initial questions of the work, were, of course correct.

To put it in the way natural scientists do when confronted by similar challenges to well-established knowledge, extraordinary claims require extraordinary proof.  Here, if you want to say something contrarian about experiences as empirically well documented as the effects of fiscal austerity on economies, you need to nail every facet of the argument.  You don’t just get to say the speed of light in a vacuum in the early universe was different from that speed now (a real claim).  You gotta prove it.  So far, eighty years of trying to do so for both the tired light hypothesis and the anti-Keynsian fairy-dusters have been unsuccessful.

This latest attempt to assert (spherical) cows are (spheroidal) chickens is no different.  The most recent analysis of Alesina and Ardagna’s claims comes  in this report from the IMF research shop.  Essentially, the new work shows, the Harvard team constructed their data universe in way that led them into a fundamental mistake, as Krugman’s describes:

…results purporting to show economic expansion following spending cuts and/or tax increases were based on a statistical illusion: an expanding economy can often lead to rising revenue and/or falling spending (e.g. because safety-net spending falls or because the government cuts back in an attempt to cool off inflationary pressures). And as a result, what the Alesina-Ardagna results capture is muddle by reverse causation.

The IMF authors say something similar with proper professional decorum r — which makes their conclusion yet more rhetorically devastating:

Estimation results based on measuring discretionary changes in fiscal policy using cyclically-adjusted fiscal data––a practice often used in the literature––suggest that fiscal consolidation stimulates private domestic demand in the short term, providing support for the hypothesis. This result is consistent with a literature that finds that fiscal contractions can be expansionary. However, our analysis suggests that using cyclically-adjusted data to estimate the effects of fiscal consolidation biases the analysis toward overstating expansionary effects.

In contrast, estimation results based on fiscal actions identified directly from contemporaneous policy documents provide little support for the expansionary austerity hypothesis. In particular, we compile an international dataset of fiscal policy adjustments motivated by a desire to reduce the budget deficit and not in response to current and prospective economic conditions using the Romer and Romer (2010) historical approach. Based on the fiscal actions thus identified, our baseline specification implies that a 1 percent of GDP fiscal consolidation reduces real private consumption by 0.75 percent within two years, while real GDP declines by 0.62 percent. The baseline results survive a battery of robustness tests. Our main finding that fiscal consolidation is contractionary holds up in cases where one would most expect fiscal consolidation to raise private domestic demand. In particular, even large spending-based fiscal retrenchments are contractionary, as are fiscal consolidations occurring in economies with a high perceived sovereign default risk.

Put that more simply:  you need to look at what really happened during the actual events you want to understand if you are going to make any sense of the situation.  When you look at a derived model of those events, you miss what people actually said and did, and you are vulnerable to a whole host of methodological traps to which any act of model-making is subject — and hence you screw up.  Which is what the Harvard pair appears to have done.

I don’t know what Alesina and Ardagna will say to all this, or about the use of their conclusions by Senator Portman.  But, of course, once it’s out there, they could issue mea culpas from the balcony in St. Peter’s Square, and it wouldn’t matter.

That’s the nub:  the real issue is that credentialed economists produced work that does not conform to reality — but does conform to what our friends in the Comfort the Comfortable lobby would wish to be true…and hence, it will never die.  Just to repeat:  it is not true that cutting demand in an economy with a demand gap in the gazillions will magically conjure up folks willing to spend.

Oh — and one more thing:  Portman knew, or should have, that the work he cited was, to say it most nicely, unproven. The IMF research, only the latest in a series of demonstrations of flaws in the Alesina-Ardagna conclusions, was released early in the summer, more than two months before the hearing this week.

If Portman did not pick up on work of direct relevance to their argument about the proper course for our country to steer, then he and his staff are incompetent, and should have no role in setting policy for a rowboat, much less for a society and economy on which the lives and happiness billions at home and abroad depend.  If he did know about it, then he’s a lying scum who has no business in any position of power.

You make the call.

So, just to get back to the underlying reality (and to belabor the obvious one more time): as the British Chancellor of the Exchequer George Osborne was reminded this week, starving an already famished economy of someone, anyone, the government willing to spend is the way to screw your economy, and especially those most vulnerable in it.

Which, of course, is exactly what the Republican deficit hallelujah chorus is trying (and mostly succeeding) in doing to us.

Images:  David Vinckboons, Distribution of Loaves to the Poorbefore 1650.

Viktor Oliva, The Absinthe Drinker, 1901

Eternal Vigilance…

August 28, 2011

… is the condition upon which God hath given liberty to man, you know.

And while “liberty” is rapidly rising to the level of “patriotic” as a word as hollow as Annie Dillard’s frog, all of John Philpot Curran’s fury still holds iwhen we’re talking the defense of our own minds in the face of the relentless, repetitive, numbing, booming bullshit machine of the right.

Case in point?  The usually estimable David Leonhardt, economics correspondent and soon-to-be Washington bureau chief for The New York Times.  In today’s Week in Review section, he’s written a mostly fine piece on the vexing question of why Bush appointee Fed Chairman Ben Bernanke has led the central bank to its current state of inaction in the face of all the economic hardship the United States now endures.

Most of the piece is on the money — so go read it. In brief(ish…remember who’s blogging–ed.) Leonhardt notes, correctly, that within the academic community both liberal and conservative economists are having a robust debate about exactly what the Fed can and should be doing.  But, he documents, the Fed has essentially collapsed the public debate to whether we should worry about essentially flat inflation at every waking moment, or merely most of them.

Leonhardt accurately diagnoses the incentives that make this intellectual vapidity the soft option for Fed chief and his colleagues:

Mr. Bernanke knows that if he errs on the side of passivity — worrying more about inflation risks than unemployment — he risks only a modest flogging from colleagues and politicians.

He even takes the next step and correctly identifies the reason why the penalty to be feared for taking action is assymetrically worse than that for the rolling disaster we now endure while the engineer dozes at the switch:

If he leans the other way, he risks being accused of, well, treason.

Yup:  he calls out Rick Perry by name and the GOP by clear implication for creating a political context in which the price of acting to aid the economy is a traitor’s badge.

So, Leonhardt knows this bully-boy intellectual thuggery is happening, and he knows its bad, and he talks about options to be taken even now — and all this is a good thing for whatever chance we have of wresting the economic debate back from the strategically ignorant who are transferring wealth, public and private, from the middle class to the richest among us.

But despite this quite explicit truth-to-power approach, you can find in this piece evidence of just how destructively successful the right has been in conditioning the basic structure of political debate over the last decade and more.  Leonhardt talks about the organization of the Fed as one of the real impediments to the adoption of policies that might trade general economic advantage for pain for the banks.  He talks, reasonably enough, of Obama’s choice of inflation moderates, rather than doves for the appointments he controls.  But then he says this:

The Obama administration has also been slow to fill some Fed openings. At least one of the 12 seats has been vacant since Mr. Obama took office, and two are now.

And whose fault is that?  Leonhardt’s account clearly blames Obama and his administration.  This is false.  The Obama team was slow — that part is true; but the responsibility for current vacancies lies squarely with a GOP Senate minority determined to block any move that might lead to an effective economic policy.

Leonhardt himself certainly knows this.

How can I be so sure?

Because his own newspaper has fully covered the key events that expose Republican knavery on these appointments.  First, Obama made appointments to all the vacancies more than fifteen months ago.  The nominees were all economics thinkers of the kind that Leonhardt seems to feel is missing from current Fed discussions.  What’s more, Leonhardt undoubtedly knows the story of my MIT colleague, Peter Diamond, an expert on unemployment and social insurance of eminence sufficient to have earned him the most recent Nobel Prize in economics, whom Obama nominated for a Fed governorship three times.

Diamond, recall, was blocked by career sucker-off-the-federal-teat Richard Shelby, point man for the destroy-the-country-to-save-it cabal now operating under the name of the Republican Party.

On his withdrawal from the nominating process, Diamond, again in the Times, pointed out what a disaster the Shelby doctrine for appointments would be for the future of intelligent policy making, of governance.

I’m picking on Leonhardt here not because he’s complicit in all that knavery.  You can tell from his writing over several years that he did not fall off the turnip truck yesterday; he knows who’s doing what, and for what reasons, and he’s spent a considerable amount of time exposing lots of Republican nonsense on everything from — well, stupid inflation tricks at the Fed now to GOP misdirection on the healthcare debate.  He is, genuinely, one of the good guys, and I’m extremely happy that he will be leading the Grey Lady’s Washington coverage heading into the next election cycle.

But that’s my point:  the notion that both sides do it, seems to be almost surgically implanted in the current journalistic frame for political reporting — and that makes it hard to think and write clearly about contentious issue even for those who clearly understand that both sides don’t, at least not in remotely symmetrical ways.  And the constant dinning of Obama’s culpability for more or less everything, including the damn four hours of rain delay in yesterday’s games at Fenway, makes it way to easy to grab the first factoid — Fed vacancies! — as evidence of mutual malfeasance.

But that means that Leonhardt’s readers don’t get the correct story.  Just to belabor the obvious one last time: Leonhardt’s story boils down to the notion that the Fed is failing now for two reasons:  fear of the pressure brought by Republican hacks shouting “treason!” and(at least partially) the Obama failure to appropriately populate the Fed board. But if you don’t know that the same Republican brown shirts shouting down reasoned deliberation are the ones making it impossible for Obama to execute his nominating power, then you can’t figure out who’s responsible for our current policy paralysis.

Eternal vigilance, baby.

Images:  Jean Clouet, Portrait of a Banker, 1522

Rembrandt, Jeremiah lamenting the destruction of Jerusalem, 1630

Even When They’re Right, They’re Wrong.

July 8, 2011

So, the banks, some of them, finally figure out that (some) loan modification is better than the alternative:

Two of the nation’s biggest lenders, JPMorgan Chase and Bank of America, are quietly modifying loans for tens of thousands of borrowers who have not asked for help but whom the banks deem to be at special risk.

Rula Giosmas is one of the beneficiaries. Last year she received a letter from Chase saying it was cutting in half the amount she owed on her condominium.

Banks are proactively overhauling loans for borrowers like Ms. Giosmas who have so-called pay option adjustable rate mortgages, which were popular in the wild late stages of the housing boom but which banks now view as potentially troublesome.

Before Chase shaved $150,000 off her mortgage, Ms. Giosmas owed much more on her place than it was worth. It was a fate she shared with a quarter of all homeowners with mortgages across the nation. Being underwater, as it is called, can prevent these owners from moving and taking new jobs, and places the households at greater risk of foreclosure.

All well and good.  Option ARM’s, the particular class of loans the banks are now modifying, allowed  borrowers to pay no principal, and only part of the interest each month — with whatever interest they chose not to cover ending up as additional loan balance encumbering whatever poor structure to which it is attached.

Those are clearly financial anti-personnel devices,* and it’s probably not a bad idea to try and defuse some of them before they blow. Or at least that’s the reasoning reported:

Bank of America and Chase inherited [interesting choice of word, there, don’t you think? — ed.] their portfolios of option ARMs when they bought troubled lenders during the housing crash.

Chase, which declined to comment on its program, got $50 billion in option ARM loans when it bought Washington Mutual in 2008. The lender, which said last fall that it had dealt with 22,000 option ARM loans with an unpaid principal balance of $8 billion, still has $33 billion of them in its portfolio.

Bank of America acquired a portfolio of 550,000 option ARMs from its purchase of Countrywide Financial in 2008. The lender said more than 200,000 had been converted to more stable mortgages.

Dan B. Frahm, a spokesman for Bank of America, said it was using every technique short of principal reduction to remake its loans, including waiving prepayment penalties, refinancing, lowering the interest rate, postponing some of the balance and extending the term.

“By proactively contacting pay option ARM customers and discussing other products with better options for long-term, affordable payments, we hope to prevent customers from reaching a point where they struggle to make their payments,” Mr. Frahm said.

But the infuriating thing about this story is, of course, that the banks have chosen to help out loans (and people) not yet in deep trouble, but are witholding such aid from those who need it most:

The concern the banks are showing for those who might get in trouble contrasts sharply with their efforts toward those already foreclosed. Bank of America and Chase were penalized last month by regulators for doing a poor job modifying mortgages in default.

Adam J. Levitin, a Georgetown University law professor, said these little-publicized programs were more evidence that the banks were behaving in contradictory and often maddening ways.

“Loan modifications that should be happening aren’t, while loan modifications that shouldn’t be happening are,” he said. “Homeowners of any sort, whether current or in default, would rightly be confused and angry by this.”

So, while I’m glad that something is finally being done to modify loans made through one of the worst ideas in the history of finance, this story actually highlights the much larger failure to deal with the financial and social catastrophe of the broader failure of the home mortgage market. The foreclosure mess is a disaster because it simultaneously has generated a feedback loop of decline in many housing markets and it breaks communities.  Nothing good happens in a neighborhood where too many houses are unoccupied.

DFH’s (Atrios/Duncan Black comes most prominently to mind, but there are plenty of others) have been pointing this out for years now.  And at last, even The New York Times seems to be noticing, even as it documents what may be the first crack in the bankers’ resistance to grappling with their losses.

Welcome to the party, I guess — and, so as not to seem ungracious, let me not say “what took you so long,” to plead instead for much more attention on “the loan modifications that should be happening” to come.

*PS: no doubt, someone, somewhere (Brooks? Will?) must soon instruct us that these clever little monetary claymores were somehow the love-children of FDR, LBJ, Malcolm X, the Big Dog, and Howard Dean.  But, in fact, this is your invisible (and never-to-be-regulated) hand in action.

Image: Jan van Goyen, Peasant Huts With A Sweep Well, 1633