The Company He Keeps

Look who Ted Cruz has recruited as his economic advisor:

If it’s true that a man can be judged by the company he keeps, what are we to make of the appointment of former Sen. Phil Gramm as economic advisor to the Presidential campaign of Ted Cruz?

Cruz made the appointment Friday, when he collected Gramm’s endorsement of his quest for the Presidency.

As Micheal Hiltzik points out in his coverage of this — what’s the word?– curious appointment, Gramm is exactly whom you’d choose if one global financial meltdown just wasn’t delicious enough:

Gramm left a long record as a dedicated financial deregulator on Capitol Hill, with much of his effort aimed at freeing up trading in derivatives. That’s why he’s often identified as one of the godfathers of the 2008 financial crisis, which was spurred in part by banks’ imprudent trading and investing in these extremely complex financial instruments.

Gramm himself is undeterred by his own disastrous record, and clearly Cruz is equally unbothered.  That would be why both men are ignoring Gramm’s last appearance as a campaign surrogate:

Gramm’s previous stint as a Presidential campaign advisor ended inauspiciously. That was in 2008, when he served as co-chairman of John McCain’s Presidential run.

Gramm’s most notable moment in that position came on July 10, 2008, when he dismissed the developing economic crisis as “a mental recession” in an interview–and video–released by the conservative Washington Times. “We’ve never been more dominant,” he said. “We’ve never had more natural advantages than we have today. We’ve sort of become a nation of whiners.” McCain immediately disavowed the remarks, and a few days later Gramm stepped down as his campaign co-chairman.

I’m assuming that Ted Cruz does actually hope to become president, and thus makes his choices in the belief that they will advance him to that end.  So I can only see two possible interpretations for this exhuming of one of the most egregious poster children for GOP economic failure.

One is that this is what epistemic closure looks like when it’s at home.  It takes a hermetic seal between you and reality to think the “nation of whiners” trope is a winner this year (or ever, really, but especially now).

The other is that this is just trolling, or rather yet one more instance of believing an action is simply good in itself, transcendently so, if it pisses liberals off.  Which lands Cruz — and the GOP — in exactly the same place as option one: doubling down on the crazy for reasons extremely clear only to those with the correct implants in their upper left second molar.

All of which is to say that I remain firm in my belief that the entity identifying itself as Senator Cruz is in fact one of these guys.

“Where are we going?”

“Galt’s Gulch”

“When?”

“Real soon!”

Image:  J. W. M. Turner, Sunrise With Sea Monsters, 1845

You Don’t Need A Weatherman…

…to tell which which way the wind blows.  Not when even Marty Feldstein marches in with a more aggressive mortgage forgiveness plan than we’ve seen out of either Congress or the administration.

I don’t love the plan as offered, to the extent that an 800 word op-ed. offers much in the way of a fine-grained proposal.  Feldstein, Ronald Reagan’s head of the Council of Economic Advisors, calls for forgiving out-of-the-money mortgages down to 110% of the homes’ value — a threshold that would touch 11 million out of the 15 million  homes in the United States.  Lenders would absorb half the loss and the government would cover the other half, at a cost Feldstein asserts would be less than $350 billion.

I don’t have much to say about that part of the plan.  Why 110%?  Is there any data that suggests that’s the number to encourage underwater mortgagees to stick with the loan?

Or…how much of the current foreclosure crisis is driven by unemployment, and hence at this moment is unlikely to be touched by a payment reduction that still leaves the house underwater?

No clue, here (and no expertise to justify a guess), but these are empirical questions that could be answered…and in any event Feldstein — now at Harvard — is at least trying to come to grips with that insane number of 15 million houses that embody enormous financial loss.

The part of the this proposal that I think is almost certainly a bad deal is the price homeowners would pay to get their mortgage reduction:  Feldstein would transform these loans from non-recourse status —  in which the lender can claim the collateral, the house, but no other assets if the borrower defaults — into an instrument that puts all the borrowers assets are at risk.  To me, taking financially vulnerable people in the midst of  a bad economy and placing them at still greater economic risk seems to me both cruel and stupid.

Much better, in my view, are the proposals that place the government — the taxpayer, you and me, baby — into financial partnership with both the borrower and lender.  In these approaches, the borrower who gets mortgage relief has to share with the lender (and/or the Feds) any gain made from an ultimate sale of the property.  Everybody’s incentives align, and the borrower is not one layoff away from utter ruin, as he or she would be in the Feldstein scheme.

But what really stood out for me is not that Feldstein has come up with the least middle-class-friendly version of mortgage relief out there — that’s how he rolls — but that even such an old Reagan hand has driven to the core of the matter:

…As costly as it will be to permanently write down mortgages, it will be even costlier to do nothing and run the risk of another recession.

Yup, Dorothy, we’re not in Kansas anymore — or perhaps, pace  Thomas Frank, even in Kansas they’ve starting to grasp the most brutish of brute fact.

Yes, it sucks that the taxpayer must bail out over-extended borrowers and the reckless (criminal) financial institutions that placed those loans.  But life does blow sometimes — as most actual grown-ups understand.  Increasingly, those able to recognize the difference between ought and is accept that it’s better to deal with that fact than to watch the entire fiscal structure of our economy swirl down the toilet of whinging infant Congressional Republican orthodoxy.

Feldstein concludes by restating that same message.  Better the nation take its medicine than seek to extract the pleasure of righteousness amidst the rubble:

I cannot agree with those who say we should just let house prices continue to fall until they stop by themselves. Although some forest fires are allowed to burn out naturally, no one lets those fires continue to burn when they threaten residential neighborhoods. The fall in house prices is not just a decline in wealth but a decline that depresses consumer spending, making the economy weaker and the loss of jobs much greater. We all have a stake in preventing that.

That’s DFH talk, of course.  Without quite saying it out loud Feldstein here offers the suggestion that society has both values and obligations that trump the every-man-a-wolf-to-his-fellow-man cult of the individual that passes for  contemporary GOP “thought” on the social compact.

When you’ve lost Marty…

Image:  John Constable, The Hay Wain, 1821

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

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

We Live In Hope

From Bloomberg (via TPM):

Goldman Sachs Group Inc. (GS), the fifth- biggest U.S. bank by assets, received a subpoena from the Manhattan District Attorney’s office seeking information on the firm’s activities leading into the credit crisis, according to two people familiar with the matter.

“We don’t comment on specific regulatory or legal issues, but subpoenas are a normal part of the information request process and, of course, when we receive them we cooperate fully,” said David Wells, a company spokesman.

It warms the cockles of my uncharitable heart that Goldman is taking at least a trivial hit where it hurts them next-to-most:

Goldman Sachs dropped 2.3 percent to $133.04 in New York Stock Exchange composite trading at 9:57 a.m., after falling as much as 3.4 percent following news of the subpoena.

The stock has slid 17 percent since the Senate subcommittee, led by Michigan Democrat Carl M. Levin, used the firm as a case study in a 640-page report on its findings released in April.

Alas, though, I haz a sad over this:

A subpoena is a request for information and doesn’t mean the company is a target of a criminal investigation. Analysts including Sanford C. Bernstein’s Brad Hintz have said they don’t expect the firm to be criminally prosecuted.

If they’ll nail individuals within the firm — enough of them — I’d be satisfied.  I live in hope.

Image:  Charles Wauters Der beim Diebstahl ertappte Hausdiener, (very loosely — the thieving servant, caught in the act), 1845

Balloon Juice is Right

It is a bit like shooting fish in a barrel (memo to self:  has anyone ever actually done this?), but GOP craziness on basic macroeconomics does make for some tasty ridicule.

No one is delivering that abuse better right now than the crew at Balloon Juice, proprietor and recovering Republican John Cole, along with Tim F. and the new co-blogger DougJ, both whom hail from that subgroup of the reality based community that knows the three laws of thermodynamics.*

As for GOP idiocy on tax cuts/opposition to enabling Americans to work, see Cole here and here, Tim here, and Doug here, just for starters.  It’s an impressive haul for one morning’s work, but I want to pick up on one stray thought from DougJ’s contribution.  He writes

The stimulus package proposed by Obama is right out of a macroeconomic textbook (albeit with too many tax-cuts), as Paul Krugman puts it. To let them off the hook because they’re Republican or southern, or whatever the excuse is, is almost like some kind of racism.

To put that another way, I think what we have here, from the media and from the chattering classes in Washington, is the subtle bigotry of low expectations.  Time for the No Republican Left Behind Standards in Economics Argumentation Act of 2009.

Unfunded, of course.  They can afford to pay for the needed tutorials themselves.

That is all.

*Numbers 1-3, which can be loosely translated thusly:  you can’t win; you can’t break even; you can’t leave the game.

Image:  Adriaen van Ostade, “The Schoolmaster” 1662

Stupid Reporter Tricks: NYTimes/Economics Writing Edition

You would think that there was little harm one could do on a mostly straight report on the emerging details of the Obama Adminstration’s stimulus plan.  But it turns out that Peter Baker and John M. Broder managed to find a way.

As I say, most of their article on the Obama plan to spend an enormous sum on public works was what it advertised itself:  a list of the projects that the new administration will fund in the hopes of achieving both short term job growth and long term return on capital improvements in things like transit and the electric grid, among much else.

But then they had to go do the obligatory reportorial “on the other hand,” seeking out a quote from an economist for that noted wellspring of intellectual rigor, the American Enterprise Institute. The AEI’s Mr. Viard obligingly offered up a bit of what he hoped would slip by as Econ 101 (or Ec. 10, for those who share my experience of that venerable course number as used at Cambridge Community College).  He said that…

…public works spending should not be authorized out of the “illusory hope of job gains or economic stabilization.”“If more money is spent on infrastructure, more workers will be employed in that sector,” Mr. Viard added. “In the long run, however, an increase in infrastructure spending requires a reduction in public or private spending for other goods and services. As a result, fewer workers are employed in other sectors of the economy.”

Sounds so simple, and so obviously right, doesn’t it?

Except, except, except…that there are two unstated assumptions here that render the quoted claim more or less nonesense

The first is that the economy is working so close to full capacity that effort in one sector needs must crowd out activity in another.  That is, at full or near employment, or so economists I consulted before writing this post told me, an aggressive public works program would indeed impose an added demand on labor (and other inputs) that could jostle other activities out of the way…but the notion that such expenditures merely rob Peter to pay Paul in a time of high and growing unemployment and a flight of capital from investment is, to put it kindly, misinformed.

For historical support for that statement, go back over the recent skirmishes over whether or not the New Deal worked.  See e.g. this and this, both from estimable Edge of the American West blog.

The other faulty assumption sneaks in there in that by-weasels much-loved phrase:  “In the long run.”

Not to belabor the Keynes connection, but, besides being the location in which we are all dead, the long run does display meaningful differences from the here-and-now. Yes — it is true that debt acquired now must be repaid in the future.  (Sort of–as historians of capitalism like Fernand Braudel have noted, the creation of a permanent, floating, tradeable government debt was one of the keys to Britain’s rise to economic dominance in the eighteenth century, and has played a significant role ever since.)

But the fact that economic conditions change over time does bear on the situation:  deficit spending to prevent disaster in a downturn can have, as mainstream economists have understood for a while, a signficant positive effect on future output (see the New Deal posts reference above).  Wild unfunded spending on stupid wars and transfer payments to the rich in a bubble-boom, not so much, but this isn’t a post about that.

In other words:  Viard’s disingenous argument that paying tomorrow for a hamburger today is a bad idea only works if you’ve already consumed enough Big Macs to make you sick.  That’s not the case right now, as most of us have grasped — which, among other reasons, is why we are not anticipating the inauguration of President John McCain.

Well and good:  so far all we know is that Viard is an ideologically blinkered guy doing what folks do who work for shops like the AEI — trying a little spin to influence the unwary.

But that’s my point.  If Viard wants either (a) to be as simpleminded as the above quote suggests, or (b) to be carefully, accurately deceptive in the way he frames an argument he knows to be weak (take your pick), that’s his look out.  What about the Times’s guys?

They are the ones at fault here.  They fell into the lazy reporter’s idea of  “balanced” journalism, where the conception of balance requires only that you transcribe a quote from somebody willing to say something opposed to the prior source’s quote.

This is a common enough trap in political reporting — reference any number of stories from the last twelve months.

But I think economics writing might be particularly at risk for sloppiness of this sort.  Economics is technical enough for the detailed analysis behind claims to be beyond most non-economist reporter/writers.  It is uncertain enough, incomplete enough as a discipline so that dissent and argument is not just plausible, it’s required.

But that still doesn’t mean you can just let any nonesense fly by.  Most reporters covering complex subjects — all science writing for example, most medical reporting and so on — know less about the technical issues within any particular story than their sources will.

(Peter Gammons is the one certain exception to this.  He knows more about his speciality, baseball, than all but a handful of those inside the clubhouses.  But the Commisioner, as Gammons is known, is a demi-god, and the rest of us aren’t.)

The solution is the same as it always is.  Get a reality check. Call someone.  I’m no journalist. (I was once, of the cub variety, but I haven’t committed serious reporting for decades). But I work at a place with a pretty good econ department, and it wasn’t hard to pick up the phone and the email cursor and ask a few people some questions.  Total time involved — about ten minutes to put the word out; return of answers within a couple of hours.  All deadline-friendly, in other words.

The rub of this all is that there are some very good econ reporters out there.  The Times employs one of the best of them in David Leonhardt. He would have known that Viard was blowing smoke.  That the two writers on this story did not would still have been o.k., if they had merely done what reporters used to do as a matter of course:  get a reality check.  Call someone who actually knows more than you do.  Just ask if the claim makes any kind of sense.

To put all this another way:  the two reporters on this story ought to have been alerted to their problem by the internal evidence of their own quote.  Viard’s statement, if true, is too obvious to have escaped smart people like Obama’s advisors — the Goulsbees and the Summers of the world.

If stimulus can’t work, if there is the kind of law-of-nature certainty that deficit spending defeats itself then, now, and always, then you would easily be able to find both economic-historical evidence and lots more heavyweight folks to say so than some guy flacking for a partisan “think” tank.  No?  Maybe, just maybe then, you’d think there was a problem here.

As a reporter for the “newspaper of record” you have to be able to run that simple minded a smell test.  If you can’t, or won’t?…well, to echo the master:

Why oh why can’t we have a better press corps?

Image:   Bernarda Bryson Shahn, “A Mule and A Plow,” poster for the Resettlement Administration, c. 1935-1937.

On the Power of Prayer: High Holidays/Financial Meltdown edition

So, last week, first day of Rosh Hashanah, the time comes in the service to say the prayer for our country.  The hazzan calls up a member of the congregation to lead that prayer, an economist — joking as he did that given the news of the day, it made sense to have our house money scholar put a little extra English on the supplication.

Flash forward ten days to yesterday.  Same point in the Yom Kippur service.  The same guy gets called, with the same joke.  Only this time he responds with the data:  the market was down 1,000 points between the two holidays (and close to the same again in the time that passed from yesterday’s prayer to this writing).

Whatever the virtues of prayer may be, moving markets ain’t in ’em.

Image:  Maurycy Gottleib, “Jews Praying in the Synagogue on Yom Kippur,” 1878.  Source:  Wikimedia Commons.