Posted tagged ‘Financial Crisis’

Stupid Reporter Tricks: NYTimes/Economics Writing Edition

December 9, 2008

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.

Quote for the Day: Financial Crisis/Warren Buffet Edition

October 17, 2008

From today’s NYT op-ed by the Sage of Omaha:

I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I’ll follow the lead of a restaurant that opened in an empty bank building and then advertised: “Put your mouth where your money was.” Today my money and my mouth both say equities.

I get the restaurant line.  But actually visualizing the thought when I consider all the places my money has been?  Not such a pretty picture

Ambinder’s Follies, Redux

October 7, 2008

Ambinder had a true howler today, one not picked up, so far as I can find on a quick search, as it should have been.

In what he billed as “The Daily Racism Debate,” Ambinder chided Barney Frank for having the temerity to suggest that the GOP and its allies might have had a racist edge when they blamed lending under the Community Reinvestment Act for the collapse in the housing market, and hence for the global financial crisis that we now endure.

Here’s what Frank said:

“They get to take things out on poor people,” Frank said at a mortgage foreclosure symposium in Boston. “Let’s be honest: The fact that some of the poor people are black doesn’t hurt them either, from their standpoint. This is an effort, I believe, to appeal to a kind of anger in people.”

Here’s Ambinder’s considered take on this apparently offensive statement, fisked lightly:

Had it not been for the Community Reinvestment Act and the cheap mortgages provided by Fannie and Freddie, a lot of poor, black people wouldn’t have homes.

Quick sleight of hand notice here:  Freddie and Fannie got Bush administration to meet affordable housing goals by buying up subprime mortgages; far from being a consequence of CRA rules, the two F’s exposure to the riskiest class of loans was increased as a part of mendacious and incompetent administration’s attempt to avoid the messy business of housing the poor.

But a lot of poor white people wouldn’t have homes either. So it’s classist, more than racist, if it’, indeed, is motivated by prejudice at all.

This is, of course exactly what Frank said:  see above.  He noted that the fact that some poor people are black is a feature, not a bug, for a campaign now increasingly obviously playing the “not-like-us” card to a crowd primed to react to the blast of the race dog whistle.

At the same time, it might speak to the recklessness of Democratic policies, well intentioned or not.

Well it would, if the policies were in fact reckless; i.e. — a significant contributor to the financial crisis.  Except, of course, they were not, at least when grown-ups minded the store.  See below for more on this.

Many of people can’t afford their mortgages, and the entire country is paying a price.  Hence the anger, which crosscuts with latent racial/culture biases.

Yes, fine:  but why do all these people have mortgages that they cannot afford?  Well Irvine Renter can give you chapter and verse on the incentive structure that led some people through folly and or deceit to borrow way beyond their means.

But if you look for the underlying cause of the mortgage and financial meltdowns, don’t you think the decision to remove most regulation of the banking sector might have something to do with it?  How about the creation of an even more lightly regulated pseudo-banking industry?  And what about the decision  — written into law by McCain advisor and potential Treasury Secretary Phil Gramm —  to leave more or less wholly uncontrolled the trillions of dollars in the kind of derivative financial instruments Warren Buffet has more than once warned were “time bombs, both for the parties that deal in them and the economic system.”

(This particular quote comes from the 2002 Berkshire Hathaway Chairman’s letter to shareholders.  2002!  That would be GOP controlled White House and, after Nov. both houses of Congress 2002, in case you were wondering.  This disaster was not a surprise to those paying attention).

Ambinder’s fellow Atlantic blogger, Ta-Nehisi Coates, has written several posts on the leap on the right to what he calls, rightly, the “Blame the Negroes” escape hatch, well before Ambinder published his post.  The key one is here.   If Ambinder had troubled to read his colleague with care, he would have seen a discussion of one of the best available one-stop debunkings of the whole CRA-poor-folk-are-the-problem slander.

Here’s the key quote from Robert Gordon’s breakdown of the role of CRA in the crisis:

Most important, the lenders subject to CRA have engaged in less, not more, of the most dangerous lending. Janet Yellen, president of the San Francisco Federal Reserve, offers the killer statistic: Independent mortgage companies, which are not covered by CRA, made high-priced loans at more than twice the rate of the banks and thrifts. With this in mind, Yellen specifically rejects the “tendency to conflate the current problems in the sub-prime market with CRA-motivated lending.? CRA, Yellen says, “has increased the volume of responsible lending to low- and moderate-income households.” [italics added]

So let’s recap.  Ambinder says, in essence, that Frank was playing the race card when he accused the other side of playing the race card in the argument over who should take the blame for the financial mess.

But Frank was right about both aspects of the question in dispute:  first, the CRA is not materially at fault — to state otherwise is a lie, disproved on the numbers over the decades-long history of the act; as you can see detailed in the piece on the other end of the link above CRA governed institutions are less, not more, likely to have engaged in bad lending practices…

…and hence, second, GOPers and the McCain campaign itself, are in fact playing to the worst of our national psychoses, as, with their now famous wink, they blame the irresponsible poor, many of whom, as Frank noticed, just happen to be black, for taking and defaulting  on loans that — they alledge —  would not have been made hwere it not for the dasterdly CRA.

That is:  Ambinder’s chiding of Frank for telling the truth echoes, perhaps amplifies, the very wound that Frank is trying to excise from our body politic.

To echo the source on this kind of post, Brad DeLong, why oh why can’t we have a better press corps.

Image: Walker Evans, Bethlehem houses and steel mill. Pennsylvania, Nov. 1935.  This image is available from the United States Library of Congress‘s Prints and Photographs Division under the digital ID fsa.8c52905.  Source:  Wikimedia Commons.

Quote for the Day: Junot Diaz/Thoughts to Think in the Midst of Interesting Times Edition

October 2, 2008

I have the very good fortune to call the wonderful writer and generous artist Junot Diaz my colleague (and friend).

A week or so ago, he gave a reading from his now famed-across-the-galaxy novel, The Brief Wondrous Life of Oscar Wao at MIT — it was kind of a homecoming after roughly a year of travels and talking in support of the book.

In introducing Junot to the crowd (and the world — the reading will be up on the MIT World site in fairly short order)  Professor James Paradis, head of MIT’s writing program, pulled out one of the less well-known bits of Junot’s work, the 2001 edition of The Beacon Best collection that he edited.

Paradis read a short passage from Junot’s introduction, and the quote so precisely catches the necessity of vigilance and the importance of art — never more vital than at those times when the self-styled “grown-ups” have so decisively lost their way.

Here, expanded, is that passage:


For the last couple of years I — a former five pages a day type guy — have not been able to write with any consistency.  The reasons for my “block” are numerous and not particularly relevant, but as a result I’ve had more time to read newspapers and watch television, more time to notice how the world is being represented by those whom we shall call for simplicity’s sake the powers-that-be.  I’ve been aware since about the Reagan administration of the gap between the world that they swear exists and the world I know exists.  What I hadn’t anticipated  — I guess I should have been reading more Chomsky — is how enormous that gap had become.

…[Junot uses several paragraphs to discusse his experience fighting the New York City Board of Education’s short lived school privatization scheme as a way into, inter alia, his framing of the work he had selected for the collection.  And then…]


During the last week of the anti-privatization campaign, when Edison and the Board of Education and the media and the politicians were turning up the heat, I would occasionally feel myself losign heart.  (There’s only so much exposure to the Official Story one can take before it starts to wear on you.)  I was very fortunate, however, for it was at this same time that I was reading these stories, these essays, these poems.  While those of us against privatization were being knocked about in newspapers and on the news, while we were being erased and distorted into cartoons, I was sifting through journals, printing pages out from e-mail, thumbing through blurred photcopies.  Would you t hink me sentimental if I said that the freshness and originality and humanity of these writers and their work renewed me?  When billions and billions of dollars are spent trying to convince you to see the world in one particular way, isn’t it something like salvation when you discover voices, brave and unwavering, who invite you to see it in another way?

Amen and amen.

Image:  Jan Davidszoon de Heem, “Still-Life of Books,” 1628.  Source:  Wikimedia Commons.

Wednesday Isaac Newton Blogging: The (Very) Deep Roots of the Banking Crisis.

October 1, 2008

Coming up next June, I’ll be publishing my book, Newton and the Counterfeiter, in which I tell the story of Newton’s mostly unknown career as a criminal investigator and death penalty prosecutor.

It is as well a story that touches on the birth of the modern financial system — it covers the period when things like the Bank of  England, fractional reserve banking, a variety of paper instruments, debt-for equity swaps (a little later, actually) and other such esoterica were all being tried out.

Of great importance was the development of a bunch of different approaches to financing government expenditure.  All kinds of things got a work out. The book deals with some of them, including a marvelous chimera of an instrument that was at once a lottery ticket, paper money, and a bond.  Weird — but creditors of the Royal Navy, among others, were compelled to accept the notes at par.

Unsurprisingly, some writers on what was yet to be called the discipline of political economy had grave doubts about the transformation of money into paper, and government resources from receipts into debt.  They raised questions.  And on at least one occasion, Newton answered them.

In 1700, Newton, then Master of the Mint, got into a dispute with John Pollexfen, a member of parliament and a founding member of the Board of Trade (with Newton’s friend and admirer, the philosopher and theorist of money, John Locke).

Pollexfen was a hard money guy — paper might have some use in the financial system, but everyone knew real money took the form of silver and gold coins.

He argued that use of paper instruments depended on the money being held to support it.  Not for him was this new fangled notion of fractional reserve banking:  an institution issuing a note had to have the denominated amount in coin to back up the piece of paper that claimed to be money.  That is: paper was a convenient method of signifying the existence of an amount of real money; it was not money in and of itself.

Newton disagreed.  His handwritten draft of a reply to Pollexfen survives in his Mint papers, and in that draft he wrote that creation of paper instruments — including those issued by the government as debt — was essential to ensure that the nation’s economy did not collapse for want of an adequate money supply.  He wrote “If interest be not yet low enough for the advantage of trade and designs of setting the poor on work…the only proper way to lower it si more paper and credit till trading and business we can get more money.”

Interesting ideas, no?  Increase the money supply to lower the price of money, the interest rate, and thus enhance trade and employment.  What a notion!

The other Newton comment that I know of on the question of whether government debt instruments were a good idea is even more striking.  He wrote in a different context on the question of whether the creation of government debt instruments were inherently damaging to government finance and the economy that, in fact, credit was supremely useful because,

“Tis mere opinion that sets a value upon money [coined precious metal]…and the same opinion sets a value upon paper security…All the difference is …that the value of the former is more universal than the latter.”

Mere opinion!  This was a radical idea indeed at the turn of the eighteenth century

Newton did allow that credit was like doctor’s physic.  To a certain dose it was helpful; to excess it could be deadly… a sentiment which also has strangely contemporary echo.

None of this to say that Newton was anything like a pioneer of economic thought; he was not.  Most of his views represented variations on contemporary elite opinion — which was struggling to come to grips with a transformation in finance that accompanied the global expansion of English and European trade and economic life.

But even here there are parallels.  Much of our problem today derives from the toxic consequences of exotic variations on older financial tricks, some of which do in fact have roots that stretch back, through several removes, to this beginning.  Now, as then, the failure of many to grasp the implications, the risks, associated with such innovation presented opportunities both legal and definitely criminal.  Even the smartest were not immune to the lure of occult, effortlessly acquirable wealth…

…and not even Isaac Newton himself avoided the infection, as will be discussed in another post, soon.

(See G. Findlay Shirras and J.H. Craig’s article “Sir Isaac Newton and the Currency” in The Economic Journal, Vol. 55, No. 218/219 Jun – Sep. 1945 for a fuller account of Newton’s involvement in the currency/credit issues of his day).

(Also:  I can’t tell you what a pleasure it was to take a brief break and write about something that doesn’t have to do with either of the those-who-must-not-be-named who have been bedevilling my concentration these last too-many days.)

Image:  Augustus Pugin and Thomas Rowlandson, “The Great Hall of the Bank of England,” in Ackermann’s Microcosm of London (1808-11).  (Anachronistic, I know — but what a nice image.)  Source:  Wikimedia Commons.

Republicans Unclear on the Concept.

September 29, 2008


“You keep using that word?”

“I do not think it means what you think it means.”

Read Pelosi’s offending speech for yourself and tell me that this is too much for grown men and women to bear.

Fools and knaves.

Update: dialogue fixed thanks to commenter and occasional guest blogger (more please) Michelle Sipics.

Simple Question, Simple Answer?

September 23, 2008

Isn’t this how it is supposed to be?  You hand over cash, you get something other than worst of somebody’s paper in return?

Just askin.

(Image reposted by popular demand. OK.  By my demand. Can’t do better, IMHO)

Image:  Poster for the “War of Wealth” by Charles Turner Dazey, a play that opened February 10, 1896. Source:  Wikimedia Commons.

Financial Disaster: The Musical

September 22, 2008

I don’t have a lot of useful stuff to say about the current financial crisis (except that no one should be surprised what happens when you combine leverage, financial engineering, a familiar mania, and a near complete failure  in the assesment of moral hazard; it’s happened before, and it will happen again.)

Lots of folks who blog, and are therefore self-appointed founts of opinion, have similar problems.  Some have turned to that which soothes the savage beast to try and account for the seemingly sudden evaporation of something on the order of five percent of our GDP in one week.

I thought I’d do the same, but I’m not subtle like the likes of Ta-Nehisi Coates.  I think Woody nailed it a long time ago:  bad guys steal your wallet; really bad guys strip you down to scorched earth.  To put it another way, I think this song expresses the reason I do not want to let the Bush Administration loose with any fountain pen.


Image:  Currier and Ives, 1875.  Source:  Wikimedia Commons.