Beat the Press

Fascinating Piece On Why Goldman Sachs Is Richer Than You Are

The NYT reports that Goldman Sachs was selling collaterized debt obligations (CDOs) based on its own mortgage backed securities and then bought credit default swaps (CDS) that were effectively bets that these CDOs would go bad. If this report is accurate, it is a remarkable story. It's not clear whether it is more incredible that supposedly sophisticated investors would buy Goldman securities that they supposedly near that Goldman was shorting or that an insurer would sell CDSs written against a company's own securities. The point is that Goldman obviously knows much more about the securities it has issued than the insurer. It is difficult to believe that an insurer would be willing to issue an CDS under such circumstances. --Dean Baker

Can We Get the Nationalistic Jingoism Out of the Budget Debate?

The focus groups must have found that saying that much of the government debt is held by foreigners got people really scared, because the deficit hawks keep citing this fact. Ruth Marcus does it today in the Post , telling readers that: "When the economic crisis hit, the country enjoyed the fiscal flexibility to respond with massive spending to counter the downturn. Next time, our capacity to whip out the national checkbook may be constrained by foreign creditors." I suppose that the sentence would sound less scary if it read: "Next time, our capacity to whip out the national checkbook may be constrained by creditors." Of course whether the country as a whole (not just the government) borrows from abroad depends on our trade deficit, not the budget deficit. If the country had the same trade deficit, but ran a balanced budget, then China, Japan, and other surplus countries would be buying up private assets like shares of Microsoft and Verizon. This might be a concern because future...

The Problem In Unemployment Insurance Funds Comes From Bernanke-Greenspan, Not States' Failure to Plan

The Washington Post had a front page article reporting on the shortfalls facing state unemployment insurance funds as the unemployment rate remains in or near double-digit levels. At one point it tells readers that: "the troubles the state programs face can be traced to a failure during the economic boom to properly prepare for a downturn." This is not true. The state unemployment insurance (UI) programs were fully prepared for a normal downturn. They just were not prepared for the worst downturn since the Great Depression. It would be difficult to imagine states raising UI taxes in preparation for a downturn that was far more severe than any major economist predicted. The problem was the incompetent economic management by Federal Reserve Board chairs Greenspan and Bernanke, not the conduct of the states. It is also peculiar to call the years preceding the crash a "boom." The country had respectable growth in the years 2004-2007, but it was not a boom by any measure. [Correction --...

Another Front Page Washington Post Editorial on the Deficit

A Washington Post article that is ostensibly on Ireland's budget problems begins: "Is this the ghost of America's future?" This no doubt had readers asking "is this the way to begin a news story on Ireland?" On the other hand, since the headline is "in Ireland's deep budget cuts, an omen for a heavily indebted United States?" we were already warned not to expect a serious news story. The Post really really wants to reduce the deficits and it wants to do so primarily by slashing Social Security and Medicare benefits. It has shown repeatedly that it is prepared to ignore accepted journalistic standards to push this cause. This is just one more instance. --Dean Baker

David Brooks' Protectionist Economy

David Brooks argues that the U.S. economy will be all about protectionism going forward . Specifically, he says that we aren't going to be making things in the future, we will support ourselves with the rents earned on patents, copyrights and other forms of intellectual property claims. (Really, I'm not making this up.) There are two fundamental problems with the Brooks story. The first, for us econ wonk types, he is describing an economy that is incredibly inefficient. It is almost certainly true that patents and copyrights are not the most efficient way to promote innovation and creative work, or at least not in most areas. ( Here , here , and here are a few short pieces describing possible alternative mechanisms. One will look in vain for economic research that establishes the superiority of patents and copyrights, economists are too bust arguing against tariffs on tires.) The second problem is that he is describing an economy that almost certainly cannot work. While Brooks...

Temporary Employment and Job Growth

The NYT has a piece noting the surge in hiring in the temporary employment industry. The article notes that in the last two recessions a rise in temporary employment had preceded a rise in permanent employment. It is worth noting that in the past when job growth had resumed there had also been much lower levels of unemployment insurance (UI) claims. While the number of weekly UI claims has fallen sharply from its peaks earlier this year, it is still averaging close to 470,000 a week. In the past, UI claims had fallen below 400,000 a week before job growth resumed. By this measure, the economy likely has some way to go before it starts generating jobs. --Dean Baker

Can Someone Tell the Washington Post About the Housing Bubble Already?

The Post has a lengthy front page article today about how the Fed under Alan Greenspan and Ben Bernanke missed the problems developing in the subprime mortgage market. The piece makes many good points, but it missed the real story: the housing bubble. Yes, bad subprime and Alt-A loans were a problem, but the only reason that they shook the financial system was that we had an $8 trillion housing bubble. If house prices had not diverged from trend values then the default rates and losses on each default would not have been a big deal. Let's put this so that even a Washington Post editor can understand it. Suppose someone gets a garbage mortgage for $200k on a $200k home. Suppose the mortgage resets to a level that they cannot pay. The homeowner then loses the home. if the bank then has to resell the home, then it will lose roughly 25 percent, or $50k, on its investment, if the home is still worth $200k. This is bad news, but loses of this magnitude on $1.6 trillion or so of subprime and...

The Washington Post Thinks That Politicians Are Always Truthful

That is the only thing that one conclude based on the assertion in a front page article that Republicans are opposed to health care reform because they: "consider [reform] to be a disastrous government intervention in the nation's health-care system." Yes, that is what Republican members of Congress say, but how do we know that this is true. Republicans get lots of money from the pharmaceutical industry, the insurance industry, the hospital industry and they also have a direct political interest in embarrassing President Obama and the Democrats in Congress. Many of us might think that politicians could be motivated by these political considerations. Fortunately, we have the Washington Post to tell us that they acted out of their concern for the good of the country. --Dean Baker

Unemployment and Deficits: Off the Charts, but Inside the Box

Floyd Norris has a fascinating little piece this morning that constructs a new "misery index" that combines a nation's unemployment rate and its budget deficit (measured as a share of GDP). The point is that the budget deficit indicates to some extent the country's ability to stimulate its economy further in order to reduce unemployment, while the unemployment rate shows the need for further stimulus. The interesting part of the picture is the reversal in positions of relative stars from 2005 by this measure, like Iceland and Ireland, with former laggards like Germany and Italy. Along with the Czech Republic, Germany and Italy boast the lowest misery indexes. Iceland and Ireland are now among the serious basket cases. It is important to note that the misery index is only a partial picture of the economic dilemma facing these countries. While it is possible to reduce unemployment by stimulating the economy and increasing labor demand, it is also possible to reduce unemployment by...

NYT Resorts to Name-Calling Against Progressive Critics of Health Care Plan

The NYT asserted that members of Congress and activists who are opposed to a health care plan that will likely lead to a sharp jump in profits for the insurance and pharmaceutical industries are motivated by "ideology," and contrasted their motivation with the "pragmatic" President Obama. The Congressional Budget Office and other independent analysts have found that the bill being debated does little to control health care costs at least in part because it does little to clamp down on insurance and pharmaceutical industry practices that push up costs. As a result of the failure of this bill to contain costs, there are serious efforts in Congress to create a deficit commission that will almost certainly seek to cut Social Security and Medicare benefits. It is not clear how the NYT has decided that the effort to prevent budget pressures that could lead to major cuts in these core social insurance programs is motivated by ideology, but this sort of name-calling has no place in a news...

Are Fannie Mae and Freddie Mac TARP by Another Name?

An NYT article indicated that the two mortgage giants may need even more government money to cover their losses beyond the $400 billion ($200 billion each) already committed. If this is true, it raises a question as to whether this money would be covering losses incurred on mortgages subsequent to their collapse in September of 2008. It would be difficult to imagine that these mortgage giants could have incurred losses in excess of their assets of more than $200 billion on their portfolios and guarantees at the time of their takeover (@ $3 trillion for Fannie and $2.5 trillion for Freddie). While both companies did get into Alt-A and subprime mortgages at the peak of the bubble, the bulk of the mortgages they held or guaranteed were prime mortgages. These mortgages required either a 20 percent down payment or mortgage insurance. Just for some quick arithmetic, if 20 percent of Fannie's mortgages (owned or insured) went bad that would imply $600 billion in bad mortgages. If Fannie's...

The NYT Uses Wrong GDP Measure in Talking About Climate Change

In a chart comparing populations, GDP, and greenhouse gas emissions , the NYT used exchange rate measures of GDP rather than purchasing power parity measures. This gives a hugely distorted picture, since exchange rates can be arbitrary and fluctuate widely. The difference matters hugely in the case of China. The chart shows China's GDP as being equal to 6 percent of world GDP. On a purchasing power parity basis, China accounts for close to 20 percent of world GDP. --Dean Baker

The Washington Post Is Panicked, Again!!!!!!

The Washington Post is widely known for giving shrill warnings about the deficit danger, but this one is really over the top. It is literally titled : "the coming debt panic." The piece tells readers of the urgency of reining in the debt, telling readers that: "failing to do so will lower the national standard of living." Sorry folks, this is not true. To push its deficit reduction position, the Post is doing what folks in Washington call "dissembling." They have another word for it everywhere else. Standard economic models do show that deficits can slow economic growth by crowding out investment, they do not show that this impact will be large enough to actually lead to declining standards of living, or at least not any time soon. The editorial also has the gall to emphasize the problem by telling readers: "consider: In the space of a single fiscal year, 2009, the debt soared from 41 percent of the gross domestic product to 53 percent." This should have readers have everywhere...

Report What The Politicians Say, Don't Tell Readers What They Believe

Yes, the Post commits this fundamental sin once again telling readers in reference to an omnibus spending bill approved by the Senate that: "all but three Senate Republicans opposed the measure, citing what they consider to be wasteful spending on domestic agencies at a time of war" (emphasis added). The point of course is that the Post doesn't have a clue as to whether Republican politicians really consider the items in the bill to be wasteful. What it knows is that they say the items are wasteful. Suppose that the Republicans don't want to make it easy for the Democrats to help important constituencies, support they don't want to see them get credit for successful programs, or suppose they just want to do whatever they can to obstruct Congress. All of these are plausible explanations for the Republicans' actions, although it is inconceivable that the Republicans would ever publicly give any of these reasons for voting against a spending bill. Does the Post know that none of these...

The People Who Could Not See an $8 Trillion Housing Bubble Warn of Public Debt Levels

The Post, which published zero news articles anywhere warning of the collapse of the housing bubble, published yet another front page piece warning about budget deficit problems, this time in Greece. This one most expressed the concerns of unnamed "analysts," (people who didn't know enough about the economy to see an $8 trillion housing bubble). The piece does include an explicit reference to Moody's, the bond-rating agency best known for giving investment grade rating to near worthless collaterized debt obligations. The point of this article is that the Washington Post wants to cut Social Security and Medicare and it will use its news pages to shamelessly push this agenda. --Dean Baker

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