Since the NYT decided to devote a Room for Debate on the question of whether the stock market is currently in a bubble, I thought I should join the party as one of the stock bubble warners from the 1990s. To my mind the story for the overall stock market is a fairly simple one. Look at the ratio of stock prices to trend earnings.
This one doesn’t look too terrifying. Obviously the market is hitting record highs measured in nominal dollars, but if we expect the price to earnings ratio to remain more or less constant over time, then we should expect the nominal value to regularly hit new highs as the economy grows. In this context, an S&P at 1800 doesn’t seem especially scary. The S&P had previously peaked at 1525 back in 2007, six years ago.
Since 2007 the price level is up by roughly 9 percent. If we assume potential growth of 2.3 percent, then the economy’s potential GDP would be 14.6 percent higher today. Taking the two together, the S&P would be 25.3 percent higher today, or at 1910, to be as high relative to trend earnings as it was in the fall of 2007. In other words, if we didn’t have a bubble in 2007, then we don’t have one today.
If we go further back to the bubble days of 2000, we had a peak S&P of roughly 1500. Since then prices have risen by roughly 30 percent. Actual growth from 2000 to 2007 was 18.4 percent. If we multiply that by my calculation of potential growth since 2007, we get a growth in potential GDP of 35.7 percent since 2000. (I am using actual growth from 2000 to 2007 since I am assuming that the economy’s growth over this period was pretty much in line with its potential.) Multiplying this 35.7 potential growth figure by the rise in prices gives us an increase of 75.6 percent since 2000, which implies that the S&P would be a bit over 2430 if it were as high relative to potential GDP today as it was at the peak of the 1990s stock bubble.
Another way to put this is that, relative to the potential of the economy, the stock market is about 68 percent of its bubble peak. Would this mean we have a bubble now? By my assessment the answer is no. The PEs at the peak in 2000 were above 30 to 1 (using trend earnings, defined as the average share of profits in GDP). That was more than double the historical average. The current ratio would put the PEs around 20. This is still well above the historical average, but not obviously in bubble territory.
There are two reasons that a higher than normal PE might be justified. The first is simply that we have unusually low interest rates. The real short-term interest rate is -1.5 percent and the real interest rate on 10-year Treasury bonds is hovering around 1.0 percent. These low rates would justify higher than normal stock prices.
The other reason that stock prices might reasonably be higher than normal is that people may feel more comfortable holding stocks today, with the easy availability of low-cost index funds, than they did in prior decades. This implies a reduced risk premium. That would mean both higher PE ratios (plausibly around 20 in my view) and lower future returns on stock. (Real returns going forward would average @ 5 percent, instead of the 7 percent return in the past.)
I could be wrong, but that’s my take — No Bubble!
Since the NYT decided to devote a Room for Debate on the question of whether the stock market is currently in a bubble, I thought I should join the party as one of the stock bubble warners from the 1990s. To my mind the story for the overall stock market is a fairly simple one. Look at the ratio of stock prices to trend earnings.
This one doesn’t look too terrifying. Obviously the market is hitting record highs measured in nominal dollars, but if we expect the price to earnings ratio to remain more or less constant over time, then we should expect the nominal value to regularly hit new highs as the economy grows. In this context, an S&P at 1800 doesn’t seem especially scary. The S&P had previously peaked at 1525 back in 2007, six years ago.
Since 2007 the price level is up by roughly 9 percent. If we assume potential growth of 2.3 percent, then the economy’s potential GDP would be 14.6 percent higher today. Taking the two together, the S&P would be 25.3 percent higher today, or at 1910, to be as high relative to trend earnings as it was in the fall of 2007. In other words, if we didn’t have a bubble in 2007, then we don’t have one today.
If we go further back to the bubble days of 2000, we had a peak S&P of roughly 1500. Since then prices have risen by roughly 30 percent. Actual growth from 2000 to 2007 was 18.4 percent. If we multiply that by my calculation of potential growth since 2007, we get a growth in potential GDP of 35.7 percent since 2000. (I am using actual growth from 2000 to 2007 since I am assuming that the economy’s growth over this period was pretty much in line with its potential.) Multiplying this 35.7 potential growth figure by the rise in prices gives us an increase of 75.6 percent since 2000, which implies that the S&P would be a bit over 2430 if it were as high relative to potential GDP today as it was at the peak of the 1990s stock bubble.
Another way to put this is that, relative to the potential of the economy, the stock market is about 68 percent of its bubble peak. Would this mean we have a bubble now? By my assessment the answer is no. The PEs at the peak in 2000 were above 30 to 1 (using trend earnings, defined as the average share of profits in GDP). That was more than double the historical average. The current ratio would put the PEs around 20. This is still well above the historical average, but not obviously in bubble territory.
There are two reasons that a higher than normal PE might be justified. The first is simply that we have unusually low interest rates. The real short-term interest rate is -1.5 percent and the real interest rate on 10-year Treasury bonds is hovering around 1.0 percent. These low rates would justify higher than normal stock prices.
The other reason that stock prices might reasonably be higher than normal is that people may feel more comfortable holding stocks today, with the easy availability of low-cost index funds, than they did in prior decades. This implies a reduced risk premium. That would mean both higher PE ratios (plausibly around 20 in my view) and lower future returns on stock. (Real returns going forward would average @ 5 percent, instead of the 7 percent return in the past.)
I could be wrong, but that’s my take — No Bubble!
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That’s more than half of the money appropriated for the program. Yes, some folks will know that the $40 billion refers to a cut over 10 years. But is there some reason that the NYT can’t provide such information in the article and not risk misleading a large share of its readers.
That comes to roughly 5 percent of the cost of the program. To give readers a bit more context, the NYT could have used CEPR’s nifty Responsible Budget Calculator to inform readers that the cut amounts to 0.09 percent of projected federal spending over this period. In short, this cut may be a big deal to the people affected, it means little in terms of the deficit or anyone’s tax bill.
The NYT is supposed to be committed to putting numbers like this in a context that makes them understandable to readers. Would anyone at the NYT really want to claim this piece expressed the proposed cuts in a way that made them understandable to most of their readers?
That’s more than half of the money appropriated for the program. Yes, some folks will know that the $40 billion refers to a cut over 10 years. But is there some reason that the NYT can’t provide such information in the article and not risk misleading a large share of its readers.
That comes to roughly 5 percent of the cost of the program. To give readers a bit more context, the NYT could have used CEPR’s nifty Responsible Budget Calculator to inform readers that the cut amounts to 0.09 percent of projected federal spending over this period. In short, this cut may be a big deal to the people affected, it means little in terms of the deficit or anyone’s tax bill.
The NYT is supposed to be committed to putting numbers like this in a context that makes them understandable to readers. Would anyone at the NYT really want to claim this piece expressed the proposed cuts in a way that made them understandable to most of their readers?
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It seems that he can’t. In his column today on finding a word for the continuing downturn he tells readers:
“Why? Unlike Hansen, today’s stagnationists haven’t identified causes [of secular stagnation]. The problem might not be a dearth of investments so much as a surplus of risk aversion. For that, candidates abound: the traumatic impact of the Great Recession on confidence; a backlash against globalization, reduced cross-border investments by multinational firms; uncertain government policies; aging societies burdened by diminishing innovation and costly welfare states.
“Whatever the cause, we are in unfamiliar territory.”
Actually the most obvious cause for most of the shortfall in demand is the trade deficit. The deficit of more than $500 billion (@ 3 percent of GDP) is income generated in the United States that is creating demand elsewhere, not in the United States. This deficit in turn was a result of the over-valued dollar that followed the botched bailout from the East Asian financial crisis. We offset this deficit in the last 1990s with the demand created by the stock bubble. We offset it in the last decade with the demand created by the housing bubble.
Without another bubble we don’t have any source of demand to offset the trade deficit other than the budget deficit, which folks like Samuelson want to reduce. So there is no real mystery to anyone who is familiar with the national income accounts.
Samuelson is just wrong when he complains about “a surplus of risk aversion.” Investment is almost back to its pre-recession level measured as a share of GDP. Clearly this is not a problem.
There is likely an issue that consumption would have fallen relative to GDP in the absence of bubbles, as income has been redistributed upward (this is a main theme of my free book, Plunder and Blunder: The Rise and Fall of the Bubble Economy), but that is very different from an aversion to risk story.
It seems that he can’t. In his column today on finding a word for the continuing downturn he tells readers:
“Why? Unlike Hansen, today’s stagnationists haven’t identified causes [of secular stagnation]. The problem might not be a dearth of investments so much as a surplus of risk aversion. For that, candidates abound: the traumatic impact of the Great Recession on confidence; a backlash against globalization, reduced cross-border investments by multinational firms; uncertain government policies; aging societies burdened by diminishing innovation and costly welfare states.
“Whatever the cause, we are in unfamiliar territory.”
Actually the most obvious cause for most of the shortfall in demand is the trade deficit. The deficit of more than $500 billion (@ 3 percent of GDP) is income generated in the United States that is creating demand elsewhere, not in the United States. This deficit in turn was a result of the over-valued dollar that followed the botched bailout from the East Asian financial crisis. We offset this deficit in the last 1990s with the demand created by the stock bubble. We offset it in the last decade with the demand created by the housing bubble.
Without another bubble we don’t have any source of demand to offset the trade deficit other than the budget deficit, which folks like Samuelson want to reduce. So there is no real mystery to anyone who is familiar with the national income accounts.
Samuelson is just wrong when he complains about “a surplus of risk aversion.” Investment is almost back to its pre-recession level measured as a share of GDP. Clearly this is not a problem.
There is likely an issue that consumption would have fallen relative to GDP in the absence of bubbles, as income has been redistributed upward (this is a main theme of my free book, Plunder and Blunder: The Rise and Fall of the Bubble Economy), but that is very different from an aversion to risk story.
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The NYT had a piece about the use of German-style apprenticeship programs in South Carolina. At one point it noted that, while the apprenticeship program is one factor attracting German and other foreign manufacturers to the state:
“there are other reasons foreign companies have moved here. For starters, wages are lower than the national average. Even more important for many manufacturers, unions have made few inroads in South Carolina.”
It is worth noting that the German companies locating in South Carolina are used to working with unions and/or workers’ councils in Germany. In Germany, every company with more than 50 workers has a workers’ council that has input into most management decisions. In fact Volkswagen plans to set up a workers’ council in a facility in Tennessee. For at least some of these companies, escaping unions is not likely to be a major factor in their location decision.
The NYT had a piece about the use of German-style apprenticeship programs in South Carolina. At one point it noted that, while the apprenticeship program is one factor attracting German and other foreign manufacturers to the state:
“there are other reasons foreign companies have moved here. For starters, wages are lower than the national average. Even more important for many manufacturers, unions have made few inroads in South Carolina.”
It is worth noting that the German companies locating in South Carolina are used to working with unions and/or workers’ councils in Germany. In Germany, every company with more than 50 workers has a workers’ council that has input into most management decisions. In fact Volkswagen plans to set up a workers’ council in a facility in Tennessee. For at least some of these companies, escaping unions is not likely to be a major factor in their location decision.
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The NYT had an interesting piece on the extent to which companies are shifting production to the United States in response to desires by consumers to buy American made products. At one point the piece tells readers;
“Americans spend more than $340 billion a year on clothes and shoes, more than double what they spend on new cars, according to the American Apparel and Footwear Association.”
Actually, the Commerce Department reported that consumers spent more than $230 billion last year on new autos, which is considerably more than half of the $340 billion figure noted here. This does not count autos purchased by businesses or used car purchases.
The piece also notes a plan by Walmart to increase its sales of American made goods by $50 billion over the next decade. It is not clear whether this refers to an annual sales target or a total over the decade. Walmart’s annual sales are currently just $450 billion. If they grow in step with the economy they should be over $700 billion in ten years. This would imply an annual target of $50 billion in addition sales would mean roughly 7 percent of sales. On the other hand, $50 billion over the next decade as a cumulative goal would be considerably less than 1.0 percent of total sales.
The NYT had an interesting piece on the extent to which companies are shifting production to the United States in response to desires by consumers to buy American made products. At one point the piece tells readers;
“Americans spend more than $340 billion a year on clothes and shoes, more than double what they spend on new cars, according to the American Apparel and Footwear Association.”
Actually, the Commerce Department reported that consumers spent more than $230 billion last year on new autos, which is considerably more than half of the $340 billion figure noted here. This does not count autos purchased by businesses or used car purchases.
The piece also notes a plan by Walmart to increase its sales of American made goods by $50 billion over the next decade. It is not clear whether this refers to an annual sales target or a total over the decade. Walmart’s annual sales are currently just $450 billion. If they grow in step with the economy they should be over $700 billion in ten years. This would imply an annual target of $50 billion in addition sales would mean roughly 7 percent of sales. On the other hand, $50 billion over the next decade as a cumulative goal would be considerably less than 1.0 percent of total sales.
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That is the question that readers of this front page Washington Post piece on the island’s $70 billion debt were undoubtedly asking. For some reason the paper never bothered to give this information, although it did compare the debt to that of other states.
Puerto Rico’s GDP is a bit over $100 billion, which means that its debt-to-GDP ratio is a bit under 70 percent. That is low for wealthy countries; however it would be a very high ratio for a state. Puerto Rico, as a territory of the United States, falls somewhere between the two. Most of its residents are not subject to the federal income tax, which means that the Puerto Rican government has access to money that other state governments would not. On the other hand it is subject to Social Security taxes, but Social Security benefits are a major source of income for people on the island.
Anyhow, it would have been helpful to include information on the size of Puerto Rico’s economy. Without this information it is impossible to assess the size of the burden of the debt.
That is the question that readers of this front page Washington Post piece on the island’s $70 billion debt were undoubtedly asking. For some reason the paper never bothered to give this information, although it did compare the debt to that of other states.
Puerto Rico’s GDP is a bit over $100 billion, which means that its debt-to-GDP ratio is a bit under 70 percent. That is low for wealthy countries; however it would be a very high ratio for a state. Puerto Rico, as a territory of the United States, falls somewhere between the two. Most of its residents are not subject to the federal income tax, which means that the Puerto Rican government has access to money that other state governments would not. On the other hand it is subject to Social Security taxes, but Social Security benefits are a major source of income for people on the island.
Anyhow, it would have been helpful to include information on the size of Puerto Rico’s economy. Without this information it is impossible to assess the size of the burden of the debt.
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For the last three decades the government has pursued a wide range of policies that have had the effect of redistributing income upward. For example our trade policy, by deliberately placing manufacturing workers in direct competition with low paid workers in the developing world, has lowered the wages of large segments of the work force. By contrast, we have left in place the restrictions that protect doctors and other highly paid professionals from foreign competition, ensuring that their pay stays high.
Similarly the too big to fail insurance that the government provides at no cost to large banks like Citigroup and Goldman Sachs allows top executives at these banks to pocket tens of millions of dollars a year. And our budget policy, that keeps tens of millions of workers unemployed or underemployed, lessens the income not only of the unemployed, but reduces the bargaining power and wages of those who are employed.
These and other government measures have the effect of redistributing income from ordinary workers to those at the top of the income distribution. Given this fact, it is peculiar that the Post would tell people in a piece on the growing strength of populists within the Democratic Party:
“many Americans are uncomfortable with the notion of the government redistributing income far beyond what happens today in order to accomplish basic elements of the populist agenda.”
The question at issue is not the amount of redistribution; the question is the direction of the redistribution. The Post seems to want readers to imagine that the upward redistribution of the last three decades was just a fact of nature, as opposed to being an outcome of government policy. That is a major distortion of reality.
For the last three decades the government has pursued a wide range of policies that have had the effect of redistributing income upward. For example our trade policy, by deliberately placing manufacturing workers in direct competition with low paid workers in the developing world, has lowered the wages of large segments of the work force. By contrast, we have left in place the restrictions that protect doctors and other highly paid professionals from foreign competition, ensuring that their pay stays high.
Similarly the too big to fail insurance that the government provides at no cost to large banks like Citigroup and Goldman Sachs allows top executives at these banks to pocket tens of millions of dollars a year. And our budget policy, that keeps tens of millions of workers unemployed or underemployed, lessens the income not only of the unemployed, but reduces the bargaining power and wages of those who are employed.
These and other government measures have the effect of redistributing income from ordinary workers to those at the top of the income distribution. Given this fact, it is peculiar that the Post would tell people in a piece on the growing strength of populists within the Democratic Party:
“many Americans are uncomfortable with the notion of the government redistributing income far beyond what happens today in order to accomplish basic elements of the populist agenda.”
The question at issue is not the amount of redistribution; the question is the direction of the redistribution. The Post seems to want readers to imagine that the upward redistribution of the last three decades was just a fact of nature, as opposed to being an outcome of government policy. That is a major distortion of reality.
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The NYT perpetuated nonsense about the magic of zero in a piece discussing recent measures of inflation and unemployment in the euro zone. It told readers;
“Deflation is considered even worse than runaway inflation, because consumers delay purchases in anticipation of ever lower prices, undercutting corporate profits and causing companies to stop investing in new plants and equipment. The result is rising unemployment and further downward pressure on prices.
“Economists at the advisory firm Oxford Economics calculate that, if the euro zone suffered deflation, unemployment would rise to 16.5 percent of the work force by 2018, or 25 million people. At the same time, countries like Greece would have even more trouble paying back debts, because economic output would shrink and tax receipts would dwindle.”
There is no link to the Oxford Economics analysis cited here, but on its face the idea that the inflation rate falling from 0.5 percent to -0.5 percent would have a devastating impact on employment and output is absurd. The inflation rate is an amalgamation of the prices of hundreds of thousands of different goods and services. At any point in time some prices are rising and some are falling. When the inflation rate goes from a small positive to a small negative it means that the percentage of items with falling prices has increased relative to the percentage of items of rising prices. The notion that this leads to economic disaster is more than a bit far-fetched. (Imagine the shift is from 45 percent of items having falling prices to 55 percent having falling prices.)
Furthermore, since the inflation indices measure quality adjusted prices we could get a shift from a modest rate of inflation to a modest rate of deflation simply because the quality of goods like computers and cell phones is increasing more rapidly. Does that sound like the basis for economic disaster?
The idea that consumers will delay purchases in any notable way due to a shift to deflation is absurd on its face. Computer and cell phone prices have been falling sharply for the last two decades yet people seem to be buying plenty of both. If we just applied an aggregate deflation rate of 0.5 percent to an item like an $800 television set, it would mean that a person could save $4 by waiting a year to buy a television set. Does that have you scared about the impact on consumption?
The point about investment is right, but the crossing of zero, from a small positive inflation rate to a small negative inflation rate is of no real consequences. Businesses invest in the present to sell more goods and/or services in the future. If those goods and services are expected to sell for higher prices then it makes investment more profitable. If they sell for lower prices then it makes investment less profitable.
However there is no particular importance to crossing zero in this story. If the inflation rate falls from 1.5 percent to 0.5 percent, this will make investment look less profitable. The same is true if it falls from 0.5 percent to -0.5 percent. The problem faced by euro zone countries (as well as Japan and the United States) is that it would be desirable to have a higher inflation rate to make investment more profitable. This is just as true when the inflation rate is a very low positive number as when it is a negative number and countries face deflation. The problem is simply too low a rate of inflation.
The NYT perpetuated nonsense about the magic of zero in a piece discussing recent measures of inflation and unemployment in the euro zone. It told readers;
“Deflation is considered even worse than runaway inflation, because consumers delay purchases in anticipation of ever lower prices, undercutting corporate profits and causing companies to stop investing in new plants and equipment. The result is rising unemployment and further downward pressure on prices.
“Economists at the advisory firm Oxford Economics calculate that, if the euro zone suffered deflation, unemployment would rise to 16.5 percent of the work force by 2018, or 25 million people. At the same time, countries like Greece would have even more trouble paying back debts, because economic output would shrink and tax receipts would dwindle.”
There is no link to the Oxford Economics analysis cited here, but on its face the idea that the inflation rate falling from 0.5 percent to -0.5 percent would have a devastating impact on employment and output is absurd. The inflation rate is an amalgamation of the prices of hundreds of thousands of different goods and services. At any point in time some prices are rising and some are falling. When the inflation rate goes from a small positive to a small negative it means that the percentage of items with falling prices has increased relative to the percentage of items of rising prices. The notion that this leads to economic disaster is more than a bit far-fetched. (Imagine the shift is from 45 percent of items having falling prices to 55 percent having falling prices.)
Furthermore, since the inflation indices measure quality adjusted prices we could get a shift from a modest rate of inflation to a modest rate of deflation simply because the quality of goods like computers and cell phones is increasing more rapidly. Does that sound like the basis for economic disaster?
The idea that consumers will delay purchases in any notable way due to a shift to deflation is absurd on its face. Computer and cell phone prices have been falling sharply for the last two decades yet people seem to be buying plenty of both. If we just applied an aggregate deflation rate of 0.5 percent to an item like an $800 television set, it would mean that a person could save $4 by waiting a year to buy a television set. Does that have you scared about the impact on consumption?
The point about investment is right, but the crossing of zero, from a small positive inflation rate to a small negative inflation rate is of no real consequences. Businesses invest in the present to sell more goods and/or services in the future. If those goods and services are expected to sell for higher prices then it makes investment more profitable. If they sell for lower prices then it makes investment less profitable.
However there is no particular importance to crossing zero in this story. If the inflation rate falls from 1.5 percent to 0.5 percent, this will make investment look less profitable. The same is true if it falls from 0.5 percent to -0.5 percent. The problem faced by euro zone countries (as well as Japan and the United States) is that it would be desirable to have a higher inflation rate to make investment more profitable. This is just as true when the inflation rate is a very low positive number as when it is a negative number and countries face deflation. The problem is simply too low a rate of inflation.
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Way back in the last decade we had a huge housing bubble which was propelled in large part by junk loans that were packaged into mortgage backed securities (MBS) by Wall Street investment banks and sold all around the world. Unfortunately few people in policy positions are old enough to remember back to the this era, which is why they are now in the process of altering rules so that investment banks will be able to put almost any loan into a MBS without retaining a stake.
As Floyd Norris explains in his column this morning, the Dodd-Frank financial reform has a provision requiring investment banks to retain a 5 percent stake in less secure mortgages placed in the MBS they issue. This gives them an incentive to ensure that the mortgages they put into an MBS are good mortgages. However the definition of a secure mortgage has been gradually weakened over time. Originally many considered the cutoff to be a 20 percent down payment, which is the traditional standard for a prime mortgage. This was lowered to 10 percent and then 5 percent, even though mortgages with just 5 percent down default at four times the rate of mortgages with 20 percent down.
Norris tells us that the latest proposed rules would allow mortgages with zero down payment to be placed into pools with no requirement that banks maintain a stake. This change would mean that banks would have the same incentive as in the housing bubble years to put junk mortgages in MBS. If this rule is coupled with the Corker-Warner proposal for having a government guarantee for MBS, it will mean that banks will likely find it far easier to pass on junk and fraudulent mortgages going forward than they did in the years of the housing bubble.
Further facilitating this process is the gutting of the Franken amendment. This amendment (which passed the Senate with 65 votes) would have required investment banks to call the Securities and Exchange Commission (SEC) to pick a bond rating agency for a new MBS. This removed the conflict of interest where bond rating agencies would have an incentive to give a positive rating in order to get more business. In the conference committee, the amendment was replaced by a requirement that the SEC study the issue. After two and a half years the SEC issued its study and essentially concluded that picking bond rating agencies exceeded its competence. This left the conflict of interest in place.
If Congress wants to set up the conditions for another housing bubble fueled by fraudulent mortgages it is doing a very good job.
Way back in the last decade we had a huge housing bubble which was propelled in large part by junk loans that were packaged into mortgage backed securities (MBS) by Wall Street investment banks and sold all around the world. Unfortunately few people in policy positions are old enough to remember back to the this era, which is why they are now in the process of altering rules so that investment banks will be able to put almost any loan into a MBS without retaining a stake.
As Floyd Norris explains in his column this morning, the Dodd-Frank financial reform has a provision requiring investment banks to retain a 5 percent stake in less secure mortgages placed in the MBS they issue. This gives them an incentive to ensure that the mortgages they put into an MBS are good mortgages. However the definition of a secure mortgage has been gradually weakened over time. Originally many considered the cutoff to be a 20 percent down payment, which is the traditional standard for a prime mortgage. This was lowered to 10 percent and then 5 percent, even though mortgages with just 5 percent down default at four times the rate of mortgages with 20 percent down.
Norris tells us that the latest proposed rules would allow mortgages with zero down payment to be placed into pools with no requirement that banks maintain a stake. This change would mean that banks would have the same incentive as in the housing bubble years to put junk mortgages in MBS. If this rule is coupled with the Corker-Warner proposal for having a government guarantee for MBS, it will mean that banks will likely find it far easier to pass on junk and fraudulent mortgages going forward than they did in the years of the housing bubble.
Further facilitating this process is the gutting of the Franken amendment. This amendment (which passed the Senate with 65 votes) would have required investment banks to call the Securities and Exchange Commission (SEC) to pick a bond rating agency for a new MBS. This removed the conflict of interest where bond rating agencies would have an incentive to give a positive rating in order to get more business. In the conference committee, the amendment was replaced by a requirement that the SEC study the issue. After two and a half years the SEC issued its study and essentially concluded that picking bond rating agencies exceeded its competence. This left the conflict of interest in place.
If Congress wants to set up the conditions for another housing bubble fueled by fraudulent mortgages it is doing a very good job.
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Floyd Norris ends an interesting discussion on the increase in the rate of long-term unemployment by telling readers that many of the long-term unemployed lack the skills to take the jobs that are available. However, there is research that suggests this is not the case.
Rand Ghayad, a researcher affiliated with the Boston Federal Reserve Bank sent out matched resumes to employers with difference being that some reported being unemployed for more than 26 weeks (the definition of long-term unemployed) and some did not. While many of the applicants who reported being short-term unemployed or currently working were called in for interviews, almost none of the applicants who reported being long-term unemployed were called back. This suggests that the main problem faced by the long-term unemployed is discrimination, not a lack of skills.
Note: “tern” was changed to “term” out of respect for birds everywhere.
Floyd Norris ends an interesting discussion on the increase in the rate of long-term unemployment by telling readers that many of the long-term unemployed lack the skills to take the jobs that are available. However, there is research that suggests this is not the case.
Rand Ghayad, a researcher affiliated with the Boston Federal Reserve Bank sent out matched resumes to employers with difference being that some reported being unemployed for more than 26 weeks (the definition of long-term unemployed) and some did not. While many of the applicants who reported being short-term unemployed or currently working were called in for interviews, almost none of the applicants who reported being long-term unemployed were called back. This suggests that the main problem faced by the long-term unemployed is discrimination, not a lack of skills.
Note: “tern” was changed to “term” out of respect for birds everywhere.
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