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Joe Nocera gets the story mostly right in his skepticism toward a bill put forward by Senators Mark Warner and Bob Corker that would replace Fannie and Freddie with a convoluted system of government guarantees. I would add three points.
First, the 30-year fixed rate mortgage is not necessarily dependent on a government guarantee. In the pre-bubble days banks did hold a substantial portion of the mortgages on their books. They also issued 30-year jumbo mortgages which could not be guaranteed by Fannie and Freddie, so apparently there is a market for these mortgages even without government guarantees.
Second, an important goal of policy in housing finance should be efficiency. In other words, the point is to make it possible for people to buy homes with as few moving parts as possible. This could probably be best accomplished with something like the old Fannie Mae.
In the pre-privatization period, Fannie was a publicly owned company that bought and held mortgages. There were no mortgage backed securities. There is little obvious purpose to move from a government company/agency holding mortgages to a government company/agency guaranteeing mortgage backed securities. In the latter case the government still has the credit risk, it only shields itself from timing risk (fluctuations in interest rates), but that is a risk the government has no problem bearing.
There are political reasons why the old Fannie system might be difficult to reinstate, but we can at least be clear that it would be the most efficient way to manage housing finance. Other methods are political compromises.
Which brings us to the third point, the waste created by these compromises is income to the financial industry: hence the argument for the sort of convoluted system of guarantees in the Warner-Corker bill.
So if we want the most efficient system that is politically feasible, it’s probably best to just shut down Fannie and Freddie altogether. The 30-year mortgage will not disappear, although it may cost somewhat more.
Joe Nocera gets the story mostly right in his skepticism toward a bill put forward by Senators Mark Warner and Bob Corker that would replace Fannie and Freddie with a convoluted system of government guarantees. I would add three points.
First, the 30-year fixed rate mortgage is not necessarily dependent on a government guarantee. In the pre-bubble days banks did hold a substantial portion of the mortgages on their books. They also issued 30-year jumbo mortgages which could not be guaranteed by Fannie and Freddie, so apparently there is a market for these mortgages even without government guarantees.
Second, an important goal of policy in housing finance should be efficiency. In other words, the point is to make it possible for people to buy homes with as few moving parts as possible. This could probably be best accomplished with something like the old Fannie Mae.
In the pre-privatization period, Fannie was a publicly owned company that bought and held mortgages. There were no mortgage backed securities. There is little obvious purpose to move from a government company/agency holding mortgages to a government company/agency guaranteeing mortgage backed securities. In the latter case the government still has the credit risk, it only shields itself from timing risk (fluctuations in interest rates), but that is a risk the government has no problem bearing.
There are political reasons why the old Fannie system might be difficult to reinstate, but we can at least be clear that it would be the most efficient way to manage housing finance. Other methods are political compromises.
Which brings us to the third point, the waste created by these compromises is income to the financial industry: hence the argument for the sort of convoluted system of guarantees in the Warner-Corker bill.
So if we want the most efficient system that is politically feasible, it’s probably best to just shut down Fannie and Freddie altogether. The 30-year mortgage will not disappear, although it may cost somewhat more.
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Niall Ferguson, who was last seen predicting soaring interest rates and hyperinflation as a result of the Obama stimulus and Fed’s QE policy is now calling for generational warfare as the best route to rescue the country’s young. In a piece for the Daily Beast, Ferguson complains about the lack of social mobility in the United States, noting that it now trails many other wealthy countries in the percentage of low income children who move up into higher income quintiles.
Ferguson goes through some of the usual conservative stuff about bad families from Charles Murray, but then he settles on the real problem, Social Security and Medicare. He tells readers that 10 percent of the federal budget goes to children compared to 41 percent for the non-children part of Social Security, Medicare, and Medicaid. He then points out that even adding in state spending, which accounts for most education spending, the government spends twice as much on seniors as it does on kids. He then says to readers:
“Ask yourself: how can social mobility possibly increase in a society that cares twice as much for Grandma as junior?”
There are two big problems with Ferguson’s logic. First, most of the payments for Grandma that he describes are part of programs with designated revenue streams. Social Security is essentially a publicly run pension system. We make people pay for their benefits. The same is true with Medicare. (In the case of Medicare people do typically get back more than they pay in but this is because we pay doctors, drug companies, and other providers so much. If our providers received the same sort of compensation as providers in other countries, Medicare taxes would be pretty much adequate to cover benefits.)
Ferguson’s outrage over seniors getting the benefit for which they have paid would be like being outraged over farmers getting payments for flood damage when they collect a federally run flood insurance program. In Ferguson’s world this would translate to caring more about farmers who are flood victims than kids, but to most other people it looks like paying back money that is owed.
The other major flaw in Ferguson’s logic is the implication that our ability to support our kids is limited by the money we spend on seniors. Countries that spend more on their seniors also tend to spend more on their kids. it seems that the question is more of national priorities for ensuring that people get treated decently at both ends of life.
This is consistent with data that show a negative relationship between the share of the economy that goes to the financial sector and spending on kids. It also turns out that a larger share of output going to the richest one percent is associated with lower payments to kids. So if Ferguson wants to see more money going to kids he should probably be looking to target the financial sector and one percent, not the Social Security and Medicare benefits of retirees.
Niall Ferguson, who was last seen predicting soaring interest rates and hyperinflation as a result of the Obama stimulus and Fed’s QE policy is now calling for generational warfare as the best route to rescue the country’s young. In a piece for the Daily Beast, Ferguson complains about the lack of social mobility in the United States, noting that it now trails many other wealthy countries in the percentage of low income children who move up into higher income quintiles.
Ferguson goes through some of the usual conservative stuff about bad families from Charles Murray, but then he settles on the real problem, Social Security and Medicare. He tells readers that 10 percent of the federal budget goes to children compared to 41 percent for the non-children part of Social Security, Medicare, and Medicaid. He then points out that even adding in state spending, which accounts for most education spending, the government spends twice as much on seniors as it does on kids. He then says to readers:
“Ask yourself: how can social mobility possibly increase in a society that cares twice as much for Grandma as junior?”
There are two big problems with Ferguson’s logic. First, most of the payments for Grandma that he describes are part of programs with designated revenue streams. Social Security is essentially a publicly run pension system. We make people pay for their benefits. The same is true with Medicare. (In the case of Medicare people do typically get back more than they pay in but this is because we pay doctors, drug companies, and other providers so much. If our providers received the same sort of compensation as providers in other countries, Medicare taxes would be pretty much adequate to cover benefits.)
Ferguson’s outrage over seniors getting the benefit for which they have paid would be like being outraged over farmers getting payments for flood damage when they collect a federally run flood insurance program. In Ferguson’s world this would translate to caring more about farmers who are flood victims than kids, but to most other people it looks like paying back money that is owed.
The other major flaw in Ferguson’s logic is the implication that our ability to support our kids is limited by the money we spend on seniors. Countries that spend more on their seniors also tend to spend more on their kids. it seems that the question is more of national priorities for ensuring that people get treated decently at both ends of life.
This is consistent with data that show a negative relationship between the share of the economy that goes to the financial sector and spending on kids. It also turns out that a larger share of output going to the richest one percent is associated with lower payments to kids. So if Ferguson wants to see more money going to kids he should probably be looking to target the financial sector and one percent, not the Social Security and Medicare benefits of retirees.
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The Wall Street Journal seems to have completely missed the story of the housing bubble and the resulting economic collapse. It begins an article telling readers:
“After a slow start early in the economic recovery, consumer spending has begun to pick up. The question is whether Americans are ready to open their wallets more widely.”
It is just mind-boggling to see this in the country’s leading business newspaper. Umm, no actually wallets have been pretty wide open for a long time. The way that economists determine the width of the opening is by looking at the saving rate. In the good old days before the stock and housing bubbles, savings out of disposable income averaged more than 8.0 percent.
The savings rate began to fall in the late 1980s in the response to the beginnings of the stock bubble. It fell further in the late 1990s as the bubble peaked. The savings rate bottomed out at just over 2.0 percent in 2000. It rose again after the bubble burst but then fell back to 2.0 percent as a result of the wealth created by the housing bubble. (Actually the saving rate fell to near zero by some measures.)
Predictably, the saving rate rose again following the collapse of the housing bubble and the loss of $8 trillion in housing wealth. However it has remained unusually low, at less than 4.0 percent in recent quarters. This means that consumers are actually spending quite freely. It is not clear what data the piece is referring to when it complains that consumers have been reluctant to spend. Clearly the opposite is true.
The Wall Street Journal seems to have completely missed the story of the housing bubble and the resulting economic collapse. It begins an article telling readers:
“After a slow start early in the economic recovery, consumer spending has begun to pick up. The question is whether Americans are ready to open their wallets more widely.”
It is just mind-boggling to see this in the country’s leading business newspaper. Umm, no actually wallets have been pretty wide open for a long time. The way that economists determine the width of the opening is by looking at the saving rate. In the good old days before the stock and housing bubbles, savings out of disposable income averaged more than 8.0 percent.
The savings rate began to fall in the late 1980s in the response to the beginnings of the stock bubble. It fell further in the late 1990s as the bubble peaked. The savings rate bottomed out at just over 2.0 percent in 2000. It rose again after the bubble burst but then fell back to 2.0 percent as a result of the wealth created by the housing bubble. (Actually the saving rate fell to near zero by some measures.)
Predictably, the saving rate rose again following the collapse of the housing bubble and the loss of $8 trillion in housing wealth. However it has remained unusually low, at less than 4.0 percent in recent quarters. This means that consumers are actually spending quite freely. It is not clear what data the piece is referring to when it complains that consumers have been reluctant to spend. Clearly the opposite is true.
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The NYT headlined an article on the release of the newest Case-Shiller housing price data, “housing market shrugging off rise in mortgage interest rates.” This may or may not be true, but the new Case-Shiller data will not provide us much information on this question.
The data released today was for the three month period ending in April. This means that the typical home in the sample was sold in March. It is also important to remember that the index picks up closings. Since it typically takes roughly two months between contracting and closing, the Case-Shiller data released today is telling us about house sales that were contracted back in January. That is not going to give us much information about how the housing market is responding to a rise in mortgage rates that has mostly occurred over the last two months.
The piece also tells readers:
“If mortgage rates rise to 4 percent by the end of the year, as the Mortgage Bankers Association forecasts, they will still be much lower than the rates most Americans have experienced over the last few decades. In May, the average interest rate on a 30-year fixed mortgage stood at 3.5 percent.”
This statement is bizarre because interest rates have already crossed 4.0 percent. The Mortgage Bankers Association reported that the average contracted rate two weeks ago was 4.17 percent. It is almost certain to be higher now since Treasury rates have risen substantially in the last two weeks.
The NYT headlined an article on the release of the newest Case-Shiller housing price data, “housing market shrugging off rise in mortgage interest rates.” This may or may not be true, but the new Case-Shiller data will not provide us much information on this question.
The data released today was for the three month period ending in April. This means that the typical home in the sample was sold in March. It is also important to remember that the index picks up closings. Since it typically takes roughly two months between contracting and closing, the Case-Shiller data released today is telling us about house sales that were contracted back in January. That is not going to give us much information about how the housing market is responding to a rise in mortgage rates that has mostly occurred over the last two months.
The piece also tells readers:
“If mortgage rates rise to 4 percent by the end of the year, as the Mortgage Bankers Association forecasts, they will still be much lower than the rates most Americans have experienced over the last few decades. In May, the average interest rate on a 30-year fixed mortgage stood at 3.5 percent.”
This statement is bizarre because interest rates have already crossed 4.0 percent. The Mortgage Bankers Association reported that the average contracted rate two weeks ago was 4.17 percent. It is almost certain to be higher now since Treasury rates have risen substantially in the last two weeks.
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Okay, this is cheap line day, but in fact this is true. Even in a best case scenario, where there are no more hazard issues, the bill for a reshaped government mortgage loan guarantee put forward by senators Bob Corker and Mark Warner would be a job killer in standard economic models, like those used by the Congressional Budget Office and others. The logic is simple. The guarantee would subsidize loans to housing thereby steering more capital to housing and away from other forms of investment. The result is lower productivity growth, which would mean lower real wages and fewer jobs. It would have been worth including the views of an economist who could have explained this scenario to the Washington Post’s readers.
It is also unlikely that the system will be able to escape the problem of moral hazard that has afflicted the current system. (Wall Street types are smart.) The real question that should be posed is whether this additional form of housing subsidy, on top of the mortgage interest deduction, is the best use of public money. Unfortunately the article never frames the issue this way.
Note: Warner’s first name has been corrected — thanks Barkley.
Okay, this is cheap line day, but in fact this is true. Even in a best case scenario, where there are no more hazard issues, the bill for a reshaped government mortgage loan guarantee put forward by senators Bob Corker and Mark Warner would be a job killer in standard economic models, like those used by the Congressional Budget Office and others. The logic is simple. The guarantee would subsidize loans to housing thereby steering more capital to housing and away from other forms of investment. The result is lower productivity growth, which would mean lower real wages and fewer jobs. It would have been worth including the views of an economist who could have explained this scenario to the Washington Post’s readers.
It is also unlikely that the system will be able to escape the problem of moral hazard that has afflicted the current system. (Wall Street types are smart.) The real question that should be posed is whether this additional form of housing subsidy, on top of the mortgage interest deduction, is the best use of public money. Unfortunately the article never frames the issue this way.
Note: Warner’s first name has been corrected — thanks Barkley.
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Eduardo Porter’s column on the drop in college graduation rates in the United States relative to other wealthy countries ignored the large variance in the wages of male college grads. While there is little dispersion for the wages of women who graduate college, this is not the case for men.
There are a substantial number of male college graduates who can anticipate wages that are less then the top quartile of men without college degrees. The marginal college graduate is presumably more likely to be in this group of low earners. If they recognize the risk of not being a high earner many men may opt not to take the time and incur the expense of getting a college degree even if on average it would make them better off.
Eduardo Porter’s column on the drop in college graduation rates in the United States relative to other wealthy countries ignored the large variance in the wages of male college grads. While there is little dispersion for the wages of women who graduate college, this is not the case for men.
There are a substantial number of male college graduates who can anticipate wages that are less then the top quartile of men without college degrees. The marginal college graduate is presumably more likely to be in this group of low earners. If they recognize the risk of not being a high earner many men may opt not to take the time and incur the expense of getting a college degree even if on average it would make them better off.
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Some applause please for Casey Mulligan. Mulligan has been a strong opponent of the Affordable Care Act and the expansion of Medicaid provided under the act. However he used his column today to dispel a misunderstanding of a study of the health impact of increased Medicaid enrollment in Oregon.
The study was written up in an article in the New England Journal of Medicine which noted that the study found no statistically significant impact of Medicaid enrollment on health care. However Mulligan makes the point that the study actually did find that the people enrolled in Medicaid had improved health by several important measures. While the improvements were not large enough to meet standard tests of statistical significance this does not mean that they were not important. As Mulligan notes, given the limited number of people in the study and the relatively short time-frame (2 years), it would have been highly unlikely that it could have found statistically significant gains in health outcomes.
Mulligan deserves credit for clarifying this point, especially when the implications seem to be directly at odds with his view of the policy. It would be great if debates on economic policy were always like this.
Addendum:
I’m glad to see that I have people knowledgeable about statistics reading this blog. Since I guess I was too quick in my post and folks apparently did not read the Mulligan piece or the study, let me be a bit clearer. The study had very little power. There were not enough people in it. As a result you had relatively few people with any specific condition, which meant that it would be almost impossible to find statistically significant results.
To see this point, suppose we chose 100 people at random for a study to determine if drug X was effective in preventing heart attacks. We gave 50 people drug X and the other 50 got a placebo. After a year, 2 people in the placebo group got a heart attack but only one person in the treatment group. Okay, this is a nice result, but almost certainly not statistically significant. Since we had not selected people with heart conditions and heart attacks are relatively infrequent in the population as a whole, it would have been almost impossible to have a statistically significant finding.
That is the story of the Oregon study. It had some encouraging results. They were not statistically significant, but it would have been almost impossible given the design of the study to have statistically significant results. That was the point of Mulligan’s piece — and he is 100 percent right.
Some applause please for Casey Mulligan. Mulligan has been a strong opponent of the Affordable Care Act and the expansion of Medicaid provided under the act. However he used his column today to dispel a misunderstanding of a study of the health impact of increased Medicaid enrollment in Oregon.
The study was written up in an article in the New England Journal of Medicine which noted that the study found no statistically significant impact of Medicaid enrollment on health care. However Mulligan makes the point that the study actually did find that the people enrolled in Medicaid had improved health by several important measures. While the improvements were not large enough to meet standard tests of statistical significance this does not mean that they were not important. As Mulligan notes, given the limited number of people in the study and the relatively short time-frame (2 years), it would have been highly unlikely that it could have found statistically significant gains in health outcomes.
Mulligan deserves credit for clarifying this point, especially when the implications seem to be directly at odds with his view of the policy. It would be great if debates on economic policy were always like this.
Addendum:
I’m glad to see that I have people knowledgeable about statistics reading this blog. Since I guess I was too quick in my post and folks apparently did not read the Mulligan piece or the study, let me be a bit clearer. The study had very little power. There were not enough people in it. As a result you had relatively few people with any specific condition, which meant that it would be almost impossible to find statistically significant results.
To see this point, suppose we chose 100 people at random for a study to determine if drug X was effective in preventing heart attacks. We gave 50 people drug X and the other 50 got a placebo. After a year, 2 people in the placebo group got a heart attack but only one person in the treatment group. Okay, this is a nice result, but almost certainly not statistically significant. Since we had not selected people with heart conditions and heart attacks are relatively infrequent in the population as a whole, it would have been almost impossible to have a statistically significant finding.
That is the story of the Oregon study. It had some encouraging results. They were not statistically significant, but it would have been almost impossible given the design of the study to have statistically significant results. That was the point of Mulligan’s piece — and he is 100 percent right.
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