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Article Artículo

Washington Post Pushes for Government Guaranteed Subprime Mortgage Backed Securities

Yes, that seems to be its fondest dream for the outcome of Tuesday's election. The bulk of its lead editorial touting the prospects for bipartisanship is focused on pushing the Johnson-Crapo bill, a measure that would replace Fannie Mae and Freddie Mac with a system whereby the government guarantees 90 percent of the value of privately issued mortgage backed securities (MBS). This means that Goldman Sachs, Citigroup and other folks who might issue MBS could now tell their customers that even in a worst case scenario they couldn't lose more than 10 percent of the value of their securities.

Fans of the market should be asking two questions here. What problem is this intended to solve? And why do private issuers need a government guarantee?

The answer to question one seems to be that the Washington Post doesn't like public companies (Fannie and Freddie) issuing mortgage backed securities. It gives us no reason why it doesn't like them. After all, the worst garbage mortgages of the housing bubble days were securitized by private issuers, not Fannie and Freddie.

And everyone agrees that it will be more costly to have private issuers replace Fannie and Freddie, with the range of estimates being that the Crapo-Johnson system will add 0.5-2.0 percentage points to mortgage interest rates. That is the cost of the additional risk, bureaucracy, and profits for the financial sector. So other than raising the cost of mortgage finance and increasing the profits of the financial industry, it is difficult to see what is supposed to be accomplished by this "reform."

This takes us directly to the second point. If we want the market to handle mortgage finance, why do we need a government guarantee. The Wall Street boys had no problem selling their garbage all around the world when it carried no guarantee whatsoever. Do we think that they will have higher quality MBS now that they can tell customers that the government is capping their losses at 10 percent even if the thing is total garbage.

It doesn't help matters that not a single bank executive went to jail or was even prosecuted for lying about the quality of the mortgages in the subprime MBS they threw together in the housing bubble days. If we believe in market incentives, why would we think they would act differently in the future? In other words, they gets lots of money for lying and no risk for getting caught.

Those who hope that the regulators will ensure the quality of MBS need look no further than the requirement that securitizers maintain a 5 percent stake in mortgages that have less than a 20 percent down payment. This requirement would have simply raised the cost of these mortgages to customers who are at a much higher risk of default. (Homebuyers with low down payments could also purchase mortgage insurance. This would add roughly the same cost to the mortgage interest rate as replacing Fannie and Freddie with the Johnson-Crapo privatized system.) However due to the pressure of the banking industry and some housing groups, this down payment requirement was eliminated.

In normal non-bubble times, the default rate for mortgages with down payments of 20 percent or more is less than 2 percent. By contrast, according to the advocates of the elimination of down payment requirements, the default rate for those putting less than 10 percent down is 10 percent, more than five times as high.

Dean Baker / November 02, 2014

Article Artículo

Fun With the “It’s Hard to Get Good Help” Crowd

For the last several years there has been a regular drumbeat of business people, economists, and pundits telling us that the economy’s real problem is that workers lack the skills necessary to fill the jobs that are available. From this perspective, the problem is not that the economy lacks demand; the problem is that our workers need more education and training. In other words, don’t blame the folks in Washington for mismanaging the economy; blame the workers for being dumb.

This crew got a little ammunition for this argument recently when the job opening rate rose back to its pre-recession level. The job opening rate is the number of job openings that firms are listing divided by the number of people employed. The rise of the job opening rate to its pre-recession level could be taken as meaning that companies are having a hard time finding qualified workers even though measures of employment, unemployment, and involuntary part-time employment all seem to imply substantial slack in the labor market.

Before we rush to retrain and re-educate the millions of unemployed and underemployed workers it is worth looking at the job opening data a bit more closely. In most sectors, the job opening rate is still somewhat below the pre-recession level. However, there are some exceptions as shown in the figure below.

Job openings 10357 image001

                                 Source: Bureau of Labor Statistics.

There are several items that are worth noting about the sectors of the economy in which employers appear to be having trouble finding workers by the job opening rate measure. First, these are not especially high skilled areas. In fact, the retail and accommodation and food service (i.e. hotels and restaurants) stand out as being among the lowest paying sectors in the economy, with the least educated workers.

CEPR / November 01, 2014

Article Artículo

"Secular Stagnation" Is Progress, Now Can We Talk About the Trade Deficit?

Matt O'Brien has a nice piece presenting charts from Larry Summers (yes, the rest of us had made this point long ago) showing that estimates of potential GDP have dropped as the economy has remained weak since 2007. The point is that a temporary downturn can have lasting economic consequences. Unemployed workers lose skills and can become permanently unemployed. And, by having a long period of weak investment, the economy's capacity will be expanding less rapidly than would otherwise be the case. As the piece notes, this means that current obsession with deficits is not just lowering output and raising unemployment in the present, it is likely to have a lasting impact on the economy.

It is great to see people like Larry Summers openly pushing the idea that the economy can face serious demand problems. This view was routinely ridiculed by mainstream economists all through the 1990s and the last decade, so it is nice to see them change their minds. Summers has even gone the extra mile of noting that lack of demand is not just a problem in the current downturn but one that has been present since the 1990s. This shows the potential for learning among mainstream economists.

However there is still one additional step that they must take to get the full picture. As every intro textbook tells us, Y = C+I+G+(X-M). That means the level of demand in the economy is equal to the sum of consumption, investment, government spending, and net exports. This is an accounting identity -- it is true by definition. It cannot be wrong, if you don't like it then it's your problem.

The significance of this simple identity is that net exports have been a large negative since the late 1990s. Back in the early post-war years we typically had trade surpluses. We began to run modest trade deficits in the 1970s due to the OPEC price increases. The trade deficit rose sharply in the 1980s following a run-up in the dollar, but then fell back to around 1.0 percent of GDP following the Plaza Accord, which brought down the value of the dollar against the currencies of our major trading partners.

The deficit stayed close to 1.0 percent of GDP until 1997. That was when the East Asian financial crisis hit. The harsh terms imposed on the countries of the region by the United States and the I.M.F. required them to massively increase their exports. This led them to sharply reduce the value of their currency against the dollar. Furthermore, to avoid ever being in the same situation as the East Asian countries, most countries in the developing world followed the same course. They lowered the value of their currency so that they could increase their exports and accumulate massive amounts of dollars to hold as reserves.

Dean Baker / November 01, 2014

Article Artículo

Labor Market Policy Research Reports, October 24 – October 30

Labor Market Policy Research Reports, October 24 – October 30

The following reports on labor market policy were recently released:

Center for American Progress

Eds, Meds, and the Feds: How the Federal Government Can Foster the Role of Anchor Institutions in Community Revitalization
Tracey Ross

A Great Recession, a Great Retreat: A Call for a Public College Quality Compact
David Bergeron, Elizabeth Baylor, and Antoinette Flores

Economic Snapshot: October 2014
Christian E. Weller and Jackie Odum

CEPR and Janine Duffy / October 31, 2014

Article Artículo

Misplaced Celebrations On Third Quarter Growth

There was much celebration in the business press over the better than expected third quarter GDP growth. (See, for example, this WaPo piece touting the U.S. recovery as the "envy of the world.") Many were quick to say that the 3.5 percent growth for the quarter implies that the economy is now on a higher growth path, possibly in excess of 3.0 percent. Mr. Arithmetic begs to differ.

First, if we can look all the way back to the beginning of 2014 we see that the average growth for the first three quarters so far this year is just 2.0 percent, the same as the average for the prior three years. And, just to remind folks, we had a really bad recession back in 2008-2009. This has left us at a level of output way below the economy's potential. To make up the ground lost the economy has to be growing faster than its 2.2-2.4 percent potential growth rate. At the 2.0 percent growth rate we have seen so far in 2014, we are making up none of the lost ground.

The second point that should have featured prominently in all discussion of the GDP report is that the major drivers of growth in the quarter, net exports and military spending, will almost certainly not be adding to growth in the same way in future quarters and will most likely be in part reversed. In other words, the strong growth in these components is reason for believing future growth will be weaker, not stronger.

Net exports added 1.32 percentage points to growth in the quarter, while military spending added 0.66 percentage points. If the contribution of these sectors to growth had been zero, GDP growth would have been 1.5 percent rather than 3.5 percent.

If the folks who expound on the economy had access to data from the Commerce Department they would know that both of these sectors are very erratic, sharp movements in either direction tend to go in the other direction in the following quarter. (There is a logic to this. Imagine that the true path for both sectors is a constant growth path, but we have random error in either direction. If our error is on the high side one quarter, then if we get an accurate measure the next quarter, it would imply a decline from the erroneously measured number the previous quarter.)

The last time next exports added more than a percentage point to growth was the fourth quarter of 2013 when it added 1.08 percentage points. The following quarter it subtracted 1.66 percentage points from growth. Net exports added 1.12 percentage points to growth in fourth quarter of 2010. It subtracted 0.24 percentage points from growth in the following quarter.

Dean Baker / October 31, 2014