ES EN
Menu Menú

Publications

Publicaciones

Search Publications

Buscar publicaciones

Filters Filtro de búsqueda

to a

clear selection Quitar los filtros

none

Article Artículo

The Fed Is Still Way Out to Lunch on Financial Bubbles

The Federal Reserve Board disastrously missed and/or ignored two huge bubbles in the last decades: the stock bubble in the 1990s and the housing bubble in the 2000s. The collapse of both bubbles led to recessions from which it was difficult to recover. Neil Irwin inadvertently tells us today that the Fed is still utterly clueless when it comes to dealing with bubbles.

The problem is that, at least according to Irwin's account, no one at the Fed seems to understand how bubbles hurt the economy. On the one hand, he presents the views of Fed governor Jeremy Stein, a bubble hawk, who he tells us:

"argued in a Feb. 7 speech that there are already signs of overheating in the markets for certain kinds of securities, including junk bonds and real estate investment trusts that invest in mortgages. And if those or other potential bubbles get so large that if they popped the whole U.S. economy could be in danger."

By contrast we have Fed chair Ben Bernanke and vice-chair Janet Yellen, the latter of whom he quotes as saying:

"At this stage there are some signs that investors are reaching for yield, but I do not now see pervasive evidence of trends such as rapid credit growth, a marked buildup in leverage, or significant asset bubbles that would clearly threaten financial stability."

Unfortunately, the concern about financial stability and discerning bubbles in a wide array of economic data completely misses the point. First, financial instability is not what caused our problems in either 2001 or in the current downturn. As much fun as it is to see the Fed chair, Treasury Secretary and other important people sweating over the collapse of huge financial institutions, this crisis was very much secondary to the country's economic problems. We know how to paper over a financial crisis, which the Fed eventually did (as did the European central bank), the hard part is replacing the demand that had been generated by a bubble once the bubble has burst.

This directly leads to the second point. The bubbles that we have to worry about are not hard to find. Suppose there is a huge speculative bubble in soy beans that pushes their price to 20 times their normal level. This could be bad news for people that like soy beans and derivative products. It may also be disastrous for producers in the industry if they get caught on the wrong side of things. However, the collapse of this bubble will have minimal impact on the economy. If for some reason our bubble watchers at the Fed failed to notice the rise in soy bean prices, the problems caused by its eventual bursting will not sink the economy.

Dean Baker / March 05, 2013

Article Artículo

Robert Samuelson Identifies the Sequester Culprit: John Kennedy

I'm not kidding, it's right there in the Washington Post. And we thought Bob Woodward was creative.

But Samuelson's economic history is even more striking than the linking of Kennedy to the sequester. He notes the fiscal stimulus that was sparked by the Kennedy tax cuts (and the Vietnam War and Johnson's Great Society programs) and the boom that resulted, and tells us that "it was a disaster."

"High inflation was the first shock. An initial boom (by 1969, unemployment was 3.5 percent) spawned a wage-price spiral. With government seeming to guarantee 4 percent unemployment, workers and businesses had little reason to restrain wages and prices. In 1960, inflation was 1 percent; by 1980, it was 13 percent. The economy became less stable. From 1969 to 1982, there were four recessions, as the Federal Reserve alternated between trying to push unemployment down and prevent inflation from going up. Only in the early 1980s did the Fed, under Paul Volcker and with Ronald Reagan’s support, crush inflationary psychology."

Before looking at Samuelson's horror story here, it is worth noting what happened in the boom, which can be treated as going through 1973, in spite of the recession in 1969. Growth over the 10 years from 1963 to 1973 averaged 4.4 percent, by far the most rapid stretch in the post-World War II era.

The unemployment rate hovered near 4.0 percent for most of this period, as Samuelson complains. This led to large gains in real wages and sharp declines in poverty. The overall poverty rate fell from 19.5 percent in 1963 percent to 11.1 percent in 1973, an all-time low. For African Americans the poverty rate fell from 55.1 percent in 1959 (annual data is not available) to 31.4 percent in 1973. I suspect most folks wouldn't mind a few more disasters like this one.

Dean Baker / March 04, 2013

Article Artículo

Time to Bury Pew Report on Wealth by Age Group

I realize that Pew is a very prestigious outfit, but Pew's garbage is still garbage. Its report on wealth by age group, or at least the interpretation that it and others have given this report, fits the bill.

A couple of years ago, Pew did an analysis that gave breakdowns of wealth by age group. It found that the median household over the age of 65 had $170,500 in net worth. I was actually pleased that they came up with this number, since it meant that the projections that I had done more than two years earlier with my colleague David Rosnick were almost right on the nose. It's always gratifying to see other researchers independently corroborate your findings. 

But what was remarkable about this report was that the Pew researchers took this number as evidence of the affluence of the elderly. The study points out that this was a 42 percent real increase from the 1984 level. By contrast, households under age 35 saw their median net worth fall by 68 percent to just $3,700. This disparity in wealth by age continues to be the take away from this report in the media.

To realize the absurdity of this position, try thinking for a moment. The bulk of people who are now turning age 65 do not have a defined benefit pension. (They did in 1984.) This means that the only income they have is their Social Security check, which averages a bit over $1,200 a month. Right off the bat, $100 a month is subtracted to pay for their Medicare Part B premium. This means that our high living seniors have an income of $1,100 a month, plus their $170,500 in net worth.

Is this rich? My guess is that 90 percent of the reporters who have covered this Pew study have no clue what net worth means. The $170,000 figure includes every asset that seniors own. That means everything in retirement accounts and other personal savings, the value of their car and the equity in their home. To put this in perspective, the median house price is roughly $180,000. That means that if our typical senior household sold off every other asset they held they would have roughly enough money to pay off their mortgage. Then they would be entirely dependent on their Social Security check to support themselves.

Dean Baker / March 03, 2013

Article Artículo

Martin Feldstein Versus Accounting Identities

It is always painful to see an economist do battle with an accounting identity. Martin Feldstein takes on the task in a piece that explains that the dollar could fall sharply in the future, if investors come to expect its decline.

Most of what Feldstein says in this piece is exactly right. Investors do not need to hold dollars as a safe haven and in fact it is not a safe haven if it is falling in value against other currencies. Also, the vast majority of foreign dollar holdings are not necessary as foreign exchange reserves to finance trade. This means that we could in fact see large declines in the value of the dollar in the future.

The conflict with national income accounting comes in Feldstein's takeaway:

"And, despite a more competitive exchange rate, the US continues to run a large current-account deficit. If progress is not made in reducing the projected fiscal imbalances and limiting the growth of bank reserves, reduced demand for dollar assets could cause the dollar to fall more rapidly and the interest rate on dollar securities to rise."

Okay, if we reduce our fiscal imbalances and there is no decline in the dollar (remember, that is the bad news in this story) then what will happen to employment? Feldstein can't seriously believe that investment in equipment and software will increase substantially from what is already a reasonably high level measured as a share of GDP. He also can't expect that consumption will rise substantially given that the savings rate is already at a very low level compared to the post World War II average. And with enormous overbuilding in both the residential and non-residential sector, he can't think that construction will fill the gap in demand that will result from smaller deficits.

This would mean that the policy he is advocating is that we should deliberately slow growth and raise unemployment because if we don't the dollar will fall in the future. This would seem to contradict both common sense and what Feldstein himself has advocated in the past: allowing the dollar to fall to boost net exports.

Dean Baker / March 02, 2013

Article Artículo

Economic Growth

The Bipartisan Policy Center Endorses a Bi-Partisan Failure

The Bipartisan Policy Center's Housing Commission released its report, Housing America's Future, on housing policy this week. Its recommendations include winding down Fannie Mae and Freddie Mac, and limiting federal government involvement in mortgages to a "Public Guarantor." In a post originally published by the National Housing Institute. Dean Baker responded.

There is a good argument for having a public company like the old Fannie Mae sustain a secondary market in mortgages. Fannie Mae created this market in the 1930s. It was able to substantially reduce regional differences in mortgage costs and availability, with minimal operating expenses. This publicly-run company was a success by any reasonable measure.

We also know that the private market can provide housing finance without any direct support from the government. This is demonstrated by jumbo mortgages, which typically carried a premium of 25-50 basis points above conformable mortgages.

Given these successful routes for providing housing finance, the Bipartisan Policy Center took the natural path for people in Washington: a proven failure.

Instead of opting for either a public company or companies to sustain the secondary market or leaving finance to the private sector, the Bipartisan Policy Center opted for the sort of public-private mix that we saw with Fannie Mae and Freddie Mac in the years leading up to the housing crash. They want the government to guarantee investors’ stakes in mortgage backed securities.

Dean Baker / March 01, 2013