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by on June 18, 2010 at 11:20 am in Web/Tech | Permalink

1 Laura S. June 18, 2010 at 11:37 am

Herbert Gintis is wrong when he says:

Moreover, Federal regulations placed serious restraints on the ability of the GSEs to assume high-risk debt. Indeed, by definition these GSEs did not engage in subprime lending because their legal statutes prohibited them from issuing mortgages without substantial down payments and closely validated assurances concerning family income and wealth. Indeed, Fannie Mae and Freddie Mac began to recede from the forefront of mortgage lending when the housing bubble emerged in the years after 2003. Fannie Mae and Freddie Mac executives panicked when their positions in mortgage markets began to deteriorate, and they introduce questionably legal procedures (“expanded approval” for Fannie Mae and “A minus” for Freddie Mac) to recapture market share. But these efforts were basically unsuccessful because the GSE lenders were saddled with fixed-rate loan structures. The share of GSEs in the mortgage market faded rapidly in the latter years of the housing bubble.

Its just one line of nonsense after another. The GSEs lowered the qualifications for a ‘conventional’ mortgage such that the qualifying threshold sank to a credit score of 630 which in prior years would have been regarded as deeply subprime. Then they took subprime loans and classified them as prime. All the while complaining to meet their credit quality restrictions.

But there were not.

Then even as the GSEs were pulling back from the market, they started to dominate the subprime space and were responsible for most of the subprime lending in the last years of the boom.

Peter Wallison summarized this thus, “Of the 26 million subprime and Alt-A loans outstanding in 2008, 10 million were held or guaranteed by Fannie and Freddie, 5.2 million by other government agencies, and 1.4 million were on the books of the four largest U.S. banks. ”

2 Michiel June 18, 2010 at 11:43 am

I am, once again, sincerely appalled by the way Krugman frames his advocacy for extended fiscal policy. Is it really that simple a dichotomy? Really? Or we create jobs, or we inflict pain? Balderdash!

3 not_scottbot June 18, 2010 at 1:24 pm

Well, I finally broke down and read Krugman – at least he was able, if not in detail, to at least refer to the reality that it was deflation that actually brought the Nazis to power, something so exceedingly rare in America discourse that he should be commended. A reality, at least to my experience in talking to a couple of German businessmen, which is very well known here.

But strangely, he seems to miss the point that a state can’t simply spend itself to health, much less wealth – as the Weimar Republic so clearly demonstrated. Somebody will have to pay the bill for the Kurzarbeit (strangely, that German practice is no longer really discussed in the American press, along with the whole issue of ‘automatic stabilizers’ in general).

Even more intriguingly, he seems extremely careful to avoid any mention of a significant strand of German political thought which denies that economic growth is always an unalloyed good for society. Or to put it a bit differently – met any Greens, Herr Doktor Krugman? Ever heard the expression ‘Konsumterror?’

4 k June 18, 2010 at 2:06 pm

if you’re so smart, why aren’t you rich already?

5 mmj June 18, 2010 at 3:29 pm

Completely ignores GSE bondholders and so completely misses the point.

6 Don the libertarian Democrat June 18, 2010 at 3:32 pm

“At the normative level, if government debt is what markets fear right now, it is not clear at all that markets would welcome an increase in the supply of debt by the country they perceive as the last bastion of fiscal and monetary control. The biggest and most immediate fear today is market worries linked to excessive European debt. How an increase in German debt would ease such fear is not clear to us.”

This is where we disagree. I see investors fearing slow growth indefinitely if austerity is introduced.

“We believe that both the diagnosis and the proposed cure are wrong. Of course, the world’s current account is always balanced, so Germany’s surpluses must appear somewhere else as deficits. But is it Germany’s fault if it became more competitive?”

Yes. It’s clear that Germany wants to keep its Saver/Exporter Economy model come what way. But, again, this needs forbearance from other countries, many of which see this model as a problem for them. Hence, if Germany can’t export its way out of this mess, they will face Debt-Deflation.

The current German Finance Minister has admitted that the Eurozone involves, and always has, transfers from richer to poorer nations. German Banks did a lot of unwise lending. Germany is putting forward its own priorities in this mess. Unfortunately, they’ve committed themselves to a larger entity and a more prominent role in the world. It would be better for them to recognize this and deal with the consequences sooner rather than later.

7 Bernard Guerrero June 18, 2010 at 4:15 pm

“I am. According to Barry.”

S’true. Welcome to the plutocracy, friend!

8 Greg Ransom June 18, 2010 at 10:09 pm

A truly disappointing Gintis FAIL.

He just isn’t an honest man here. Or else he is far more ignorant than I imagined.

William White was detailed and specific in his predictions using Hayekian macro as were others.

There are a number of empirical studies supporting Hayekian macro.

And Gintis doesn’t understand the empirical nature of economic science, which starts with an empirical problem of design-like order without a designer just like
Darwinian biology and provides a causal explanation just like Darwinian biology that cannot be limned in simple linear math relation — entrepreneurial in the context of changing prices and local conditions.

Hayek’s simple claim is that we know empirically that people learn and causally change the world as learners.

Does Gintis deny it?

9 lisa June 18, 2010 at 11:49 pm

Really Andrew? You make over 250k/year. if so good for you; now pay (in taxes) what you did during the reagan or clinton years.

10 dieter June 19, 2010 at 6:42 am

Austrian economics reminds me of alternative medicine. The proponents of alternative medicine attack the validity of evidence based medicine with hyper-skepticism and agnosticism, deny the existence of illnesses, the evidence for HIV causing AIDS, etc. and question the very epistomoligcal basis of western medicine and then turn around to make grandiose statements about certain illnesses being caused by “negetive energy” and the effectiveness of the specific remedies they sell.

11 Bernard Yomtov June 19, 2010 at 1:43 pm

Exactly what dieter said.

If you deny the value of empirical testing of your theories how can you then claim that a crisis, or any other event for that matter, proves the validity of your theory? You can’t.

You are either making statements about the world which are subject to empirical testing, or you’re building an abstract system justified only by its own logic. If you choose the latter then it makes no sense to pick out some isolated fact or other as “proof” of your ideas. (“We think central banks causes crises. Since we have both a central bank and occasional crises, our theory is obviously true.”)

12 Greg Ransom June 20, 2010 at 1:08 am

Re: “testing”

This is a pseudo-scientific picture of “science” derived from philosophy.

Darwinian biology offers empirical problems and a massively powerful causal mechanism as an explanatory strategy of the highest quality.

But as Darwin himself said, it does not provide simple empirical tests, like a bogus and crude philosophers idea of chemistry or physics. Or an economists.

13 Idlewild June 21, 2010 at 12:07 am

Haha, Greg, I was gonna reply to your posts, assuming you were a bright guy with a background in physics and you knew what you were talking about. Turns out you write a blog worshiping Hayek, and probably wrote a story called “Obama Hid His Father’s Socialism From Readers”.

You should at least link to Marginal Revolution on your blog under “Econ blogs”.

14 Greg Ransom June 21, 2010 at 1:10 pm

Popper bowed to Hayek on the nature of science and explanation in the complex sciences — Kuhn included Hayek’s many-many problem from his _The Sensory Order_ as part of his explanation of the non-reducibility of science to “sense data”. (And note well, Kuhn used economics / the social sciences as his non-science exemplar for highlighting the nature of genuine science via its contrast with real science).

The philosophy of science in the legitimate sciences has been moving in Hayek’s direction for 90 years.

If only that could be said as well within the still unsettled and confused — and constantly re-invented — sub-field of math and statistics called “economics”.

15 Idlewild June 24, 2010 at 11:39 am

Hey Greg, sorry, I’ve been busy.

Just because you mention it so much, “complexity” is a label that applies to efforts in dynamical systems, chaos theory, and numerical analysis to analyze complicated models that defy simplistic explanations, like the kind of topological classification schemes built off things like the Hartman-Grobman theorem. There’s plenty of models and approaches in economics that could be classified as falling in that paradigm. But if we want to know whether school lunches raise student performance, or if job training reduces recidivism, a complexity approach is hardly appropriate. Claiming that complexity will become the mainstream approach, and eventually replace treatment-effects or randomization studies makes you sound woefully out of touch with what a huge chunk of what economics studies.

When it comes to epistemology, a priori claims about what is “OK” and “not OK” to do with data are pretty irrelevant. Since the methods themselves internally consistent, the question is about whether they work in practice or not. Some things work in econ, others don’t, and that’s why new tools and theories are constantly being developed. The reason heterodox economics is often rejected out-of-hand is not because valid points are not made, but because heterodox economics is a great place for hacks to hide who don’t want to do theory or empirical work, but love to criticize what others are doing and wallow in smugness. “Sense data” is the foundation of science: the validity of evolution is not built on the a priori or aesthetic value of the theory, but on measurable consistency of the theory with observed reality. Look up Heidegger or Lord Kelvin for witty quotes. Quantum is not valued because it is archaic, but because it delivers accurate predictions based on what we can measure. Denying the usefulness of data or rejecting mainstream theory is what people do when they are outsiders looking to score easy points (Steve Keen…), or don’t want to invest on understanding cutting-edge efforts (the theoretical physics people who criticize econ and publish crappy agent-based models…). Real researchers and participants find ways to develop new theory and methods that extend and revitalize the field, which is what you are constantly observing in economics.

I’d get into the Obama thing, but you seem to think that using “the daughter of a close friend of…” as the source of information on Obama’s father’s political views instead of Obama’s father is OK. You also use a law of large numbers argument to estimate his views (“basically all”), so you also contradict your criticisms of using data…

Good luck with your blog!

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