How much did Fannie and Freddie cause the financial crisis?

by  Tyler Cowen in

Rortybomb summarizes some of the “not much” case (piling on here); see also Brad DeLong, Paul Krugman, David Min, and others.  He wonders what the non-spinners think and I will tell him what I think:

1. It is not denied that the mortgage agencies were guaranteeing about half of all U.S. mortgages right before the crisis  (Yet somehow they had not so much to do with the crisis?)  And the crisis was not just about subprime.  The mortgage market remains screwed up to this day, with no clear end in sight.

2. There is also the more ambitious claim — not necessarily true but not obviously dismissable either — that leverage would have been much, much lower in American real estate markets without the mortgage agencies.  It is hard to judge such counterfactuals, but arguably lenders would have demanded more money down and offered fewer 30-year fixed rate mortgages.

3. Arnold Kling has a good response to the delinquency chart which is circulating.

4. Following the crisis, banks recovered and paid back virtually all of their bridge/bailout.  The mortgage agencies remain hundreds of billions in the red.  And yet the agencies had not much to do with the crisis?

5. It is wrong to suggest that the agencies caused the crisis in the sense that I will cause myself to eat breakfast cereal this morning.  One can debate which weaker notion of cause might be appropriate, but I will just say that the mortgage agencies made the crisis much, much worse.

I don’t yet see that the counters to Wallison and Co. should budge me from this position.  I would prefer that they start by acknowledging (or challenging) #1 and #4 and then trying to talk their way back to what they see as the truth.  As it stands, I see a lot of “devalue and dismiss” being applied to the messengers, rather than focusing on what the agencies did or did not do in the broader scheme of things.  From my quiet sofa seat in Fairfax, VA, it ain’t a pretty picture.

The economics of the Michelin Guide

by  Tyler Cowen in

Michelin stresses though that when taken together, the maps, guides and digital businesses are profitable. But the losses incurred by the red books have become such a concern that Michelin has turned to outside consultants. Accenture looked last year at three different scenarios for the red books, including outright closure.

The nuclear option was quickly rejected, partly in recognition of the undoubted brand value of the guide but also because of the political impossibility in France of such drastic action. However, Accenture warned that to carry on with things as they are today would mean yearly losses at the guide hitting €19m by 2015, representing a cumulative loss of €70m over the next four years.

The thinking seems to be that Michelin would do well to seek a share of the good fortune that its awards bestow on restaurants, possibly by creating a “red book” website that provides paid-for links for those establishments with Michelin stars and allows users to make online reservations.

Here is more.

Will a debt ceiling deal save America’s AAA credit rating?

by  Tyler Cowen in

I have not been following the political ins and outs of the debt ceiling debate, but I did run across the following.  I am not endorsing it, but if anyone has good reason to believe it is false, I would like to hear the response:

Keeping America’s gold-plated credit rating may take both a deal to raise the debt ceiling (which will happen) and a meaningful deficit reduction plan of around $4 trillion (which is not happening). Moody’s says it wants a  ”deficit trajectory that leads to stabilization and then decline in the ratios of federal government to GDP and debt to revenue beginning within the next few years.” And here is Standard & Poor’s in a report released last night:

“If a debt ceiling agreement does not include a plan that seems likely to us to credibly stabilize the U.S.’ medium-term debt dynamics but the result of the debt ceiling negotiations leads us to believe that such a plan could be negotiated within a few months, all other things unchanged, we expect to affirm both the long- and short-term ratings and assign a negative outlook, If such an agreement is reached, but we do not believe that it likely will stabilize the U.S.’ debt dynamics, we, again all other things unchanged, would expect to lower the long-term ‘AAA rating, affirm the ‘A-1+’ short-term rating, and assign a negative outlook on the long-term rating.”

There is much more at the link.  And so what is the view of the “gun up the fiscal policy stimulus” people?  Is it:

1. This is simply a lie and they will stick at AAA for the foreseeable future.  It is a strategic and pre-emptive move from the ratings agencies but they don’t mean it.

2. The U.S. government, and all those municipalities, can do just fine with a downgrade.

3. A downgrade is coming anyway, so we might as well do the correct Keynesian fiscal policy, because with austerity we’ll get an even worse downgrade over time, due to falling output and employment.

I genuinely wish to know.  I seem to be reading claims which rule out #2.  Is the Keynesian response a mix of #1 and #3?  If so, how come I don’t see the Keynesian advocates putting that on the table up front?

No, it’s not the bond market vigilantes, it is the credit rating agency vigilantes.

Sentences to scare you the most important blog post in the world today

by  Tyler Cowen in

According to the report, between 1990 and 2006 — the year in which issuance of Asset-Backed Securities (ABS) peaked — assets with the highest credit rating rose from a little over 20 per cent of total rated fixed-income issues to almost 55 per cent. Think about it. More than half of the world’s debt securities were, for all intents and purposes, considered risk-free. In 2006, that was nearly $5,000bn of assets.

The financial crisis had a lot to do with triple-A ratings being slapped on to subprime securities which didn’t warrant them, we know that. The report says between 1990 and 2006 ABS accounted for 64 per cent of the total growth in the amount of AAA-rated fixed income, compared with 27 per cent attributable to the growth in public debt, 2 per cent to corporate and 8 per cent to other products.

But watch what starts happening from 2008 and 2009.

The AAA bubble re-inflates and suddenly sovereign debt becomes the major force driving the world’s triple-A supply. The turmoil of 2008 shunted some investors from ABS into safer sovereign debt, it’s true. But you also had a plethora of incoming bank regulation to purposefully herd investors towards holding more government bonds, plus a glut of central bank liquidity facilities accepting government IOUs as collateral.  Where ABS dissipated, sovereign debt stood in to fill the gap. And more.

It’s one reason why the sovereign crisis is well and truly painful.

It’s a global repricing of risk, again, but one that has the potential for a much larger pop, so to speak.

The link to the entire blog post is here, with a good graph, hat tip goes to Annie Lowrey.  We weren’t as safe as we thought we were.  And we still aren’t.

Good thing he didn’t ask Alex to explain the Solow growth model (in French)

by  Tyler Cowen in

He asked an Air Canada fight attendant for 7Up and he got Sprite.

“I’m a little bit disappointed with the lower amount awarded,” Thibodeau said. “But the positive note is that the court recognized our rights were violated on several occasions.”

…So, in 2009, when Thibodeau ordered a 7Up in French, and the English-speaking attendant brought him a — gasp! — different brand of lemon-lime soda, he sued.

“If I take a flight and I’m not served in the language of my choice, and I don’t do anything about it, then my right is basically dead,” Thibodeau told The Globe and Mail. “I was not asking for anything other than what I was already entitled to. I have a right to be served in French.”

It’s a right that Thibodeau — who is a federal employee and happens to speak perfect English — takes very, very seriously.

The full story is here.  I suppose one could make a living this way.  Which are the French questions most likely to be misunderstood by an English-speaking Canadian?  From another article:

It is Thibodeau’s second successful legal action against the airline and its subsidiaries. In 2000, he was refused service in French when he tried to order a 7Up from a unilingual English flight attendant on an Air Ontario flight from Montreal to Ottawa.

Thibodeau filed suit in Federal Court for $525,000 in damages. The court upheld his complaint, ordered the airline to make a formal apology and pay him $5,375.95. Thibodeau was later honoured by the French-language rights group, Imperatif Francais.

For the pointers I thank Graham Rowe.  Alex and I explain the Solow growth model — in English — here.  Chinese, Spanish, and other editions are on the way.

The *greater* stagnation

by  Tyler Cowen in

Peter Lindert and Jeffrey Williamson write:

The new estimates imply that America’s real income per capita dropped by about 22% over the quarter century 1774-1800, a decline almost as steep as during the Great Depression between 1929 and 1933, and certainly longer. If the 1790s recorded brisk growth rates (Sylla 2011: pp. 81-3), it follows that the Revolutionary War period could have been America’s greatest income slump ever. That fall may have been 28% or even higher in per-capita terms.

Factors behind this decline include the Revolutionary War, the lagging South, and a negative trade effect.  The article is interesting throughout, for instance:

In 1774 the colonial South had about twice the per-capita income of New England, even when one rightly counts slaves as in the population. The absolute economic decline of the South Atlantic over the last quarter of the 18th century and its relative decline over the subsequent four decades stand out as an example of what has come to be called reversal of fortune (Acemoglu et al. 2002). By 1840 the South Atlantic was well behind the Northeast, having been well ahead in 1774, and its population share of the original thirteen colonies had fallen too. Furthermore, we can find no evidence that the colonial South had any large army of poor whites in 1774; indeed, Southern free labour had some of the highest wages anywhere in the colonies. Thus, it appears that the ubiquity of poor whites in the South was strictly a nineteenth-century phenomenon, associated, presumably, with post-1774 decades of very poor growth. Why the reversal of fortune for the South? We are still not sure whether it was bad luck in its export commodity markets, institutional failure, or exceptionally severe wartime damage.

An argument for the McConnell plan

by  Tyler Cowen

We’ve never thought the debt ceiling was the best leverage for a showdown over the entitlement state…

The tea party/talk-radio expectations for what Republicans can accomplish over the debt-limit showdown have always been unrealistic. As former Senator Phil Gramm once told us, never take a hostage you’re not prepared to shoot. Republicans aren’t prepared to stop a debt-limit increase because the political costs are unbearable. Republicans might have played this game better, but the truth is that Mr. Obama has more cards to play.

The entitlement state can’t be reformed by one house of Congress in one year against a determined President and Senate held by the other party. It requires more than one election.

The full article is here.  Ezra reports:

You’re increasingly hearing about the possibility of a split Boehner/McConnell deal, in which Boehner gets less than $2 trillion in spending cuts, which is not quite as many as he wanted, and the McConnell process is used to raise the debt ceiling beyond where the spending cuts have gone. That would, in other words, be the GOP giving on its dollar-for-dollar demand, which seems likelier to everyone involved than the party making an agreement on taxes.

Model this

by  Tyler Cowen in

As we have written before, private colleges and universities are by far the biggest offenders on grade inflation, even when you compare private schools to equally selective public schools.

There are charts and further information at the link.  By the way:

…about 43 percent of all letter grades given were A’s, an increase of 28 percentage points since 1960 and 12 percentage points since 1988. The distribution of B’s has stayed relatively constant; the growing share of A’s instead comes at the expense of a shrinking share of C’s, D’s and F’s. In fact, only about 10 percent of grades awarded are D’s and F’s.

It’s worth trying to model that too.

One of the strangest and most depressing markets in everything

by  Tyler Cowen

The link is here.  It deserves more than a mere link in a list, yet I can’t bring myself to excerpt from it either, or for that matter to really comment on it.  It is estimated that the woman (the link is safe for work, by the way) earns $90,000 a year, although she denies this.  There’s the consumer surplus on top of that.

For the pointer I thank Andrew H.

American vs. Russian notions of friendship

by  Tyler Cowen in

Not long ago I attended an evening-long discussion group on this topic, comprised mostly of Russian emigrants and their spouses.  The Russians were generally keen to argue that they have deeper and closer friendships than do the Americans.  They also dislike that Americans will call their acquaintances “friends.”  In response I noted that:

1. Relative to Americans, Russians are far more concerned with defining who is truly a friend, or not.  (Though Google+ may change this.)

2. Russians are far more likely to conduct purges of their friends.  (“A future enemy” is one good Eastern European definition of a friend, or so the joke goes, thanks to BC.)

3. American geographic mobility has been falling for some time and so we might move back toward some closer and more durable notions of friendship; social networks play a role here too.

Since that evening, I’ve formulated a new version of the question in my mind.  Putting aside the so-called “intelligentsia” (a Russian phrase, not one which comes quickly to my tongue), are Russian lower-middle class friendships so much more “life and death” than American lower-middle class friendships, especially among the immobile?  What if seven guys grow up together in Somerville, MA, never go to college or leave town, work in auto parts stores, and end up reminding you of characters in a Clint Eastwood movie?  Maybe they’re pretty tight, albeit with grudges and perhaps even purges along the way.

The new question is then this: why does the “treatment” of greater education have so much less affect on the nature of Russian friendships, relative to American friendships?  Are there other dimensions along which the treatment of education influences Russians less?  (Examples would be child-bearing age, taste in sports, taste in food, etc.)  Influences Americans less?  Other groups?

The Russian intelligentsia will be the first to insist how much education matters in their circles, but perhaps they doth protest too loud.

The value of the internet and double counting

by  Tyler Cowen in

Continuing the exchange over the value of the internet, David Henderson writes (and do read the whole thing):

So I can imagine doubling Goolsbee’s and Klenow’s 2% to 4% to reflect the broader version of CS [consumer surplus] that users get directly and then adding another 4% to reflect the lower cost of getting goods and services delivered to us even if we never use the Internet directly. That get’s it to 8%. To me that’s “huge.”

This is useful for helping sort out where David and I disagree.  As I see it, the latter factor — the lower prices for goods and services — is already reflected in measured real wage gains, or smaller real wage losses than would otherwise hold, as the case may be.  We’re back down to four percent.

In the post, David mentions both the “lower price” gains (which he stresses in the TGS review) from the “lower time cost of shopping” gains.  The two are not quite the same.  What about the latter?  The lower time cost of shopping is already counted in WTP measures of the value of the internet — you’ll pay more for the internet if it saves you more time — and to some extent in gdp statistics and other real income measures.  How does the gdp effect work?  Let’s say it used to take half an hour to buy a book, now it takes ten seconds.  People will buy more books and that gain is already measured.  The rest of the saved half hour goes into other methods of production and shopping, which also show up in national income.  Some of the saved half hour shows up as “pure leisure” (i.e., sitting on one’s bum, doing nothing) and that one part of the saved time doesn’t show up in gdp statistics though it still does show up in WTP estimates (which again clock in below four percent).

Time use studies also count these “time saved shopping” gains, but in a different way.  Goolsbee and Klenow measure the income elasticity of leisure uses of the internet and find it is negative.  That means high value of time users find the internet a time sink, on net, rather than a time saver.  In any case the magnitude of this value already lies behind their estimate.

Goolsbee and Klenow estimate two percent for consumer surplus, not “2% to 4%,” and they worry they are overestimating the gains because of assumptions they make about substitutability.  The other studies I cited are below four percent, unless it’s for computer use more generally.  I’m the one who kicks it up to four percent, largely because of Facebook, which de facto postdates some of the papers (though not the FCC study which still gives modest sums), and also because of unmeasured workplace consumption usage.  But that’s probably as high as we should go, once we adjust for what is already counted elsewhere.

Addendum: The Billion Price Index matches the CPI pretty closely, so there is not much gain from invoking the “CPI doesn’t measure internet bargains” argument, though there may still be a small effect there.  And Matt Yglesias offers interesting comment.