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From the comments

by  Tyler Cowen

This is from Mark, the caps are his:

We had these big interconnected undercapitalized things that were mandated by federal policy to keep expanding the amount of paper they bought or backed, which meant inevitably they were going to reach the point where the paper they were backing was too risky, and the GSE’s mandated growth necessarily called for them to issue more paper of their own to do that..And then you had Basel II and its US application that made GSE paper Tier I capital to support maximum loan growth in private sector banks. No wonder credit dried up when the GSEs were taken over in Sept 08. But you never see the Rortys and Mins speak to this perspective. THE GSE’S WERE PROCYCLICAL VECTORS THAT TRANSFORMED HOUSING DEMAND TRENDS INTO CREDIT MARKET TRENDS AND VICE VERSA, FREQUENTLY AMPLIFYING THEM, BUT THEY WERE NOT STRONGLY CAPITALIZED ENOUGH TO ABSORB A TREND REVERSAL.

The Gang of Six plan

by  Tyler Cowen

Ezra Klein links to a founding document.  David Wessel summarizes some of it.  It’s complicated and a lot of it will be re-legislated.  We still have an OK path forward.  It seemed to me that gdp+1 for Medicare does lot of the medium-term work.  The entire tax discussion was unclear and I feared that some revenue losses were perhaps not acknowledged.  At this point the real questions are about public perceptions, not the principles of public finance as they might be debated by Musgrave and Buchanan.  The estimated level of social capital in the U.S. political system will very shortly be revalued, one way or the other.

Here is Dan Mitchell on the plan.  Here is a Hayekian argument on the debt ceiling.  Here is Peter Leeson on the history of “God Damn!”

On Europe, it’s as simple as that.  The Greek bond yield topped 39 percent.  As I said to a reporter today, France gave birth to it (the euro), faltered and left it on the doorstop of some distant, passive-aggressive German parents, and they are willing to feed the thing but not to pay the bill at Harvard.

Addendum: Ezra has a lengthy summary and analysis.  Blog-lengthy, that is.  Chait doesn’t think it can pass.

Assorted links

by  Tyler Cowen

1. Many WWII bombs in Germany remain unexploded, and live, and they are (still) tracked with WWII reconnaissance photos.

2. Krugman can’t bring himself to present the figures on government spending.  Herbert Hoover raised spending and raised taxes too, in a slightly expansionary combination.  It is incorrect to take, say, a state governor who is pursuing a contractionary fiscal policy and liken that person to Hoover.  Krugman would do better to simply cede this historical point, which need not infringe upon his more general critique of contractionary policy.

3. What is a high mortgage default rate?, from Arnold Kling.  And Rortybomb, with links to Min, responds on GSEs, a useful post.

4. Are all non-Africans part Neanderthal?

5. A sign that “the Left” is falling apart too; how many hackneyed or false memes or misguided examples of us. vs. them thinking or mistakes of mood affiliation are in this blog post?  It is a veritable feast of fallacy and it should be studied by future historians.  (If you are looking for balance, try David Brooks on the contemporary right.)

A realistic portrait of Argentina

by  Tyler Cowen in

…beyond the stellar growth numbers, the picture is mixed. To start with, the boom owes much to global factors. Amid a surge in global prices, Argentina is a leading food commodities producer, with agriculture making up 35 per cent of foreign sales. Furthermore, not only is China clamouring for Argentina’s natural resources, but the middle class in neighbouring Brazil – its main trading partner – are also avidly buying cars, its biggest manufacturing export.

“The terms of trade are now at a historic high. This is the best possible world for Argentina,” says Lucio Castro of Cippec, a Buenos Aires-based think-tank. “But take out the natural-resource intensive sectors and productivity in the rest of the economy is bad and informality extremely high.”

Unemployment, at 7.4 per cent in the first quarter, is low, but investment is lacklustre – 19.4 cent of gross domestic product. Meanwhile, productivity is “not bad, it’s dismal”, says Mr Castro.

Moreover, following years of underfunding, the country’s once admired education system is a shadow of its former self.

Repeat after me three times: real shocks really, really matter.  That adds up to six “reallys.”  The link is here.

Assorted links

by  Tyler Cowen

1. Can you digitally organize your friends (acquaintances, enemies, etc.)?  (By the way, I haven’t yet figured out how to respond to Google+ queries, thanks if you sent me one though.)

2. Can the neuroeconomics revolution revolutionize psychiatry? (gated, in any case I am skeptical)

3. The new Tim Groseclose book on media bias is now out.

4. Professorial hobbies.

5. The demographic depression in household formation, or why housing may not recover anytime soon.

6. Star Trek vs. Anti-Star Trek.

The *four* flavors of financial crisis (more on the mortgage agencies)

by  Tyler Cowen in

Here is a response from Brad DeLong on Fannie and Freddie.  It is hard to excerpt so read the whole thing, as it is full of substance.  Matt Yglesias makes related arguments.

I agree with many of Brad’s specific points, but he is underestimating how simple and direct my initial argument was.  I explicitly wrote that the agencies did not cause the crisis.  The agencies, along with several other government policies, did increase the size and leverage of the real estate sector, as well as parts of the financial sector, namely those dealing with securitization.  That made the blow-up — as caused by other factors — worse than it otherwise would have been.  And that’s the fourth flavor of the crisis.  Here is a simple parallel argument to my case on the agencies:

1. The U.S. government put a lot of additional people into its Embassy in Ruritania.

2. Terrorists blew up the Embassy with a really big bomb.

3. Because of the U.S. government’s previous staffing policy, the tragedy was worse than it otherwise would have been.

4. The U.S. government did not cause those deaths, but #3 is still true.  And since Ruritania was a dangerous country with lax security (analogous to the financial sector!  analogous to the poor decisions of low income borrowers!), #1 was a very unwise policy.

The early part of Brad’s post doesn’t counter that argument.  Both Brad and Matt are trying to semantically rope off some pre-2008 events and call them “not part of the crisis,” or rather only a part of Brad’s Crisis1.  They are neglecting Fischer Black’s point that the longer-run causes of underlying economic vulnerability are important and it is not just about the shocks themselves.

Brad’s fifth point is more directly on my thesis:

Fannie and Freddie did not make the crisis worse but rather made it better. The really bad parts of the crisis–crisis2 and then the subsequent failures of political economy that have given us crisis3 started with the uncontrolled bankruptcy of Lehmann Brothers, in which it was all of a sudden no longer clear where the government stood and which financial assets had value. But people knew one thing at least: they knew that the government stood behind Fannie and Freddie. If every Fannie and Freddie bond and mortgage guarantee had suddenly dropped to the quality of Lehmann Brothers’ liabilities–as would have happened if they had not been GSE’s–things would have been much much worse. Crisis1 phenomena encourage overleverage during the boom, but they are a fountain of confidence and stability and make crisis2 much less severe when the crunch comes.

I agree with the specific claims but not with the general conclusion as embodied in the first sentence.  Had we abolished the agencies in, say 2008, matters would have been much worse, as Brad is suggesting.  It does not rebut my claim that never having created the agencies would have led to a smaller blow-up in the first place.  Imagine that 2006 rolls around, full of financial shenanigans and bad derivatives trading, but homeownership rates had been lower, credit had been tighter, and a lot more people had had twenty percent down.  2008 would not have been nearly so bad.  Work-outs would have been easier too.  On this entire question, the time horizon really matters.

In similar fashion the mortgage interest deduction made matters worse, though again without causing the crisis in any active or temporally-specific sense.

Here is Arnold Kling and his reply.  To pursue the Embassy analogy, I would say that Brad is simply claiming that the “added employees” had a lower than average fatality rate.  Maybe so, but it was still a mistake to stick them where we did, when we did.  Furthermore a crisis is not just about loan default.  What about the wealthy family that bought extra homes and flipped them, ended up getting caught by the price crunch, never defaulted but now has to cut back significantly on consumption?  Default rates won’t give you the true measure of the malinvestments and AD problems caused by the mortgage agencies.  These days, household leverage is a problem per se.

The economics of Al Qaeda?

by  Tyler Cowen

Such analyses are often highly speculative, but this one seems to be based on concrete data:

And, contrary to speculation that Al Qaeda in Iraq was reliant on international donations, this wasn’t a source of funding either. The group was self-financing. In fact, the core organization of Al Qaeda in Iraq in Anbar province was so profitable that it sent revenue to associates in other provinces of Iraq, and perhaps even further afield. The group raised millions of dollars annually through activities such as simple theft and resale of valuable items such as cars, generators, and electrical cable, and hijacking truckloads of goods, such as clothing. And their internal financial record-keeping was diligent, with all the requirements of expense accounts in regular businesses. A central unit of Al Qaeda in Iraq’s hierarchy required operatives to keep records of even the smallest outlay and to turn over their “take” to upper-level leaders, who made the spending decisions.