Showing posts tagged economics

The US Government is not a payday lender

If that’s confusing, there’s an even easier way to think about it. TARP made its first round of investments on Monday, October 13, 2008. As of November 21 last year, TARP was about to turn a paper profit, at least according to the Treasury Department, getting $432 billion back on $422 billion in investments. That’s a 2.4% total return over more than five years, or an annualized return of less than 0.5%. If the government had instead put its money into the stock market on Friday, October 10, 2008, it would have earned a total return of 132% over the same period, or more than 18.3% per year. [James Kwak]

Right, because if some other entity had stopped the bank panic, rescued the auto industry, and bailed out credit unions, then the stock market would have gone up. The US government should have just waited for this mysterious other entity to show up and then - PROFIT! This is like complaining about a builder who wasted so much concrete on the foundation instead of building some more floors on the top.

Yes, the government got back more money than it invested, if you are looking solely at TARP disbursements. But if Larry Summers evaluates his own investments that way, then he should find someone else to manage his money

Summers did not claim that the government’s investment was the most profitable possible. That’s actually not the purpose of government bailouts. This is what Summers wrote:

In the moment, though, the overwhelming imperative was restoring confidence at a time when complete breakdown looked like a real possibility. The government got back substantially more money than it invested. http://www.ft.com/cms/s/2/3ec604c0-ec96-11e3-8963-00144feabdc0.html#ixzz34FZmhiY9

He’s not arguing that the government maximized profits, whatever that might mean in this case. He is arguing that the Obama administration was a careful steward of public funds. Considering that the Democrats had to battle back against Paulson’s plan to just give money away and the Obama administration’s situation on taking office after Paulson had already sent out $350billion of TARP funds, that’s a pretty solid claim. Should the FDIC should evaluate each bank rescue against the possible returns from a mutual fund; should the DOE  compare investments in solar power to returns available by payday lending?  This is a ridiculous line of attack which has, probably unconsciously, incorporated all sorts of dumb libertarian arguments about the role of government.

I should also note that TARP rescued the Auto industry and 1 million jobs - something that seems to be hard for Obama administration critics to remember. If the “liberal” critics of the Obama administration had been able to curb their enthusiasm for joining in the right wing attack on government financing, TARP could have been extended into a rolling fund that the government could have used to provide financing to areas where the dysfunctional finance sector fears to tread: wind and solar, urban low income housing, minority small business,  … . But the “Progressives” are in the grip of Paulism and can’t seem to shake it.

Who is Noah Smith kidding?

Students’ dissatisfaction is mostly about politics — they perceive mainstream economics as thinly disguised shilling for unrestrained free-market capitalism (also called “neoliberalism”). But that criticism is extremely out of date. Any Econ 101 course not taught by a total ideologue will contain plenty of theories that support the need for government intervention. Mankiw’s book certainly does. These include externalities, asymmetric information, strategic behavior (game theory), welfare economics, monetarist and Keynesian macroeconomics, and more. I could teach you an Econ 101 course straight out of Mankiw that did nothing but give reasons for more government. The fact is, if your Econ 101 course is a front for neoliberal propaganda, it’s only because your professor wanted it to be.

Should I first point out that “government intervention” is not the difference between right wing and left/liberal views? Hayek supported the army and secret police mass murdering union organizers in Chile - that’s a serious government intervention. At least to me.  And Mankiw’s right wing politics permeate his book, whether or not Smith is willing or able to notice. On page 10 students are told that taxes “adversely affect the allocation of resources for they distort prices and thus the decisions of households and firms.”  Nothing political or ideological in that, just fact, proven by empirical research. Uh huh.  On page 13,  students are told “the growth rate of a nations productivity determines the growth rate of its average income.”  Even mainstream economists like Larry Summers have known that to be false for DECADES.  On the same page, “when a government creates large quantities of a countries money„ the value of the money falls.”  This is what every right wing hack in the world says - announced here as a fact. On page 30, students get a lesson in the difference between positive (fact based, scientific) assertions and “normative” (emotional, magical thinking ) assertions. The example, is Polly scientifically explaining that minimum wage laws cause unemployment and that hippie Norm demanding that government raise the minimum wage.  Subtle!  And on page 36, students are invited to wag their heads wisely, but sadly, as Greg wonders why cities have rent control laws despite economists factual explanation that these things make matters worse. And at that point, I give up.

Right wing politics disguised as “science”. This stuff is junk and only those whose paychecks depend on it argue otherwise.

Economics can make even smart people stupid

This is the from the department of duhsplaining. Professors Mian and Sufi are upset at the Obama administration

The two men — economics professors who are part of a new  generation of scholars whose work relies on enormous data sets — argue in a new book, “House of Debt,” out this month, that the government misunderstood the deepest recession since the 1930s. They are particularly critical of Timothy  Geithner, the former Treasury secretary, and Ben Bernanke, the former Federal Reserve chairman, for focusing on preserving the financial system without addressing what the authors regard as the underlying and more important problem of excessive household debt. They say the recovery remains painfully sluggish as a result.

Mian and Sufi’s analysis of credit card data showed that during the bubble, irresponsible loans from banks, presumably many of these based on bubble level real-estate valuations, fueled consumer spending. After the collapse, these same consumers, heavily in debt, spend less. Well, that’s a shocker! As in many of these stories, the first step is surprise and dismay at the obvious, and the second step involves a magical unicorn understanding of the political process.

What were Geithner and Bernanke supposed to do about debt? Tell lenders to write it down? No authority. Get Congress to pass a law forcing lenders to write down debt? Ha! Get the GSE’s to write down those mortgages they control? Great idea, but the director of the FHA, Ed DeMarco refused and because the Senate must approve FHA director, President Obama was able to replace him only in January 2014!

In fact, Geithner and Bernanke did a lot to reduce public debt burden, within constraints. For profit student loans were stopped - causing Nebraska Senator Ben Nelson to try to sabotage health reform. The auto industry was bailed out, letting millions of people keep jobs! TARP money was funneled into not for profit community loan programs. Fed rates were kept low,  allowing millions to escape from high interest loans and variable rate mortgages. The stimulus bill and the extensions for UI put money in the hands of consumers. The health care law reduced health care costs, putting money back in the hands of consumers.  What they didn’t do is make a magical debt unicorn appear.