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April 21, 2008



A few days of excerpted Cassandra-type comments & responses to thoughtful microblog posts from Nov.-Dec.,2006:

Dave, Isn't it CREDIT EXPANSION that's been driving our economy for FIVE years?
Posted by: bailey | December 05, 2006 at 09:15 PM

bailey -- I do agree that the housing boom was driven by a combination of low interest rates -- which I think had to do with standard macro fundamentals like very weak investment demand from 2000 - 2003 and Bernanke's savings glut story -- and innovations in financial packaging that may have dramatically increased access to funds. I know that your feeling is that the latter is not benign and a symptom of policy failure. You may be right -- I just don't know, and that is clearly (in my mind anyway) one of the keys to how badly this whole episode turns out. In terms of traditional monetary policy of the FOMC sort, I will say that I have difficulty associating an inverted yield curve with a stimulative stance.

Dean Baker, ... Just to be completely clear, I concede that you may be the one who looks smart after all this has played out, and it is not my intention to diss your position -- I stand in very great risk of being on the losing side of this bet. But, it seems useful to point out that there is indeed another bet to place that is not totally silly.
Posted by: Dave Altig | December 06, 2006 at 06:45 AM

I appreciate you willingness to admit that "you may be wrong" (or alternativly stated "they may be right") in your responses to Bailey and Dean. We are all waiting for this episode to unfold so that we can see -- to evaluate after the fact -- which theories seem to be worth following and which seem less worthy. Or as Peter Drucker once said (long ago in the WSJ) whether we have been following the wrong economic prophets (or the right ones). Thanks for keeping up your blog, amid all your other work.
Posted by: Dave Iverson | December 06, 2006 at 12:36 PM

Dave, I'll share this anecdotal BusinessWeek story (reported by MSN) to once again try to make my single point. It wasn't low interest rates that created our housing bubble & has caused our present risk leveraging dilemma, it was inordinate risk taking by a financial sector that continues to spiral ever faster out of control. First, from BusinessWeek:
"When Brad Kehn received his first credit card from Capital One Financial in 2004, it took him only three months to exceed its $300 credit limit and get socked with a $35 over-limit fee. But what surprised the Plankinton, S.D., resident more was that Cap One then offered him another card, even though he was over the limit -- and then another and another.
By early 2006, he and his wife had six Cap One Visa cards and MasterCards. They were in over their heads.
The Kehns were late and over the limit on all six cards, despite occasionally borrowing from one to pay the other. Every month they chalked up $70 in late and over-limit fees on each card, for a total of $420, in addition to paying high interest rates as a penalty.
The couple fell further behind as their Cap One balances soared. Even so, they still received mail offers for more Cap One cards. "I didn't open them," says Kehn, 33, who manages a truck stop and runs a carpet-cleaning business on the side. "I owe these people that much damn money and they are willing to give me another credit card? This is nuts." The lenders' explanation is telling: "Credit card experts and counselors who help overextended debtors contend that Cap One is simply aiming to maximize fee income from debtors ply aiming to maximize fee income from debtors who may be less sophisticated and who may not have many options because of their credit history."
This is EXACTLY the reasoning we've heard from our mortgage lenders! At some point, lending to those previously deemed BAD RISK has become smart business. Even if we're so awash in liquidity & so encumbered by future obligations to warrant such business practices, it can't be in our best interests to trust sellers of the risk to assess the degree of risk we're ALL buying!
How much "paper" profit (growth) is our financial sector ringing up from risk assignment programs (including derivatives trading to the tune of $370 Trillion)? How susceptible are we to even a slight economic correction? And, when will it become obvious that our financial sector, largely unregulated since the total repeal of Glass-Steagall, is spinning ever faster out of control?
Instead of looking historically to Bond yield inversion for direction, we'd do better to ask why the Bond Market has made such an extraordinary bet that the FED WILL be fast to ease - even though doing so would surely promote further egregious risk management?
Is the answer that the deregulation of our financial sector has rendered the FED pretty much impotent? The FED MUST argue for single Body regulatory responsibility over a fast-expanding financial sector that's been running helter skelter since Glass-Steagall's repeal.
Posted by: bailey | December 06, 2006 at 12:59 PM

Dave, I have NO axe in this, but I'd like to add my two cents to Dave I.'s comment. My interest is solely to advance a larger argument - how can we better manage the caretaking of our economy? I don't see this as a Republican/Democrat debate, or a freetrader/protectionist one.
I see our world spinning ever-faster and I'm comfortable asserting that while the stimulus may be technological advancement, the driving force is surely Economics not Ideology. So, it's important to me that Economics advance as a science, as free as possible from political & commercial influence.
That's where this site comes in. You've made it clear from the beginning it's about & for your students. And to this, I say we're ALL students! Thanks again for your efforts & consideration.
Posted by: bailey | December 06, 2006 at 03:13 PM

Dave I -- I'm actually not so sure these things are good tests of economic theories. I bet Dean and I , for example, have just about the same views of how the world works. What we are disagreeing on is how to read the data and, frankly, on a few pure guesses.
bailey --Thanks for the nice words. When I used the term "innovations in financial packaging" I really am thinking of changes like the appeal of Glass-Steagall that you are worried about. I'm not yet ready to give up the idea that these sorts of changes represent a step forward, but it is true that our experience with this new world is pretty limited, and the stress testing has likely only just begun. All I can say is that I hope your worst fears are unfounded.
Posted by: Dave Altig | December 06, 2006 at 09:37 PM

It sure looks like BB's been played like Charlie Brown since the day he signed on. More & more he's looking like a nice guy on a field full of Lucys, unable to apply reason in a world run by rules he doesn't "get".
First, he gets sucker-punched by a dufus cnbc reporter. Then, he takes someone's advice to forget he's always been a straight-shooter, that we all want him to talk gibberish. Then, for some unknown reason he approves an all but toothless credit guidance to his Banks AFTER they publicly confess to absurdly loose lending practices. And now, it's the BEA's turn to pull the football away with a casual oops.
BEA's under Commerce, it's mission is “to foster, promote, and develop the foreign and domestic commerce” of the United States." THEIR job is to help business do more business. Even I know Commerce is just as political as the RNC. So, why is our FED Head "trusting" them, unchecked, to present a credible representation of anything?
On housing, BB has commented that price increases were "driven by fundamentals". He hasn't asked Congress or used his pulpit to call for greater regulatory control over our financial sector, post Glass-Steagall.
He hasn't even cautioned markets not to overread his professed belief that a lot of economic ills can be cured with printing presses. Obviously, the markets are betting big time that Ben will "work" with them.
In a statement last March on the challenges hedge funds present, BB argued that market discipline can work but counterparty risk management is concerning. Concerning? What's the growth rate of credit derivatives? Is anyone reassured because BB's going to China with Hank?
Dave's wonderful Cleveland Fed link ended with a great closing line: "Credibility is the currency of central banks." We ALL trust in the FED to identify and act on the REAL threats to our longterm economic wellbeing. If the scope is now outside FED mandate, we trust it to argue for new regulatory controls. My simple question for BB is, if we can't trust the FED to act for our LONGTERM economic viability, what are our prospects? Personally, I take no solice that BB's going to China with Hank. It's the Administration's & Congress' profligate policies & practices that got us here & it's folly to think there's a win in this for the FED. I just wish BB would learn, the Lucys in his world NEVER change.
Posted by: bailey | November 30, 2006 at 11:31 AM

Bailey asks a question of BB: "if we can't trust the FED to act for our LONGTERM economic viability, what are our prospects?"
My question is similar, but twisted to read: "How can we (why should we?) trust the FED to act for our LONGTERM economic viability?" This I ask because the FED keeps coming up with (and being proud of) documents like the one Dave linked us to above that ask us pretty much to "trust them." After all they "are" the experts, no?
We'll I don't trust physicians, engineers, economists or pretty much any of the too-arrogant professional classes. What I want to know from them is what they intend to do when faced with difficult choices (policy and other) and then be able to make my choices accordingly.
What I read from the afformentioned paper http://www.clevelandfed.org/Annual01/essay.pdf was that "central banks ultimately can deliver more economic growth by abandoning preoccupaiton with output gaps (and the like) in favor of a price-stability rhetoric and a policy orientation that meets this objective with the least interference to the natural, dynamic forces of the econmy."
Good luck when the FED seems incapable of even admitting to asset inflation, let alone admitting any complicity in such. I'm probably in a distinct minority, but I trust the ECB more than I do the FED. Or maybe I just don't know enough about the ECB to not trust their rhetoric or policy either.
Posted by: Dave Iverson | November 30, 2006 at 05:30 PM

I can't help but continue harping that we'd ALL be a LOT better off today had Congress listened to Katharine Abraham instead of AG. Here's a Dean Baker post that makes the point better than I'm capable of doing.
But, on to today. I appeal to the BB because this Administration, Congress AND current Democratic leadership have ALL convinced me the FED's the only thing between us & a disastrous economic meltdown. Recognizing we're a LONG way from FED transparency, I'd love to hear BB read Dave's linked Cleveland Fed piece verbatum to our financial center moguls. In fact, I'd love to hear BB speak to our long-term prospects, any time, any way he chooses.
I can't fathom a way out of the financial hole we've dug for ourselves except to take our medicine & get back to work. A great first step would be for BB to start explaining to the markets why they've made a terrible bet that he's as short-sighted as they are.
Posted by: bailey | December 01, 2006 at 11:38 AM

"Institutionalize priority setting"? That's a mouthful I wish I'd heard about 6 years ago! I would hope encouraging "more savings" is a "legitimate concern", but I haven't seen any evidence to suggest it. In SoCal, I'm STILL receiving 2-3 credit card offers weekly with enticements of 0% interest for 15 months on xfers & purchases. Potential home buyers here are still beseiged with no-doc, no $$ down financing offers, stores are still offering no interest on purchases until 2008. Have you checked what interest rates Banks are offering?
So, here's my rhetorical question of the day:
How does the FED decide 5.25% Fed Funds rate is near that midpoint where it encourages neither spending nor saving? We're not a manufacturing economy anymore and most distributors long ago switched to just-in-time inventory management. (Many of these now use Wall St., not their local bank, to fund their overhead. My guess is, the FED is VERY slow to change, that it's one thing to push for the HUGE changes repealing Glass-Steagall brought, but it still prefers to conduct its oversight in the same old way that worked poorly in the past.
I'm as tired of banging the "accountibility" drum as you are of politically charged rhetorical argument, but I think in times of Administration AND Congressional irresponsibility, the FED at the least should at the least use it's pulpit to call for responsibile legislation & fiscal budgeting. Yet, it doesn't. It's clear AG HUGELY damaged our long-term economic prospects, BUT he's gone. Where is BB's plan to institute & bring regulatory controls of our financial sector into the 21st century? If the FED doesn't want sole responsibility for independent oversight of our economy it serves no public benefit. Encouraging the FED to lead "would be a GREAT beginning".
Posted by: bailey | November 21, 2006 at 10:58 AM

pgl and bailey, my friends -- C'mon. There are new kids in town. Don't you think its time to stop harping on the past? Time to start thinking about the new agenda, not the purported failures of policymakers who are no longer relevant.
Posted by: Dave Altig | November 22, 2006 at 05:49 AM

Thanks Dave, It's great to start the morning with a smile!
Posted by: bailey | November 22, 2006 at 07:56 AM


As apt as Samuelson's quote may be, it's time dependent; Abbey's is CLASSIC.


Dave, Hope retirement and you are doing well. I certainly understand cutting back web efforts, I'm at a loss to figure it out. On the brighter side, CR Blog commentary has turned into a social club for many who'd do well to read more & comment less.
FYI, in case you missed it:

Fed's Bailout Is Questioned by Ex-Staffer
April 29, 2008; Page C3

WASHINGTON -- The Federal Reserve's rescue of Bear Stearns Cos. will come to be seen as its "worst policy mistake in a generation," a former top Fed staffer said.

Vincent Reinhart: An ex-Fed player's Monday-morning quarterbacking.
The episode will be seen as comparable to "the great contraction" of the 1930s and "the great inflation" of the 1970s, Vincent Reinhart said Monday at a panel organized by the American Enterprise Institute, a conservative-leaning think tank where he is now a scholar. Until mid-2007, Mr. Reinhart was director of monetary affairs at the Fed and secretary of its policy-making panel, the most senior position on the Fed's Washington-based staff.

His appraisal is one of the harshest yet by a high-profile observer. The Fed last month lent Bear Stearns money to prevent a bankruptcy filing and then financed $29 billion of its assets to facilitate a takeover by J.P. Morgan Chase & Co. Former Fed Chairman Paul Volcker has said the move went to "the very edge of [the Fed's] lawful and implied powers," although he has since said that that wasn't meant as a criticism. Congress and analysts have deferred to the Fed's judgment.

Mr. Reinhart said the bailout "eliminated forever the possibility the Fed could serve as an honest broker." In 1998, the Fed coaxed private creditors of Long-Term Capital Management to bail out the hedge fund but didn't have to put up its own money. If it ever tries a similar maneuver on a Wall Street cohort, he said, "The reasonable question any person in the room will ask is, 'How much will you contribute to the solution?'"

Mr. Reinhart said the Fed's move may have been justified if the alternative was a chain-reaction run on many other investment banks. But he asked if other options were available, such as taking a "tougher line" with J.P. Morgan, seeking other suitors, removing certain assets from Bear's portfolio or quickly implementing its previously announced offer to temporarily swap Treasury securities for dealers' less liquid assets. "All those things were possible but not pursued," he said.

A Fed spokeswoman declined comment Monday. At the time, Fed officials said that they had explored many alternatives to directly aiding Bear. The speed with which the company was losing cash and the due diligence most potential buyers needed left the J.P. Morgan takeover as the only way to shore up Bear quickly enough, and J.P. Morgan wouldn't do the deal without Fed support.

"A sudden, disorderly failure of Bear would have brought with it unpredictable but severe consequences for the functioning of the broader financial system and the broader economy," Federal Reserve Bank of New York president Timothy Geithner told Congress this month.

Write to Greg Ip at greg.ip@wsj.com

(I agree. At the very least, it's inexplicable the FED didn't first demand Wall St. ante up $35 billion front money (an equivilent to 2007 bonuses paid out only two months earlier) BEFORE FED guarantees kick in.)

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