Krugman disputed

[Magox]

I read a very interesting piece this morning by Raghuram Rajan, a well-respected economist who has been disputing Krugmans claims for quite some time. What I like about Rajan is that he picks apart specific parts of Krugmans claims and he does it with facts. This piece is about the housing crisis and how Fannie, the CRA and low interest rates policies contributed to the financial crisis that we are in. The spat between him and Krugman derives from Krugman disputing that Government and the Federal Reserve played no role in the financial crisis.

 

I'd be interested to hear DC TOM's and GG's POV regarding this article and anyone else of course...

 

http://american.com/archive/2010/september/many-are-the-errors

 

Perhaps Paul Krugman believes that by labeling other economists as politically extreme, he can undercut their credibility. But his is badly weakened by the myriad errors he makes.

 

First, Krugman starts with a diatribe on why so many economists are “asking how we got into this mess rather than telling us how to get out of it.” Krugman apparently believes that his standard response of more stimulus applies regardless of the reasons we are in the economic downturn. Yet it is precisely because I think the policy response to the last crisis contributed to getting us into this one that it is worthwhile examining how we got into this mess, and to resist the unreflective policies Krugman advocates.

 

 

My book emphasizes a number of related fault lines that led to our current predicament. Krugman discusses and dismisses two—the political push for easy housing credit in the United States and overly lax monetary policy in the years 2002–2005—while favoring a third, the global trade imbalances (which he does not acknowledge are a central theme in my book). I will argue shortly, however, that focusing exclusively on the imbalances as Krugman does, while ignoring why the United States became a deficit country, gives us a grossly incomplete understanding of what happened. Finally, Krugman ignores an important factor I emphasize—the incentives of bankers and their willingness to seek out and take the risks that brought the system down.

 

Let me start with the political push to expand housing credit. I argue that, in an attempt to offset the consequences of rising income inequality, politicians on both sides of the aisle pushed easy housing credit through government units like the Federal Housing Administration, and by imposing increasingly rigorous mandates on government sponsored-enterprises such as Fannie Mae and Freddie Mac. Interestingly, Krugman neither disputes my characterization of the incentives of politicians, nor the detailed documentation of government initiatives and mandates in this regard. What he disputes vehemently is whether government policy contributed to the housing bubble and, in particular, whether Fannie and Freddie were partly responsible.

 

While the Community Reinvestment Act was enacted in 1979, it was the more vigorous enforcement of the provisions of the Act in the early 1990s that gave the government a lever to push its low-income lending objectives.

 

The United States’ policies encouraged over-consumption and over-borrowing, and unless we understand where these policies came from, we have no hope of addressing the causes of this crisis.

 

Interestingly, before the housing market collapsed, HUD proudly accepted its role in pushing low-income lending through the various levers that Krugman now denies were used. For instance, in 2000, when announcing that it was increasing Fannie and Freddie’s affordable housing goals, it concluded:

 

Lower-income and minority families have made major gains in access to the mortgage market in the 1990s. A variety of reasons have accounted for these gains, including improved housing affordability, enhanced enforcement of the Community Reinvestment Act, more flexible mortgage underwriting, and stepped-up enforcement of the Fair Housing Act. But most industry observers believe that one factor behind these gains has been the improved performance of Fannie Mae and Freddie Mac under HUD’s affordable lending goals. HUD’s recent increases in the goals for 2001-03 will encourage the GSEs to further step up their support for affordable lending.

 

And in 2004, when announcing yet higher goals, it said:

 

Over the past ten years, there has been a “revolution in affordable lending” that has extended homeownership opportunities to historically underserved households. Fannie Mae and Freddie Mac have been a substantial part of this “revolution in affordable lending.” During the mid-to-late 1990s, they added flexibility to their underwriting guidelines, introduced new low-downpayment products, and worked to expand the use of automated underwriting in evaluating the creditworthiness of loan applicants. HMDA data suggest that the industry and GSE initiatives are increasing the flow of credit to underserved borrowers. Between 1993 and 2003, conventional loans to low income and minority families increased at much faster rates than loans to upper-income and nonminority families.5

 

If the government itself took credit for its successes in expanding home ownership then, why is Krugman not willing to accept its contribution to the subsequent bust as too many lower middle-class families ended up in homes they could not afford?

 

If the government itself took credit for its successes in expanding home ownership then, why is Krugman not willing to accept its contribution to the subsequent bust as too many lower middle-class families ended up in homes they could not afford? I agree there is room for legitimate differences of opinion on the quality of data and the extent of government responsibility, but to argue that the government had no role in directing credit, or in the subsequent bust, is simply ideological myopia.

 

Finally, a note on method. Perhaps Krugman believes that by labeling other economists as politically extreme, he can undercut their credibility. In criticizing my argument that politicians pushed easy housing credit in the years leading up to the crisis, he writes, “Although Rajan is careful not to name names and attributes the blame to generic “politicians,” it is clear that Democrats are largely to blame in his worldview.” Yet if he read the book carefully, he would have seen that I do name names, arguing that both President Clinton with his “Affordable Housing Mandate” (see Fault Lines, page 35) as well as President Bush with his attempt to foster an “Ownership Society” (see Fault Lines, page 37) pushed very hard to expand housing credit to the less well-off. Indeed, I do not fault the intent of that policy, only the unintended consequences of its execution. My criticism is bipartisan throughout the book, including on the fiscal policies followed by successive administrations. Errors of this kind by an economist of Krugman’s stature are disappointing.

 

I found this article to be very interesting, mainly because my first newsletter Where we were and what to expect that I wrote was basically a parallel to Rajan's views.

[ieatcrayonz]

When Krugman was on Quincy they always thought he was wrong for almost the entire show but he was usually right at the end.

[BB27]

When Krugman was on Quincy they always thought he was wrong for almost the entire show but he was usually right at the end.

 

 

LMFAO - I was thinking about Quincy the entire time I was reading the thread and was coming up with a smart reply but you totally beat me to it.....

[GG]

This is the operative line from the article

 

My book suggests that many—bankers, regulators, governments, households, and economists, among others—share the blame for the crisis.

 

Anyone who suggests otherwise is either clueless or has an axe to grind.

 

Krugman cannot be this intellectually corrupt to still contend that Fan/Fred are blameless. Even if they didn't participate in direct lending to the subprime sector, their obfuscation of residential mortgage market data swayed the statistics that the entire industry used to estimate/guess the safety of the subprime loans.

 

Where do you think the rating agencies & banks get their macro data on the mortgages and borrower pools? If Fan/Fred hda to live by private sector standards, many people there would now be sharing office space with Madhoff, Fastow & Ebbers.

[TPS]

This is the operative line from the article

 

 

 

Anyone who suggests otherwise is either clueless or has an axe to grind.

 

Krugman cannot be this intellectually corrupt to still contend that Fan/Fred are blameless. Even if they didn't participate in direct lending to the subprime sector, their obfuscation of residential mortgage market data swayed the statistics that the entire industry used to estimate/guess the safety of the subprime loans.

 

Where do you think the rating agencies & banks get their macro data on the mortgages and borrower pools? If Fan/Fred hda to live by private sector standards, many people there would now be sharing office space with Madhoff, Fastow & Ebbers.

Hmmm...I may regret this...

You say the ratings agents and banks got their macro data from Fr/Fan, but Fan/Fr don't participate in direct lending. So where did Fan/Fr get their data? Ans. From the direct lenders. So who corrupted the data? Ans. Direct lenders.

Blame can surely be spread, but it's just plain idiotic to blame things put into place years ago (like CRA).

 

Blame should go to the bubble in the housing market in general, not just subprime. The credit created on the basis of housing wealth was unprecedented. Everyone wanted a piece of this cash cow, and fraud was rampant at all levels of finance and all wealth values (i.e. a $50,000 home vs a $500,000 one) in order to keep the ponzi schemes going up and down the credit chain. Subprime was simply the "canary in the coal mine."

 

Check this little report out that was trying to estimate losses from suits to corps in order to estimate the losses to those who insure directors.

link

[Magox]

Blame can surely be spread, but it's just plain idiotic to blame things put into place years ago (like CRA).

CRA played a huge role. How in the world can you say that it didn't? CRA was re-strengthened in 1999, when Clinton renewed the push in exchange for Repeal of GS. You don't remember? Well I do, Fannie Mae came under pressure from the Clinton administration to expand mortgage loans to low and moderate income borrowers by increasing the ratios of their loan portfolios in distressed inner city areas designated in the CRA of 1977. It was because of the increased ratio requirements, institutions in the primary mortgage market pressed Fannie Mae to ease credit requirements on the mortgages it was willing to purchase, enabling them to make loans to subprime borrowers at interest rates higher than conventional loans.

 

So your whole argument that it was placed years ago is thrown right out out the window considering that the renewed push occured in 1999. You should do your homework before you opine and use the idiotic when you don't have your facts straight. You should redo your homework on the matter.

Edited September 20, 2010 by Magox

[IDBillzFan]

It looks like Krugman is now trying to understand the angry rich.

 

It's amazing to me that a guy like him get's such attention, especially when he plays to the the lowest-hanging fruit at HuffPost/Daily Kos with words like these:

 

And among the undeniably rich, a belligerent sense of entitlement has taken hold: it’s their money, and they have the right to keep it. “Taxes are what we pay for civilized society,” said Oliver Wendell Holmes — but that was a long time ago.

 

The spectacle of high-income Americans, the world’s luckiest people, wallowing in self-pity and self-righteousness would be funny, except for one thing: they may well get their way. Never mind the $700 billion price tag for extending the high-end tax breaks: virtually all Republicans and some Democrats are rushing to the aid of the oppressed affluent.

 

So what Krugman is arguing is that wealthy people, who only received that wealth through luck, need to understand that the money they earn is NOT their money, and they have no right to keep it.

 

It would be the most embarrassing thing I've read in a while if I had only chose not to read the comments below the article.

 

You're an idiot, Krugman. A completely useless idiot.

[Alaska Darin]

You should do your homework before you opine and use the idiotic when you don't have your facts straight. You should redo your homework on the matter.

Not TPS' strength.

[GG]

Hmmm...I may regret this...

You say the ratings agents and banks got their macro data from Fr/Fan, but Fan/Fr don't participate in direct lending. So where did Fan/Fr get their data? Ans. From the direct lenders. So who corrupted the data? Ans. Direct lenders.

Blame can surely be spread, but it's just plain idiotic to blame things put into place years ago (like CRA).

 

Blame should go to the bubble in the housing market in general, not just subprime. The credit created on the basis of housing wealth was unprecedented. Everyone wanted a piece of this cash cow, and fraud was rampant at all levels of finance and all wealth values (i.e. a $50,000 home vs a $500,000 one) in order to keep the ponzi schemes going up and down the credit chain. Subprime was simply the "canary in the coal mine."

 

Check this little report out that was trying to estimate losses from suits to corps in order to estimate the losses to those who insure directors.

link

 

Blame goes all around, but without the subprime, there is no catastrophe.

 

Yes, Fan/Fred got their information from the direct lenders. But there were no direct lenders who had access to nationwide data and could aggregate and report on the risk pools to the same extent than Fan/Fred or the Fed did. There is some noise emanating from Fan/Fred's former risk managers that the agencies massaged the subprime data, to make their own balance sheets look better and allow them to buy more subprime mortgages & securitizations by booking them as prime assets. The rest of the market which relied heavily on that data - was getting doubly misleading information - crap data from unscrupulous lenders, which was sugarcoated by Fan/Fred, and gave imprimatur to the rating agencies to assign AAA to a big chunk of that debt.

 

To me, whether Fan/Fred were the major culprits in the collpase is not as big of a deal as the fact that if anyone in the private sector was doing accounting trickery on a 1% scale that Fan/Fred execs were doing, there would be lots of jail time meted out, and not multi-million $$ departure bonuses and an open ended checkbook from Uncle Sam.

[DC Tom]

To me, whether Fan/Fred were the major culprits in the collpase is not as big of a deal as the fact that if anyone in the private sector was doing accounting trickery on a 1% scale that Fan/Fred execs were doing, there would be lots of jail time meted out, and not multi-million $$ departure bonuses and an open ended checkbook from Uncle Sam.

 

I do know of when case where - roughly speaking - one of Fannie or Freddie sold about $20M worth of mortgages to Ginnie, who had to take a bath on them because they didn't meet Ginnie capitalization requirements despite being misrepresented as such.

[TPS]

Blame goes all around, but without the subprime, there is no catastrophe.

 

Yes, Fan/Fred got their information from the direct lenders. But there were no direct lenders who had access to nationwide data and could aggregate and report on the risk pools to the same extent than Fan/Fred or the Fed did. There is some noise emanating from Fan/Fred's former risk managers that the agencies massaged the subprime data, to make their own balance sheets look better and allow them to buy more subprime mortgages & securitizations by booking them as prime assets. The rest of the market which relied heavily on that data - was getting doubly misleading information - crap data from unscrupulous lenders, which was sugarcoated by Fan/Fred, and gave imprimatur to the rating agencies to assign AAA to a big chunk of that debt.

 

To me, whether Fan/Fred were the major culprits in the collpase is not as big of a deal as the fact that if anyone in the private sector was doing accounting trickery on a 1% scale that Fan/Fred execs were doing, there would be lots of jail time meted out, and not multi-million $$ departure bonuses and an open ended checkbook from Uncle Sam.

I know for a fact that fraud was rampant by direct lenders. Banks and mortgage finance companies input fraudulent data into Fred/Fan proprietary systems (midanet/mornet) because they no longer carried the risk--their goals were to churn assets to generate fee income. And, by the way, these were all loans, not just so-called subprime loans. Now it's possible that F&F execs weren't diligent in weeding it out as well. As I said, everyone was getting rich off this crap. It is a crime that no execs across the spectrum are doing time, which speaks to the bipartisan culpability of this mess.

 

Not TPS' strength.

I missed you too AD.

[Alaska Darin]

I missed you too AD.

[OCinBuffalo]

Hmmm...I may regret this...

You say the ratings agents and banks got their macro data from Fr/Fan, but Fan/Fr don't participate in direct lending. So where did Fan/Fr get their data? Ans. From the direct lenders. So who corrupted the data? Ans. Direct lenders.

Blame can surely be spread, but it's just plain idiotic to blame things put into place years ago (like CRA).

 

Blame should go to the bubble in the housing market in general, not just subprime. The credit created on the basis of housing wealth was unprecedented. Everyone wanted a piece of this cash cow, and fraud was rampant at all levels of finance and all wealth values (i.e. a $50,000 home vs a $500,000 one) in order to keep the ponzi schemes going up and down the credit chain. Subprime was simply the "canary in the coal mine."

 

Check this little report out that was trying to estimate losses from suits to corps in order to estimate the losses to those who insure directors.

link

So what is your point?

 

Are we supposed to be pleased that Barney Frank, etc., used their influence to bastardize the system?

Are we supposed to forget that the CRA is where this all starts?

 

I understand that others are culpable. But, what I understand the best is: this all starts, and ends, with a retarded political agenda: "taking care" of poor people by telling them "you can own a house too!", forcing banks to lend them money, and then, when they can't pay....because....they can't pay, you take their house, and their equity away.

 

Yes, what an incredible job liberals did of "taking care of the poor".

 

Once again: liberal motives are usually honorable, but liberal methods are usually retarded.