FM newswire for 10 January, hot articles for your morning reading

Today’s links to interesting news and analysis…

  1. No exit“, Andrew Bacevich (Colonel, US Army, retired), American Conservative, 1 February 2010 — “America has an impressive record of starting wars but a dismal one of ending them well.”
  2. Get ready for China’s domination of science“, Jonathan Adams, New Scientist, 06 January 2010
  3. Afghanistan: What Could Work“, Rory Stewart (bio here, Professor of the Practice of Human Rights at Harvard), New York Review of Books, 14 January 2009 — Another endorsement of the war, assuming a strategy we will not use. It’s the feel-good solution for liberals — macho predicated on fantasy.
  4. A rare bit of sense in the media about the housing crisis:  “Walk Away From Your Mortgage!“, New York Times, 10 January 2010 — Corporations strategically default on debt, but our ruling elites say it violates God’s laws for the peasants to do so.  If done a large scale it will change America, in ways as yet unforeseeable.

Below are today’s special features:

(a)  Quote of the day, by David Broder
(b)  An even better quote of the Day, by Rudy Guiliani
(c)  Graph of the day by Paul Krugman

(a)  Quote of the day, by David Broder

Failed Christmas bomb plot will likely alter Obama’s agenda“, David S. Broder, op-ed Washington Post, 8 January 2010 — Excerpt:

Was Christmas Day 2009 the same kind of wake-up call for Barack Obama that Sept. 11, 2001, had been for George W. Bush? The near-miss by a passenger plotting to blow up an American airliner as it flew into Detroit seems to have shocked this president as much as the attacks on the World Trade Center and the Pentagon did the last. … Bush reacted with anger and a determination to punish the people who wreaked the havoc. Obama was just as mad, but a good portion of his anger was targeted at the members of his own intelligence bureaucracy who he said had missed the abundant clues and failed to forestall the attack. Like Bush, he vowed to see that the consequences also fell on the foreign country that gave birth to the plot — Afghanistan eight years ago, Yemen today. For now, we are conducting a proxy war in Yemen, but that may change. Al-Qaeda’s local enablers must learn that there is a price to be paid when Uncle Sam is attacked from their bases.

The Big Lie continues to thrive, despite the 9-11 Commission debunking, that “Afghanistan gave birth to the plot.”  Knowing our sloth and disinterest, our ruling elites lie to us with impunity.  When that changes America will change. Character matters.  More than the words of the Constitution or any other structural features of our society.

Nice summary by Mark Thompson (The League of Ordinary Gentlemen):

I think it important to note how Broder gets to draw an equivalency between the murder of 3000 and a guy blowing up his junk in order to justify using the latter incident as a basis for war. This is the position of the DC establishment that Broder so often seems to represent. Somehow, this is deemed a “moderate” opinion…

Why do America’s most widely featured pundits and geopolitical experts so often advocate war?   As Brad Delong (Prof Economics, Berkeley) says, “Remember, the Cossacks work for the Czar.”

(b)  An even better quote of the Day

George Stephanopoulos interview with Rudy Giuliani on ABC’s “Good Morning America”, 8 January 2010 — From the full transcript:

“And if he {Obama} recognizes we’re at war with terror, a lot of things follow from that. … What he should be doing is following the right things that Bush did — one of the right things he did was treat this as a war on terror. We had no domestic attacks under Bush. We’ve had one under Obama.”

Rational responses having proved useless to this conservative insanity, only mockery remains.  Such as these from Matthew Yglesias blog at ThinkProgress.

FlipYrWhig Says:

Don’t forget the DC sniper, the LAX shooting, the Lackawanna Six, the Fort Dix plot, etc., etc. Because they all prove that, like, terrorists were on the run, or they would have been successful, except for the cases that were successful, because those prove, um, toughness, and this one’s being unsuccessful just reminds us of how serious a successful one would have been, but those others couldn’t have been successful, on account of all the great strategies that prevented them.

Typist Says:

Shooting sprees by lone nuts on school campuses, abortion clinics, cafeterias and churches are not terrorism. The shooting spree at Ft. Hood by a lone nut was terrorism because the perp was a Muslim (as is the President!) However, the DC sniper attacks were not terrorism, despite the perps being Muslim. The LAX shooting was not terrorism because Los Angeles is not American soil.

calipygian Says:

9iu11ani was just on CNN explaining how since the Anthrax attacks weren’t attributed to Muslims, they really weren’t terrorist attacks.

Mike K Says:

The timeline basically proves that government is nearly powerless to protect us against terrorists or criminals intent on killing us. Governments are organized to protect us and that works when state-on-state wars evolve i.e. World War II. They also worked pretty well in WW III aka The Cold War. But against invisible threats, individuals with weapons do better. … Where’s my .45 Colt? Just where it always is, on the nightstand!

Not stupid says:

Dipshit, do you know your chances of being the victim of a terrorist attack in your home? Someone recently compared it to the chances of being emasculated by a shark – given the number of terrorist attacks that have occurred in reach of a nightstand .45, the metaphor must be extended. Your chance of staving off a terrorist attack is roughly the same as your chance of being emasculated by a shark in your bedroom. …

(c)  Graph of the day

From “CRE-ative destruction“, Paul Krugman, blog of the New York Times, 7 January 2009

For some reason I haven’t seen this: a comparison of commercial real estate prices from Moody’s/MIT with housing prices from Standard and Poor’s/Case-Shiller. Here it is … From my perspective, the CRE bubble is highly significant; it gives the lie both to those who blame Fannie/Freddie/Community Reinvestment for the housing bubble, and those who blame predatory lending. This was a broad-based bubble.

Afterword

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13 thoughts on “FM newswire for 10 January, hot articles for your morning reading

  1. Interesting graph, but Krugman doesn’t explain why the “broad-based bubble” “gives lie” to two competing explanations for the bubble. The main determinates for investment decisions in residential RE (equity requirements and interest rates) tracked with those in commercial. Why is this surprising? Too-low equity requirements plus too-low interest rates sounds to me like a formula for overstimulating all sectors of the real estate market. Of course, it’s always easier in hindsight.
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    FM reply: You are not quoting Krugman accurately. Krugman does not address the two factors you mention: too-low interest rates and equity requriements. He addresses two other alleged factors:

    “those who blame Fannie/Freddie/Community Reinvestment for the housing bubble, and those who blame predatory lending”

    Neither of these factors affected commercial real estate (CRE), and CRE prices closely tracked home prices. Hence these were not the key factors; there must be a common explanation for both CRE and RRE.

    “it’s always easier in hindsight.”

    While true, that’s not relevant to this crisis. There were widespread warnings of the housing bubble in 2006 and 2007.

  2. One of Krugman’s better comments. Which really isn’t saying much. Hopefully those blaming the Community Reinvestment Act, or any such act, will come to realize how silly this seems when absolutely every class of real estate fares just as poorly as those directly affected by the act itself. Not that the act wasn’t detrimental, but it’s impact in isolation was little more that a footnote, and anyone claiming otherwise is either delusional or simply class baiting.

    From there on, it’s straight downhill, as is typical of Krugman. Fannie / Freddie were / are a huge part of the residential mortgage market. Buying, hence enabling, lots of trashy loans. Which contributed to inflating home values. Obviously in market segments where F&F were directly active, but also in segments affected by people bringing their F&F enabled home price gains into the next transaction, segments affected by sub F&F credit standard lenders observing the rapid expected rise in collateral values and hence allowing higher loan to value loans etc., etc. The scale of F&F’s mortgage market involvement have nothing at all in common with some silly little liberal feel good act with total costs of about one Tora Bora bomb run. But leave it to Paul, the economist turned pundit, to attempt sleight-of-handing it to all be one of the same; nothing more than some undifferentiated right wing talking point. Ever so confident in his audience of starstrucks’ continued acceptance of argument by reference to perceived authority, no doubt.

    Anyway, with artificially inflated home prices, comes artificially high growth in perceived wealth, leading to artificial growth in spending. Leading to artificial growth in revenue and earnings for those who end up bidding for commercial real estate. Arguing F&F involvement was independent from CRE appreciation, means arguing either that F&F buying trillions in mortgages had no impact on home price appreciation, or that trillions upon trillions in newfound wealth had no impact on those bidding for commercial space.
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    FM reply: A politically useful urban legend never dies! Do you have any evidence for this statement? It seems quite exaggerated IMO.

    “Fannie/Freddie were … a huge part of the residential mortgage market. Buying, hence enabling, lots of trashy loans”

    (1a) The primary cause of the housing bubble was a series of changes in regulation of the financial system, removing constaints imposed during and after the Depression — changes driven by banks. For a description of these changes in laws and regulations see “The Evolution of the Subprime Mortgage Market” by the St Louis Fed.

    (1b) Let’s take the analsyis one step further. Given the primacy of these structural changes by Congress and regulators, what was the role of the GSE’s as players in the sub-prime part of the bubble? At Calculated Risk, one of the go-to sites for reporting on the housing crisis, Tanta said:

    I think we can give Fannie and Freddie their due share of responsibility for the mess we’re in, while acknowledging that they were nowhere near the biggest culprits in the recent credit bubble. They may finance most of the home loans in America, but most of the home loans in America aren’t the problem; the problem is that very substantial slice of home loans that went outside the Fannie and Freddie box.

    (1c) For something more specific see:

    Between 2004 and 2006, when subprime lending was exploding, Fannie and Freddie went from holding a high of 48 percent of the subprime loans that were sold into the secondary market to holding about 24 percent, according to data from Inside Mortgage Finance, a specialty publication. One reason is that Fannie and Freddie were subject to tougher standards than many of the unregulated players in the private sector who weakened lending standards, most of whom have gone bankrupt or are now in deep trouble. During those same explosive three years, private investment banks — not Fannie and Freddie — dominated the mortgage loans that were packaged and sold into the secondary mortgage market. In 2005 and 2006, the private sector securitized almost two thirds of all U.S. mortgages, supplanting Fannie and Freddie, according to a number of specialty publications that track this data. (source: McClatchy Newspapers)

    (1d) A second calcualtion confirming this: “From 2004 to 2006, the two purchased $434 billion in securities backed by subprime loans, creating a market for more such lending.” (source: WaPo). That’s 5% of the roughly $10 trillion in outstanding mortgages, aprox 1/5 is subprime.

    (2) “artificially inflated home prices, comes artificially high growth in perceived wealth, leading to artificial growth in spending. Leading to artificial growth in revenue and earnings for those who end up bidding for commercial real estate.”

    This is why economic analysis is all about numbers. Otherwise we get things like this, which are largely imaginary. While there is some sort of connection here, the effect is probably quite small. That’s how to bet, unless there is supporting evidence.

    (3) Two notes about this, however. First, the GSE’s were major factors in the overall mortgage bubble by converting mortgages into government-guaranteed securities. Second, now owned by the government the GSE’s and FHA have become the subprime market. Conduits for massive flows of our money into subprime mortgages, attempting to save the banks and re-inflate the US economy. This is an almost certain-to-fail strategy, the cost of which probably be horrific.

  3. FM: “Character matters. More than the words of the Constitution or any other structural features of our society.

    NS Sherlock. And character was missing in both REs…RRE AND CRE. Witness PK’s graph. And both were simply the result of long term Rates being long-termingly held low….coupled with “Securitizations”. All in plain sight. And voila—the boyz saw the beauty thereof. If you do not think there was Predatory Lending in CRE then you really need to look again.

    Having been involved in many Loans originated by Goldman I can personally tell you they would try to give you a Loan with Terms and Conditions, sub 1.0 DSC, Int Only, insane Cash Out that would shame even one of the Body Builder RRE Loan Sharks in Florida, CA, Nevada and Arizona. Stupidly laughable—which is exactly what I told them. IF you were so naive to accept them….well, you would be writing (NOT cashing) monthly checks and wondering about the idea of Equity right now.

    ALL part of the Plan to stuff those CDOs intended for the unsuspecting Institutional Buyers.(Clearly visible now —when offered we were like: “Are these guys nuts?”) Re: BS and Lehman (and GS, MS, CW, Wamu et.al. with AIG greasin’ it all up!) And PLEASE, if you did NOT see this before 2006—well, too darn late and maybe you need to try a new Business!

    Oh back to “Character”. Wasn’t any then and still MIA now.
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    FM reply: I do not understand what you are attempting to say.

    (1) My reference to character was about our wars, not (as you imply) the housing bubble. I said:

    “The Big Lie continues to thrive, despite the 9-11 Commission debunking, that “Afghanistan gave birth to the plot.” Knowing our sloth and disinterest, our ruling elites lie to us with impunity. When that changes America will change. Character matters. More than the words of the Constitution or any other structural features of our society.”

    (2) Financial bubbles are not matters of character, but an enduring feature of market-based economies (disproving the simple folks who believe gold-based currencies solve all ills). In the early 19th century were the railroad bubbles. In the 18th century were the frontier land bubbles (the South Sea Company and the Mississippi Company). I suspect the 22nd century will see even more interesting ones.

    (3) What makes the current cycle so interesting is that it is not just a bubble, but a massive transfer of wealth from middle classes (broadly defined) to the rich, supported in all phases by government action. I discussed that in A real “loaves to fishes” miracle, taking place every day in America (9 January 2010), and in a long series of posts about “Theft pretending to be solutions” (see the list here, under section 7). That results from political machinery which we are too lazy to operate, and has been taken over by our ruling elites and run for their benefit. That is a matter of character, ours.

  4. FM: “When that changes America will change. Character matters. More than the words of the Constitution or any other structural features of our society.

    What an amazingly succinct way of putting it, thanks.

    When you read some of the debates about what the constitution “really means” in depth, you start to realize that “the constitution” is no more a sure protector than are the laws, the FBI, “the people”, my bank account, my family, my freinds or my job. Like anything else the meaning is political, & depends on your point of view.
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    FM reply: I have a post in the pipeline making this more explicit. It cites “The Frozen Republic: How the Constitution is Paralyzing Democracy” by Daniel Lazare. While I disagree with much of his analysis, he is IMO spot-on about our worship of the Constitution. However, he shares the underlying delusion that some words on paper — the right words! — will fix everything. We need to realize that our fate lies in our actions, not in some magic spell we call laws.

    Another fine book in this vein is “A Machine that would go of itself — The Constitution in American Culture”, by Michael Dammen.

  5. FM from #4

    While I disagree with much of his analysis, he is IMO spot-on about our worship of the Constitution. However, he shares the underlying delusion that some words on paper — the right words! — will fix everything.

    Yeah, it’s as far as I know a uniquely American “worship”. I see it on the left and on the right & even the unaligned. (Do people in Australia or the UK go on & on about their awesomely mystical “constitutions”? Anna Nicholas or Old Skeptic? Or anyone outside the USA?)

    The people who wrote the constitution were certainly an intelligent bunch but also flawed… and they wrote it for a society we wouldn’t ever recognize as modern today! It makes sense to write down principles for how your society is going to act. It makes sense to demand that any new laws obey these basic principles. What doesn’t make sense is, as you’ve put it, to consider the words a “magic spell”, that’s gonna magically protect you from the bullshit that everyone has to deal with.

  6. I have a wee issue with the stroy of China’s eventaul domination of science. Working, as I do, in a university as a researcher, I don’t see it happening. Science and politics don’t make a good marriage and Chinese politicians aren’t…well, the most liberal.
    Another thing I also notice is that the labs I pass also happen to have a large contingent of people from India. Many of the publications I use in my research are Indian. Yet nary a word about it…
    As a friend of mine once quipped, if everything is made in China, how come you always get an Indian to help you fix it?
    :-)

  7. Like any pyramid scheme, an asset bubble always needs people coming in on the bottom to keep it going. While changes to the CRA didn’t initiate the housing bubble, it certainly helped it get bigger by widening the base of the pyramid:

    According to Ben Bernanke, this law greatly increased the ability of advocacy groups, researchers, and other analysts to “perform more-sophisticated, quantitative analyses of banks’ records,” thereby influencing the lending policies of banks. Over time, community groups and nonprofit organizations established “more-formalized and more-productive partnerships with banks.

    I suspect many banks secretly welcomed ‘pressure’ from Acorn et. al. to pump up their balance sheets.
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    FM reply: Numbers, numbers, numbers. The rock on which so many urban legends fall. This has been studied a dozen times or more; none have found CRA to have had a major effect on the housing bubble. But truth is irrelevant for those pedalling politically useful stories. For a more detailed rebuttal see the following, a sample of the many studies on this subject:

  8. Charachter matters more than the constitution? Does this imply that leaders of ‘good character’ should be able to disregard the law in order to serve what they perceive as the public good?
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    FM reply: No. We’re speaking of the character of the people. My view was shared by many (most?) of the Founders.

  9. (1) My reference to character was about our wars, not (as you imply) the housing bubble. I said:

    I know how you used the reference to Character. I simply applied the description to the Krugman RE graphs. And relevantly so, IMO and to most reasonable observers. And if you really think Financial Issues are not a matter of character then why are you complaining? If you think the so-called Housing Bubble was not laced with Fraud then why do you take issue with it? So what is wrong with Wealth Transfer? Every Tax Code is excactly THAT.

    “Theft pretending to be solutions”
    Odd use of the term theft if we are not to assume character has a strong place in the discussion. I know you do not think “theft” is a moral neutral item and or that thieves do not lack some form of good character. And as JM Keynes offered(a quip full of moral judgment and a wee bit of reference to:character”):

    “Capitalism is the astounding belief that the most wickedest of men will do the most wickedest of things for the greatest good of everyone.”
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    FM reply: This makes no sense to me. Bizzarre, even crazy.

    “And if you really think Financial Issues are not a matter of character then why are you complaining?”
    That is a bizarre mischaracterization of what I said.

    “If you think the so-called Housing Bubble was not laced with Fraud then why do you take issue with it?”
    Because it was unnecessary, resulting from a repeal of hard-won lessons from the great depression. Isn’t this obvious by now?

    “So what is wrong with Wealth Transfer? Every Tax Code is excactly THAT.”
    The usual justification of a progressive tax code is the transfer of income from rich to poor. I’ve never seen a justification for poor to rich.

    “Odd use of the term theft if we are not to assume character has a strong place in the discussion.”
    I clearly explained this, but you obviously have little interest in what I’ve actually said.

  10. FM: Thanks for clarifying that. Notions of character in politics set my teeth on edge, because they tend to be either dog-whistles signifying a religious affiliation or worse attempts to justify irresponsible or out and out criminal behavior by appealing to the personal morality of the leadership. Tony Blair’s sickening insistence that ‘he only did what he thought was right’ is a good example.

    As long as we’re talking about irrational reverence for the Constitution, we should probably also talk about the frankly bizarre way ‘the founding fathers’ are themselves mythologized.
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    FM reply: I suspect that the Founders would be horrified at their deification. The Civil War is definitive evidence that their work was incomplete, as is that of every generation.

  11. Re #1, I’m not quoting Krugman at all. I’m observing that both explanations for the residential bubble, CRA and predatory lending, are two sides of the same coin, that coin being lenders not demanding enough down payment for the risk. In both cases, principles are too high for payments to be affordable.

    Krugman shows the commercial side tracks and says, well, these explanations cannot be correct because the commercial side wasn’t affected by either the CRA or by predatory lending. I’m simply pointing out that low equity requirements – or lax lending standards, if you will – through any mechanisms, plus low interest rates, would be expected to create a bubble. At any rate, a monocausal explanation seems too pat at the outset. We already know the commercial side was impacted by the low interest rate climate. It would be interesting to look to see if lending standards loosened up on that side as well.
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    FM reply: I don’t see any connect between the CRA, which Krugman discusses, and low interest rates. Nor is there any evidence that the CRA was a significant factor in the bubble. You can repeat this legend as often as you like, but that does not make it true.

    “At any rate, a monocausal explanation seems too pat at the outset.”
    This is a strawman. Krugman does not assert a monocausual explanation. He’s giving a rebuttal to one, that the CRA is responsible for the bubble.

  12. FM: “He’s giving a rebuttal to one, that the CRA is responsible for the bubble.

    And here he is right. CRA was only a small side show of what Securitization (which began way back in the 70’s–even prior to the S and L mess/RTC )has brought to us. LIQUIDITY is the overriding cause of this mess, some call a Bubble. And that is why the Fed/treasury have done everything they can with that Printing press to force more liquidity into the whole system. Credit begets debt which requires liquidity which maybe needs net present CASH. (joke)

    If we had not had asset and mortgage backed Securities MAYBE the Banks would have kept a few loans and maybe they would have felt some need to oversee the entire array of lending guidelines? Maybe that is why early on as CRA was implemented they pushed-back a bit? Maybe.
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    FM reply: I’m note sure what you are attempting to say in this series of comments, or how it disagrees with what anyone else is saying — or with my previous explanation. I suggest you stick with citing some studies supporting whatever you’re saying.

  13. FM: “I suggest you stick with citing some studies supporting whatever you’re saying.

    CRA was a small sideshow? Securitization has brought us “this”? Studies? Sorry. Can’t help you if these ideas seem obtuse to you/us. Good luck.
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    FM reply: Understanding these things requries research, which is why we use studies. I’ve cited many. You’ve citing none in your 5 comments. Nothing but assertions. Some are correct (securitization was important, athough driven by larger factors). Many wrong (yes, CRA was “a sideshow” cause of the mortgage crisis). It’s just making stuff up, which gets no respect here.

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