Paul Krugman: There’s no mystery about why: America was coping with the legacy of a giant housing bubble. Even now, housing has only partly recovered, while consumers are still held back by the huge debts they ran up during the bubble years. And the stimulus was both too small and too short-lived to overcome that dire legacy.

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http://www.nytimes.com/2014/02/21/opinion/krugman-the-stimulus-tragedy.html?ref=paulkrugman&_r=0

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Five years have passed since President Obama signed the American Recovery and Reinvestment Act — the “stimulus” — into law. With the passage of time, it has become clear that the act did a vast amount of good. It helped end the economy’s plunge; it created or saved millions of jobs; it left behind an important legacy of public and private investment.

It was also a political disaster. And the consequences of that political disaster — the perception that stimulus failed — have haunted economic policy ever since.

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All the evidence, then, points to substantial positive short-run effects from the Obama stimulus. And there were surely long-term benefits, too: big investments in everything from green energy to electronic medical records.

So why does everyone — or, to be more accurate, everyone except those who have seriously studied the issue — believe that the stimulus was a failure? Because the U.S. economy continued to perform poorly — not disastrously, but poorly — after the stimulus went into effect.

There’s no mystery about why: America was coping with the legacy of a giant housing bubble. Even now, housing has only partly recovered, while consumers are still held back by the huge debts they ran up during the bubble years. And the stimulus was both too small and too short-lived to overcome that dire legacy.

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There’s a long-running debate over whether the Obama administration could have gotten more. The administration compounded the damage with excessively optimistic forecasts, based on the false premise that the economy would quickly bounce back once confidence in the financial system was restored.

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http://www.nytimes.com/2014/05/02/opinion/krugman-why-economics-failed.html?_r=0

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While it’s true that few economists saw the crisis coming — mainly, I’d argue, because few realized how fragile our deregulated financial system had become, and how vulnerable debt-burdened families were to a plunge in housing prices — the clean little secret of recent years is that, since the fall of Lehman Brothers, basic textbook macroeconomics has performed very well.

But policy makers and politicians have ignored both the textbooks and the lessons of history. And the result has been a vast economic and human catastrophe, with trillions of dollars of productive potential squandered and millions of families placed in dire straits for no good reason.

In what sense did economics work well? Economists who took their own textbooks seriously quickly diagnosed the nature of our economic malaise: We were suffering from inadequate demand. The financial crisis and the housing bust created an environment in which everyone was trying to spend less, but my spending is your income and your spending is my income, so when everyone tries to cut spending at the same time the result is an overall decline in incomes and a depressed economy. And we know (or should know) that depressed economies behave quite differently from economies that are at or near full employment.

For example, many seemingly knowledgeable people — bankers, business leaders, public officials — warned that budget deficits would lead to soaring interest rates and inflation. But economists knew that such warnings, which might have made sense under normal conditions, were way off base under the conditions we actually faced. Sure enough, interest and inflation rates stayed low.

And the diagnosis of our troubles as stemming from inadequate demand had clear policy implications: as long as lack of demand was the problem, we would be living in a world in which the usual rules didn’t apply. In particular, this was no time to worry about budget deficits and cut spending, which would only deepen the depression. When John Boehner, then the House minority leader, declared in early 2009 that since American families were having to tighten their belts, the government should tighten its belt, too, people like me cringed; his remarks betrayed his economic ignorance. We needed more government spending, not less, to fill the hole left by inadequate private demand.

But a few months later President Obama started saying exactly the same thing. In fact, it became a standard line in his speeches. Nor was it just rhetoric. Since 2010, we’ve seen a sharp decline in discretionary spending and an unprecedented decline in budget deficits, and the result has been anemic growth and long-term unemployment on a scale not seen since the 1930s.

So why didn’t we use the economic knowledge we had?

One answer is that most people find the logic of policy in a depressed economy counterintuitive. Instead, what resonates with the public are misleading analogies with the finances of an individual family, which is why Mr. Obama began echoing Mr. Boehner.

Continue reading the main story Write A Comment *

And even supposedly well-informed people balk at the notion that simple lack of demand can wreak so much havoc. Surely, they insist, we must have deep structural problems, like a work force that lacks the right skills; that sounds serious and wise, even though all the evidence says that it’s completely untrue.

Meanwhile, powerful political factions find that bad economic analysis serves their objectives. Most obviously, people whose real goal is dismantling the social safety net have found promoting deficit panic an effective way to push their agenda. And such people have been aided and abetted by what I’ve come to think of as the trahison des nerds — the willingness of some economists to come up with analyses that tell powerful people what they want to hear, whether it’s that slashing government spending is actually expansionary, because of confidence, or that government debt somehow has dire effects on economic growth even if interest rates stay low.

Whatever the reasons basic economics got tossed aside, the result has been tragic. Most of the waste and suffering that have afflicted Western economies these past five years was unnecessary. We have, all along, had the knowledge and the tools to restore full employment. But policy makers just keep finding reasons not to do the right thing.

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http://baselinescenario.com/2014/03/07/the-fallacy-of-financial-education/#more-10839

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The Fallacy of Financial Education

By James Kwak

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In White House Burning, there is a section on the rise and political influence of the conservative media. At one point, I looked up the top ten talk radio shows by audience. Nine of them were unabashedly right-wing, politically oriented shows. The tenth was Dave Ramsey. Ramsey has plenty of conservative elements: religion, moralism, glorification of wealth. But his show isn’t about conservative politics. It’s about personal finance.

Ramsey is a huge success because—in addition to his charisma and marketing skills—he is peddling one of the huge but popular illusions of American culture: that people can become rich by making better financial decisions. He’s also one of the characters skewered by Helaine Olen in her recent book, Pound Foolish, which describes the fallacies, hypocrisies, and borderline-corrupt schemes of personal finance gurus like Ramsey and Suze Orman. It’s a fun read—a bit repetitive, but that’s largely because all personal finance “experts” are pushing a small handful of myths.*

 

The “sham” of the financial literacy movement—the idea that all of our financial problems would be solved if Americans were better educated about money—is the subject of Olen’s article in Pacific Standard. More than a dozen states require personal finance classes in high school, even though the evidence is that they have no impact. In short, people who consume financial education behave no differently from people who don’t.

There is a whole hierarchy of reasons for this. One is that people tend to forget what they learn in class—no matter what class you’re talking about. One is that at the moment of making the financial decision—say, to take out the subprime mortgage—anything they may remember from class is overwhelmed by the sales pitch of the mortgage broker sitting in front of them. One is that people make financial decisions on irrational grounds.

There are a couple of structural reasons, as well. Financial education content has to come from somewhere—and overwhelmingly it comes from the asset management industry itself, which has the incentive to teach people many of the wrong things. Financial education courses are often designed by financial institutions themselves; financial “education” available on the Internet is even more likely to be a type of marketing above all else.

Beyond that, it’s not even clear—to me, at least—that there is a scientific basis of agreement on how people should make financial decisions. Sure, there are some obvious things that any informed expert should know: buy index funds (for liquid, near-efficient markets) and minimize fees, for example. But when it comes to asset allocation, for example, there are reputable people like Ian Ayres who say that young people should invest more than 100% of their assets in the stock market, and reputable people like Zvi Bodie who say that the minimum amount of money you need for retirement should be invested in inflation-indexed Treasuries. Similarly, you could get a spectrum of reasonable opinions on the wisdom of taking out loans to go to college. (Up to a point, most of the opinion would be in favor because of the expected earnings boost you get from education, but it depends on a lot of factors like where you go to college, what you study, etc.).

Olen’s book shows in entertaining detail that the way most financial education is done is a joke. (Ramsey, for example, advises people to pay down their debt in increasing order by principal amount—not descending order by interest rate, which is obviously better from an, um, financial perspective.) But it’s not clear to me how much of it could even be done right. The bottom line is that it’s no panacea—not for poor financial decision-making, let alone for the income inequality and threadbare safety net that are the underlying cause of most serious personal financial problems.

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http://baselinescenario.com/2014/03/06/obama-2015-budget-posturing-from-weakness/

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Posturing from Weakness

By James Kwak

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President Obama’s 2015 budget proposes a number of tax increases that will mainly affect the rich. They include:

  • Limiting the tax savings on deductions to 28 percent of the deduction amount (and applying this limit to exclusions as well, such as the one for employer-provided health benefits)
  • Requiring a minimum 30% income tax on income less charitable contributions, which is intended to limit the benefit of tax preferences on capital gains and qualified dividends
  • Reducing the estate tax exemption from $5.34 million to $3.5 million and raising the estate tax rate from 40% to 45%
  • Eliminating tax preferences for retirement accounts once someone’s account balance is enough to fund a $200,000 annuity in retirement (simplifying slightly)

These are all good things, given the size of the projected national debt and the urgent needs elsewhere in society. But, of course, they have no chance of actually happening.

If President Obama really wanted these outcomes, there was a way to get them. He could have let the Bush tax cuts expire for good a year ago, making high taxes on the rich a reality. Then, a year later, he could have proposed a middle-class tax cut and dared the Republicans to block it in an election year. (He could also have traded a reduction in the top marginal rate—from the 39.6% that would have resulted, not counting the 3.8% Medicare tax—for the reforms he is now proposing.)

But no. Instead, he locked in low marginal rates, including low rates on dividends, that cannot be budged so long as Republicans have 41 votes in the Senate. And today he’s left waving a “roadmap” that has no chance of becoming reality.

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http://baselinescenario.com/2013/09/26/the-wall-street-takeover-part-2/#more-10729

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The Wall Street Takeover

By James Kwak

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Five years later, and things seem marginally better in some areas (the CFPB exists), significantly worse in others (LIBOR, money laundering, London Whale, etc.). There has been some debate recently about whether we have a safer financial system today than before Lehman collapsed. But the fundamental issue, as Simon and I discussed in 13 Bankers, is whether our political system will put the interests of society at large ahead of the interests of large financial institutions. On that score, there is little to be encouraged about.

In 2002, Art Wilmarth wrote a mammoth (262 pages) article titled “The Transformation of the U.S. Financial Services Industry, 1975–2000.” In that article, he identified many of the key trends in the financial sector—consolidation, deregulation, breakdown of Glass-Steagall, complex products, increased risk-taking—that would not only produce a financial crisis but make it so destabilizing for the economy later in the decade. Now he has written a shorter (164 pages) article, “Turning a Blind Eye: Why Washington Keeps Giving into Wall Street,” on the key question: why our government doesn’t do anything about it, even after the financial crisis.

Much of the material will be familiar to readers of this blog and others who follow the misdeeds of the megabanks closely. But Wilmarth provides a nearly comprehensive catalog of all the things we should be outraged about. Reading it, I remembered so many instances where Wall Street blocked or delayed sensible regulatory policies, or regulators pushed for Wall Street’s interests—the watering down of mark-to-market accounting, the artificial inflation of the mortgage settlement by giving dubious credits to banks for doing things that were in their own interests, and so on—that I had forgotten about or not thought about recently because they had been crowded out of my mind by successive waves of revelations.

According to Wilmarth, the fundamental problem, and the reason things don’t get significantly better, is the political power of major financial institutions. This power takes on many forms: campaign contributions, lobbying, regulatory capture in various flavors, and simply being “too big to jail.” Wilmarth tries to end his article on an optimistic note: even though Wall Street appears to be just as influential as it was before the financial crisis, perhaps the magnitude of its victory will trigger a popular backlash. I find it hard to be so hopeful: if we couldn’t get the job done in 2009–2010, when the financial crisis was on everyone’s minds, how will we be able to do it now? This is especially true with a Democratic president who is completely uninterested in dealing with the problem—and a Democratic nominee on deck who has never shown any inclination to take on Wall Street. (We can safely assume that the Republican nominee will be against any substantive regulation of the financial sector.) In any case, Wilmarth’s article does a great job of pointing exactly where we should be looking.

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http://baselinescenario.com/2013/11/27/why-jpmorgan-is-jpmorgan/

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Why JPMorgan Is JPMorgan

By James Kwak

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Which is to say, a basket case. Along with Citigroup, and Bank of America.

We all know that JPMorgan Chase is too big to fail. We all know that this means that it enjoys the benefit of a likely bailout from the federal government and the Federal Reserve should it ever collapse in a financial crisis. So why does that make it a poorly run company? It’s possible for a behemoth to be well run; think of Intel in the 1990s, for example.

One reason, of course, is that it’s too big to manage. Even if bribing Chinese officials by hiring their children wasn’t part of the master strategy, not being able to stop it from happening is a sign that things aren’t really under control. (And for “bribing Chinese officials,” you can insert any number of other things, like “betting on the relative values of various CDS indexes,” or “manipulating LIBOR.”)

Mark Roe (blog post; paper) points out another reason. For decades, the supposed cure for bad management has been the so-called market for corporate control. In other words, do a bad job, and someone will take over your company and you’ll be out of a job. That someone might be a corporate raider like T. Boone Pickens, or it might be a private equity firm, but in either case bad management is a sign of opportunity.

Not so with too-big-to-fail banks. For one thing, TBTF banks  are impossible to acquire in one piece: no other bank could absorb JPMorgan, even if there weren’t the rule against a banking conglomerate having more than 10 percent of all U.S. deposits. The other option is to engineer a breakup, which is what all manner of shareholder advocates have been arguing for. But, Roe argues, if being too big to fail is your competitive advantage, that would kill the golden goose. Therefore, the market for control doesn’t work properly, and these behemoths continue bumbling along their way—not just threatening the financial, but doing a lousy job at their job of providing credit to the economy.

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http://baselinescenario.com/2014/04/11/what-might-have-been/

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I was reading the plea deal in the SAC case, which was approved by the judge yesterday, and then I started reading the criminal indictment filed by the U.S. Attorney’s Office. What I noticed was how relatively simple it was for the prosecutors to convict SAC Capital for the insider trading committed by its employees. In short, because the firm enabled and benefited from the employees’ crimes, the firm was itself criminally liable.

Looking back at the enormous amount of effort the Southern District has put into Preet Bharara’s crusade against insider trading, you have to wonder what they might have accomplished had they instead targeted, say, fraud committed by Wall Street banks that contributed to the financial crisis. That’s the topic of my new column in The Atlantic. One of the frustrations of post-crisis legal proceedings is that it’s so hard to show that any senior executives themselves committed fraud, since they can usually plead some combination of ignorance and incompetence instead. Failing that, though, the government could have put more resources into flipping lower-level employees and then filing criminal indictments against their banks. Yesterday Bharara claimed, “when institutions flout the law in such a colossal way, they will pay a heavy price.” But only if the Department of Justice chooses to go after them.

 

 

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One Response to Paul Krugman: There’s no mystery about why: America was coping with the legacy of a giant housing bubble. Even now, housing has only partly recovered, while consumers are still held back by the huge debts they ran up during the bubble years. And the stimulus was both too small and too short-lived to overcome that dire legacy.

  1. brianansorge says:

    This sort of pseudo-intellectual rhetoric is not at all unexpected from self-proclaimed experts such as Krugman—the same clueless ass clowns who couldn’t see the “bubble” even collapsing, nor could they if you gave them a flashlight and a two week headstart.

    The reality and gravity of the situation—one where, more than ever, the adage that there is no such thing as a free (as in “beer”) lunch is becoming excruciatingly clear—is still, apparently, lost on educated idiots who (bless their hearts and their presumed good intentions) really seem to believe that a balanced Federal budget is *not* the same as sane, rational, and arithmetic ally sound balanced budget of the average, hard-working individual or family.

    What planet are they from?

    And, more literally, what school did they get their degree from that they think the answer to any and every crisis is “Spend more money!”

    And, true to their demagogic nature, the ever shrill mantra: “tax the rich, tax the rich!”

    Yes, that is the mantra, over and over.

    Lather, rinse, repeat.

    With diminishing efforts to even try concealing their elitist-like contempt for those they want to portray as “them,” and their increasing desperation to convince the *real* masses and populace that they are on *their* side, these would be purveyors of solutions, answers and cures for all that ails the middle class of America (as well as the “be all, end all” victory in the “war on ‘poverty'”) always fall back on the same fallacy:

    We can *spend* our way out of this crisis.

    For too long, all of us—especially privileged products of academia—have gotten more and more spoiled. For too long, we have all been conditioned to believe that our increasingly convenient and (relatively) lavish lifestyles of profligate consumption are both sustainable and beneficial.

    They are neither.

    Wake up.

    Don’t be like the Krugmans of the world. Don’t be an idiot.

    Simply screaming (like “fire” in a crowded theater) “tax the rich, tax the rich” may win you a few friends, but when you stop to think that snobs like Krugman are living in the lap of luxury and will continue to do so until the whole unsustainable confidence game comes crashing down, it makes their petulant whining about the “rich” obvious for what it is: sheer hypocrisy.

    I’ll match Mr. Krugman, tax return for tax return.

    That’s right, you show me yours, and I’ll show you mine!

    I’m a poor, out of work homeless guy—you hypocrite Krugman.

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