December 31 4:08 AM

Measuring the Impact of the Stimulus Package with Economic Models  – It’s been nearly a year since the stimulus package of 2009 was passed. Unfortunately most attempts to answer the question “What was the size of the impact?” are still based on economic models in which the answer is built-in, and was built-in well before the stimulus. Frequently the same economic models that said, a year ago, the impact would be large are now trotted out to show that the impact is large. In other words these assessments are not based on the actual experience with the stimulus. I think this has confused public discourse. Menzie Chen has a post on Econbrowser which mentioned the three graphs in the original New York Times news story as an illustration of his excellent analysis of the use of counterfactuals (the gray lines in the graphs). The additional two graphs illustrate how important it is to go beyond a few models and establish robustness in policy analysis. Moreover, in my view, the models have had their say. It is now time to look at the direct impacts using hard data and real life experiences.

Term deposit facility – Econbrowser – On Monday the Federal Reserve proposed a new term deposit facility that would allow the Fed to borrow directly from private institutions. Here I offer some thoughts on how this fits into the Fed’s long-term plans and what its implications for the rest of us might be. Let’s begin with some background on how we got here. The Fed’s conception has been that the core problem we have been going through was a credit crisis– banks stopped lending and institutions stopped buying mortgage-backed securities, as a result of which businesses and consumers could not borrow adequate amounts. The Fed’s goal was to step in where private lenders would not, with the Fed initially lending directly to private banks through a new term auction facility and to foreign central banks through currency swaps, supporting issuers of commercial paper through the commercial paper funding facility, and lending broadly through a number of other new facilities. (includes Fed balance sheet charts)


 The truth about all those excess reserves –– The Economist – ONE of the biggest challenges facing the Fed is widespread ignorance about how it actually operates. Inflation is falling, unemployment is 10%, yet some people think it’s running an inflationary policy because an extra $1 trillion of reserves are in the banking system. The misperception has only grown with yesterday’s announcement that the Fed would offer “term deposits” to banks as a way of draining some of the excess reserves its emergency operations have created. The move has been widely reported as aimed at keeping banks from lending the reserves out, which would spur inflation. This has brought differing reactions depending on whether you think the Fed should be worried more about inflation or unemployment. Ezra Klein and my colleague across the hall think the latter, and are thus critical of the move.  I sympathise with their point of view but some clarity about what the Fed is doing is in order. For starters, the volume of reserves has almost no significance for the growth of bank lending and inflation.

Credit card charge-off rate climbs again – More U.S. credit card users fell further behind on their payments in November, Moody’s Investors Service said. The credit card charge-off rate, as measured by Moody’s Credit Card Index, rose to 10.56 percent last month after falling for the two previous months. October’s charge-off rate was 10.04 percent. The charge-off rate measures those credit card account balances written off as uncollectable, as an annualized percentage of total outstanding principal balance. The record-high of 10.76 percent was reached in June.  The delinquency rate also rose, to 6.2 percent in November from 6.1 percent in October. That includes all payments that are 30 to 180 days late but have not yet been written off. This figured peaked at 6.4 percent in March.

 Are Homes now “Cheap”?  –  Brett Arends wrote in the WSJ today: Latest Home Price Data Is Good News for Buyers  Homes are now cheap. Mr. Arends does write that homes are not cheap everywhere, but his main argument is:  If you buy an average home today, and take out a 30-year mortgage at 5%, the annual bill for interest and repayment of principal will come to about 19 times typical weekly earnings …  He then provides a chart that shows this is the lowest level since the early ’70s for this metric.  Well, allow me to retort.

 The Fairness of Financial Rescue – DeLong: Whatever the cause, when the risk tolerance of the market crashes, so do prices of risky financial assets. Everybody knows that there are immense unrealized losses in financial assets, but no one is sure that they know where those losses are. To buy – or even to hold – risky assets in such a situation is a recipe for financial disaster. So is buying or holding equity in firms that may be holding risky assets, regardless of how “safe” a firm’s stock was previously thought to be. This crash in prices of risky financial assets would not overly concern the rest of us were it not for the havoc that it has wrought on the price system, which is sending a peculiar message to the real economy. The price system is saying: shut down risky production activities and don’t undertake any new activities that might be risky. But there aren’t enough safe, secure, and sound enterprises to absorb all the workers laid off from risky enterprises. And if the decline in nominal wages signals that there is an excess supply of labor, matters only get worse. General deflation eliminates the capital of yet more financial intermediaries, and makes risky an even larger share of assets that had previously been regarded as safe. Ever since 1825, central banks’ standard response in such situations – except during the Great Depression of the 1930’s – has been the same: raise and support the prices of risky financial assets, and prevent financial markets from sending a signal to the real economy to shut down risky enterprises and eschew risky investments.

Fed Offers New CD; Chairman Bernanke is still confused – As reported in the NYT yesterday, the Fed has decided to offer banks an interest-paying CD. So far, so good. However, the argument offered by the Fed to justify this "innovation" is that it needs to start mopping up reserves in order to prevent inflation.  This blog has published a number of pieces explaining why there is no need to worry about the trillions of dollars of reserves and cash created by the Fed to deal with the run to liquidity set-off by this crisis (see here and here). As and when banks decide they do not want to hold reserves, they will retire their loans at the discount window and will begin to purchase higher-earning assets. As this pushes up asset prices (reducing interest rates), the Fed will begin to unwind its balance sheet—selling the assets it purchased during the crisis. Retiring discount window loans plus purchases of assets from the Fed will eliminate undesired reserve holdings. It is all automatic and nothing to worry about or to plan for….

The single most important thing Democrats could do for jobs – The arcane rules and regulations governing the 51-vote budget reconciliation process made it a tricky path for health-care reform. But they make it perfect for stimulus. After all, what’s dearer to the budget than spending money and changing tax rates?There are three ways to use the budget reconciliation process for further stimulus. The first is to include a reconciliation "directive" in the next budget. The second is to use the directive that was included in the 2010 budget for health care. And the third is to pass a new directive into the 2010 budget. Because I don’t want your eyes to glaze over before you reach the conclusion, I’ll put it up at the top: If Democrats want to do this, they can. They can do it on their timetable, and they only need 51 votes.

bmaz: The New Robber Barons – Previously, Marcy Wheeler noted the unsavory blending of the private interests of health insurance companies with the power and hand of the US government: It’s one thing to require a citizen to pay taxes–to pay into the commons. It’s another thing to require taxpayers to pay a private corporation, and to have up to 25% of that go to paying for luxuries like private jets and gyms for the company CEOs. It’s the same kind of deal peasants made under feudalism: some proportion of their labor in exchange for protection In this case, the federal government becomes an appendage to do collections for the corporations. Marcy termed this being “On The Road To Neo-feudalism” and then followed up with a subsequent post noting how much the concept was applicable to so much of the American life and economy, especially through the security/military/industial complex so intertwined with the US government. Marcy Wheeler is not the only one recently noting the striking rise in power of corporate interests via the forceful hand of US governmental decree..

Withdrawing Support –  The Economist – EZRA KLEIN notes that the Fed is plowing ahead with its planning for withdrawal of monetary supports for the economy, like: The Federal Reserve on Monday proposed allowing banks to set up the equivalent of certificates of deposit at the central bank, a move that would help the Fed mop up money pumped into the economy and prevent inflation from taking off later.  Under the proposal, the Fed would offer "term deposits" that would pay interest. Doing so would provide banks with another incentive to park their money at the Fed, rather than having it flow back into the economy. The Fed’s commitment to undo its interventions is already having an effect. In expectation of more of these moves to come (as well as, perhaps, increases in interest rates) markets have been bidding up the dollar, which has busily appreciated during the month of December. That, in turn, will deprive the American economy of a potential source of demand—growth in consumption of American exports thanks to the effect of a weak dollar.More bluntly, we’re seeing a move toward contractionary monetary policy at a time when unemployment is at 10%. Funny that.

 Why Powerful People — Many of Whom Take a Moral High Ground — Don’t Practice What They Preach –  Science Daily – 2009 may well be remembered for its scandal-ridden headlines, from admissions of extramarital affairs by governors and senators, to corporate executives flying private jets while cutting employee benefits, and most recently, to a mysterious early morning car crash in Florida. The past year has been marked by a series of moral transgressions by powerful figures in political, business and celebrity circles. New research from the Kellogg School of Management at Northwestern University explores why powerful people – many of whom take a moral high ground – don’t practice what they preach.

Agency FICO Redline? A Question to Ask – The US Treasury Department’s Christmas Eve announcement confirming massive new support for the Agencies had the following as the last sentence: "Recent announcements on the tightening of underwriting standards by Fannie Mae, Freddie Mac, and the Federal Housing Administration, demonstrate a commitment to prudent housing finance policy that enables a transition to an environment where the private market is able to provide a larger source of mortgage finance." I believe that this is a very mistaken assumption by Treasury. Take them at their word on this regarding the tightening of standards. I can confirm that all of the Agencies have “independently” (Every thing is coordinated in D.C.) announced that they are tightening standards. It is impossible to quantify that promise at this point. I believe there is some teeth to this. However there is no connection to the actions by the Agencies and an increase in lending by the “private market”. That is not going to happen.

A Convenient Delusion – The same sort of public relations wizardry that once convinced a sizeable portion of Americans that cigarette smoking was harmless, that Saddam Hussein had weapons of mass destruction and had a hand in the 9/11 attacks, that Al Gore claimed to have invented the internet, and that John Kerry’s war record was fraudulent, is now convincing an increasing number of our citizens that global warming is at least of little consequence, or, at most, a massive hoax. This trend is reported by the Pew Research Center which, in August, 2006, found that 77% of the public believed that there is solid evidence that the earth is warming. In October, 2009, that number had dropped to 57%. In the same period, the percentage of those who denied that there is such evidence increased from 17% to 33%. An early Pew poll found that "global warming ranked dead last among 40 concerns ranked by the 1503 respondents to the poll." Unfortunately, facts are stubborn things; and whatever may be our wishes, our inclinations, or the dictates of our passion, they cannot alter the state of facts and evidence. Here are some of those stubborn facts:

Did California Overbuild its Housing Stock? – It all depends on the relevant time frame. If we look at the 00’s in isolation, California overbuilt. But California has grew by 7 million people between 1990 and 2008 and added about 2.43 million housing units (all data are from US Census– assume that 98 percent of units permitted are actually built). The average household in California has 2.9 people (which is the second highest in the country, and compares with 2.5 nationally), which means that even without removals from the stock and no change in household size, the state needed 2.41 million new housing units. So if we look at the 18 year horizon, California did not overbuild–there we almost surely more than 20,000 demolitions over an 18 year period.

Guest Post: Economist Says Health Care Bill “Is Just Another Bailout Of The Financial System” – –  For example, economist L. Randall Wray writes: Here’s the opportunity, Wall Street’s newest and bestest gamble: there is a huge untapped market of some 50 million people who are not paying insurance premiums—and the number grows every year because employers drop coverage and people can’t afford premiums. Solution? Health insurance “reform” that requires everyone to turn over their pay to Wall Street. Can’t afford the premiums? That is OK—Uncle Sam will kick in a few hundred billion to help out the insurers. Of course, do not expect more health care or better health outcomes because that has nothing to do with “reform” … Wall Street’s insurers… see a missed opportunity. They’ll collect the extra premiums and deny the claims. This is just another bailout of the financial system, because the tens of trillions of dollars already committed are not nearly enough.

What’s a Bailed-Out Banker Really Worth? – When Feinberg announced his pay packages in late October, he found a way to give something to everyone. The public enjoyed a measure of revenge: Feinberg’s ultimate rulings looked hard-nosed when compared with what the executives used to make. Yet the leaders of these failed companies still ended up winning big paydays — an average of $6.5 million to each Bank of America executive and $6.2 million to those at Citigroup. Meantime, the Obama administration looked tough on fat-cat compensation, even as it quietly cajoled Feinberg to ease up on some of the restrictions he wanted to impose. Feinberg’s power was limited from the start and is now fading as quickly as it rose up last spring amid the furor over huge bonuses given to bailed-out executives.

 Pinnacle Notes are blasting off again! – A year ago, I wrote a post dissecting Morgan Stanley’s Pinnacle Notes Series 9 and 10 – a structured product that abruptly imploded at the peak of last year’s financial crisis. It’s the most popular JRE post ever, and it was even picked up by the Financial Times The notes blew up not because they hit their stated default triggers, but because the underlying collateral – an ugly low tranche of an ugly synthetic CDO – completely evaporated. The investors – most of whom had bought the product because they’d been told it was low risk and just like a term deposit – were understandably pissed.  FT’s Sam Jones rightly wrote: The bottom line though, is that this kind of product should never have been made available to retail investors, and no sane regulatory authority would have allowed it to have been. …but instead of cracking down on banks selling gnarly structured credit products to aunty-and-uncle retail investors, the MAS crawled into their shell and said "it’s not our problem". And surprise, surprise – the exact same thing has happened again.
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