Big Government and the Bailouts Saved the Day

Krugman:

So it seems that we aren’t going to have a second Great Depression after all. What saved us? The answer, basically, is Big Government.

Just to be clear: the economic situation remains terrible, indeed worse than almost anyone thought possible not long ago...

For all that, however, the latest flurry of economic reports suggests that the economy has backed up several paces from the edge of the abyss...

So what saved us from a full replay of the Great Depression? The answer, almost surely, lies in the very different role played by government...

Probably the most important aspect of the government’s role in this crisis isn’t what it has done, but what it hasn’t done: unlike the private sector, the federal government hasn’t slashed spending as its income has fallen...

In addition to having this “automatic” stabilizing effect, the government has stepped in to rescue the financial sector. You can argue (and I would) that the bailouts of financial firms could and should have been handled better, that taxpayers have paid too much and received too little. Yet it’s possible to be dissatisfied, even angry, about the way the financial bailouts have worked while acknowledging that without these bailouts things would have been much worse.

The point is that this time, unlike in the 1930s, the government didn’t take a hands-off attitude while much of the banking system collapsed. And that’s another reason we’re not living through Great Depression II.

Last and probably least, but by no means trivial, have been the deliberate efforts of the government to pump up the economy. From the beginning, I argued that the American Recovery and Reinvestment Act, a k a the Obama stimulus plan, was too small. Nonetheless, reasonable estimates suggest that around a million more Americans are working now than would have been employed without that plan — a number that will grow over time — and that the stimulus has played a significant role in pulling the economy out of its free fall.

All in all, then, the government has played a crucial stabilizing role in this economic crisis. Ronald Reagan was wrong: sometimes the private sector is the problem, and government is the solution.

And aren’t you glad that right now the government is being run by people who don’t hate government?

Yglesias points out that "“bailouts saved the economy” and “bailouts were structured so as to be very favorable to politically influential financiers” are not exclusive options."

I think that's right. The stimulus worked, but it could have worked better if it had been targeted solely at... stimulus, and less at, oh, say Goldman Sachs.

If there are any responsible Republicans left, please take lessons from this for the healthcare debate. You can't stop it, like you couldn't stop the stimulus. (In fact you shouldn't stop it, like you shouldn't have stopped the stimulus.) But if instead of fearmongering and holding your breath and throwing tantrums, you direct your opposition to things that actually should be opposed, you could affect positive change.

With regard to the stimulus, you could have held your fire, not smeared Obama as Stalin-incarnate, not ridiculed the very idea of stimulus, and instead insisted on making sure that the stimulus was as trim and directed as possible. Oh, you'll say you did argue against some of the waste and misdirected funds, and of course you did, but that was lost among the greater lunacy.

Now you have an opportunity to make sure that the health care plan does what it sets out to do rather than rewarding corporate interests at the expense of everybody else. But you've got to stop lying about everything, smearing Obama as a socialist, pretending that Obama's coming for grandma, insisting that government can never do good, and generally engaging in fearmongering. Instead, be a responsible opposition party. The Dems put forward a plan, respond with the same plan slightly improved. Stay on message. Say you support the plan, but you want to include tort reform. Or you want less money for X and more for Y. You can do that. If you put all your energy on making the plan better and none of it on insanity, you could not only cause a better health care plan, but take great strides in restoring a civil democracy.

Or you can scream "Socialism" and tear at your hair and have to live with whatever the Democrats manage to ram through without your help. Your choice.

Newsflash: Media Still Really Really Not Liberal

What with Democrats owning the White House and Congress and the media being allegedly liberal, one would expect the debate over the most important issue of the day to be slanted heavily to the left. It's not, because the media are not liberal but incompetent, offering "two sides" of any debate without any perspective on whether those two sides have anything remotely to do with the truth.

The Democrats and most economists believe that the economy requires a stimulus package. Obama, being a moderate kind of guy, chose a moderate number for the size of the stimulus, as compared to the numbers suggested by economists. The Republicans, on the other hand, staked out an insanely far-right position: a spending freeze. (A freeze? Holy crap, we dodged a bullet in the last election. What if McCain had actually followed through on the Hooverian rhetoric?)

So the media, incompetent approval-seekers that they are, dutifully accepted those two positions as representing opposite ends of the spectrum and has presented them as such. The result is a "debate" wildly skewed towards the right.

This happens on many issues. In the lead-up to the Iraq war, the right staked out the "we must invade" position, while the left took to a moderate "let's wait and see" position. So the media dutifully framed the debate that way, effectively making the new center the "we'll probably invade soon, but we'll pay a little lip service to waiting first."

Krugman:

One major sin of news coverage, especially on TV, is the way certain points of view just get excluded from consideration — even if many of the best-informed people hold those views. Most famously and disastrously, the case against invading Iraq was just not heard in the months before the war.

And still it happens. According to the invaluable Media Matters, the idea that the Obama stimulus plan might be too small — a view held by many well-known economists — basically went unreported on broadcast news during the stimulus debate. Out of 59 broadcasts addressing the plan, only 3 mentioned concerns that the plan was inadequate. And it’s actually even worse than that: one of those three involved Harry Reid talking about longer-term goals on health and education — and one of the other two was me.

Meanwhile, it’s rapidly becoming clear that yes, the plan was too small.

The future of our economy is at stake. And it's at risk because the Republicans are better at framing the debate and the media are too cowed to correct for it.

Obama should have opened with a 1.3 or 1.5 trillion dollar package, with almost no tax cuts. The Republicans would have stuck to their extreme, and the media would have framed the debate so that a $750 billion stimulus with $300 billion in tax cuts appeared to be the moderate, centrist position it is. And who knows? We might have even gotten a stimulus big enough to fix things. Now we just have to hope.

Stop Blaming The Borrowers

A guy walks into the doctor's office and says, doc, I want liposuction. And the doctor has the guy's medical records and the records show that he has a heart condition and that there's a significant risk he won't make it through liposuction. The doc says, no problem, just give me $5,000. I'd be happy to do it. The guy, who has no idea that his heart condition puts him at risk during surgery, dies on the table. Who do we blame?

It's so obvious a point I wouldn't think it needs mentioning, but too many people don't get it. When you have a banker agreeing to lend an average guy $500,000, the average guy is going to assume the banker knows what he's doing. Sure, he might suspect the banker's taking advantage of him to some extent, but it would probably never occur to him that there's a good chance he'd be unable to make his payments. He wouldn't know that the real estate market might crash and that if it did, he'd be upside-down in his mortgage. (In fact, he's probably never heard the term "upside-down" as it relates to mortgages.)

The average American has an IQ of 100 and a high-school diploma. He doesn't understand compound interest and isn't likely to have a good grasp of the nuances of housing markets or ARMs. The guy in the fancy suit with all the big words tells him he can handle the mortgage. And it's not just some guy who knocked on his door, but a man employed by a major national bank as an expert on mortgages. What's he going to do? Drill the guy on real estate markets and debt-to-income ratios? Or just trust that the guy knows what he's doing?

Republicans have been gleefully passing around this video that shows what some rich asshole thinks of average Americans like that who got screwed on their mortgages. They're "losers."


No compassion, no understanding. Just pure rage. Rage and hate.

Oh, and by the way, here's Santelli on September 2nd, saying that the economy was healthy.


I'm sure Republicans will soon be passing each other Santelli's next rant about how losers like himself are still rich and employed despite having been irresponsible and completely fucking wrong about the subject he is supposed to be an expert in.

Here's Matthew Yglesias, who says it better than I can:

Along with the absurd, Santelli-led revolt of the overclass against efforts to help middle class homeowners, there’s been a larger sense that “reasonable” people can all agree that there’s “plenty of blame to go around” and that on some level “irresponsible borrowers” deserve to take their lumps in all of this. I have my doubts.

When someone applies for a mortgage, there are two parties to the transaction. On one side of it is a teacher or a blogger or an electrician or a lawyer or a nurse or a guy who manages a Home Depot. On the side is a guy who, for a living, as a professional, works in the “deciding on what terms to offer people mortgages” business who works, for a living, at a financial services business. Businesses like that got in the habit of making loans with little regard to actual prospects for long-term payment on the theory that since house prices were rising, the borrower could always sell or refinance. That, to repeat, wasn’t the judgment of electricians and store managers; it was the judgment of people who were professional mortgage-offerers. They, in turn, were being lax in part because they were finding it very easy to sell the mortgages off as securities. And it was easy to sell the mortgages as securities irregardless of their quality, because big sophisticated financial services firms devised tactics for slicing and dicing the securities into packages that could be easily resold. Those packages could, in turn, be easily resold because they had high ratings from the bond agencies. These ratings were based on models which held that a nationwide decline in housing prices was impossible. The ratings agencies and the modeling firms were, in turn, regulated by the U.S. government. And in addition to the formal regulatory agencies, there are a variety of public officials—the Chairman of the Federal Reserve, the President, the Secretary of the Treasury—who have a kind of generalized responsibility for oversight of the economy. Beyond the political system, the American media offers extensive coverage of business and real estate.

There really is plenty of blame to go around here. But I just don’t see how more than a tiny fraction of it could possible adhere to our electrician or teacher or secretary who’s decided, basically, that the financial services professionals and government regulators know what they’re doing. Now could she have known better? Sure. She could have been reading Dean Baker and Paul Krugman and others. The idea that this lending was all being undertaken on a false premise that a nationwide housing bust was impossible wasn’t a highly guarded secret. I was, for example, familiar with the chart above and with the analysis suggesting that a bust was, in fact, likely. And I believed that analysis. But at the same time, I write about U.S. public policy debates for a living. If there’s a dissident line of thinking that, despite its general unpopularity, is popular among left-of-center economists—well, that’s the kind of thing I know a lot about. But our nurse? Why would she know?

Obama in 2007 on the Mortgage Crisis

March 22, 2007

Dear Chairman Bernanke and Secretary Paulson,

There is grave concern in low-income communities about a potential coming wave of foreclosures. Because regulators are partly responsible for creating the environment that is leading to rising rates of home foreclosure in the subprime mortgage market, I urge you immediately to convene a homeownership preservation summit with leading mortgage lenders, investors, loan servicing organizations, consumer advocates, federal regulators and housing-related agencies to assess options for private sector responses to the challenge.

We cannot sit on the sidelines while increasing numbers of American families face the risk of losing their homes.

And while neither the government nor the private sector acting alone is capable of quickly balancing the important interests in widespread access to credit and responsible lending, both must act and act quickly.

Working together, the relevant private sector entities and regulators may be best positioned for quick and targeted responses to mitigate the danger. Rampant foreclosures are in nobody's interest, and I believe this is a case where all responsible industry players can share the objective of eliminating deceptive or abusive practices, preserving homeownership, and stabilizing housing markets.

The summit should consider best practice loan marketing, underwriting, and origination practices consistent with the recent (and overdue) regulators' Proposed Statement on Subprime Mortgage Lending. The summit participants should also evaluate options for independent loan counseling, voluntary loan restructuring, limited forbearance, and other possible workout strategies. I would also urge you to facilitate a serious conversation about the following:

* What standards investors should require of lenders, particularly with regard to verification of income and assets and the underwriting of borrowers based on fully indexed and fully amortized rates.

* How to facilitate and encourage appropriate intervention by loan servicing companies at the earliest signs of borrower difficulty.

* How to support independent community-based-organizations to provide counseling and work-out services to prevent foreclosure and preserve homeownership where practical.

* How to provide more effective information disclosure and financial education to ensure that borrowers are treated fairly and that deception is never a source of competitive advantage.

* How to adopt principles of fair competition that promote affordability, transparency, non-discrimination, genuine consumer value, and competitive returns.

* How to ensure adequate liquidity across all mortgage markets without exacerbating consumer and housing market vulnerability.

Of course, the adoption of voluntary industry reforms will not preempt government action to crack down on predatory lending practices, or to style new restrictions on subprime lending or short- term post-purchase interventions in certain cases. My colleagues on the Senate Committee on Banking, Housing and Urban Affairs have held important hearings on mortgage market turmoil and I expect the Committee will develop legislation.

Nevertheless, a consortium of industry-related service providers and public interest advocates may be able to bring quick and efficient relief to millions of at-risk homeowners and neighborhoods, even before Congress has had an opportunity to act. There is an opportunity here to bring different interests together in the best interests of American homeowners and the American economy. Please don't let this opportunity pass us by.

Sincerely,

U.S. Senator Barack Obama

HT: Andrew Sullivan

Chart of the Day: Obama and McCain on Taxes

Via Andrew Sullivan.

The Human Toll of Republicanism

Ezra Klein writes about the real-world ramifications of a McCain victory:

It's almost inarguable that a McCain presidency will push policies leading to an increase in illness and homelessness. Last year, McCain voted against expanding S-CHIP, which would have extended pubic health insurance to millions of currently uninsured children. Many of those children will become sicker than they would have if they'd been able to access a doctor early in their illness. Some may well die. In 1995, McCain voted for a GOP plan to balance the budget by cutting Medicaid by $182 billion over 10 years. Many adults would have been tossed off the rolls, been incapable of accessing a doctor, and fallen ill, or even died as unchecked hypertension led to cardiac arrest or a small lump grew into a full-body cancer. You can find similar examples of McCain trying to chop apart the safety net in almost every year of voting since.

...

There's a tendency to want to sugarcoat the outcomes of elections. You can say you disagree with McCain's policies because universal health care is important and humane and social programs are just and decent and upper-crust tax cuts are regressive and shameful and he's on the other side of all those opinions. What you're not supposed to say is that if John McCain is elected, the policies he has signaled he will pursue will harm the country's health, defund its safety net, lead to untreated illnesses, reduce mitigation of the ravages of poverty, and, in many cases, the outcome will be sickness and death and homelessness and, for those cut off from health coverage and help, probably hopelessness, too. McCain, for his part, would argue that even so, tax cuts are a matter of fairness and it's more important that health insurance is primarily private than that health insurance is actually accessible. And fair enough. But no reason we should ignore the implications of that philosophy.

It's easy to forget the real human cost of the right's political philosophies. They have a rationalization for everything -- progressive taxation is a priori immoral, higher taxes will kill the economy, universal health care will kill the economy, etc. -- but when you put their rationalizations on one side of the scale and the reality of those who will suffer as a direct and inevitable result of their policies, you've got to be awfully confident in the rationalizations for it to balance out.

When they make predictions that fly in the face of experience -- such as the claim that returning the tax code to Clinton's levels will kill the economy -- you really have to question their calculus.

Greenspan Criticizes Bush, Praises Bill Clinton

Stating the obvious, but it's nice to hear a lifelong Republican with Greenspan's reputation say it:

Alan Greenspan, who served as Federal Reserve chairman for 18 years and was the leading Republican economist for the past three decades, levels unusually harsh criticism at President Bush and the Republican Party in his new book, arguing that Bush abandoned the central conservative principle of fiscal restraint.

While condemning Democrats, too, for rampant federal spending, he offers Bill Clinton an exemption. The former president emerges as the political hero of "The Age of Turbulence: Adventures in a New World," Greenspan's 531-page memoir, which is being published Monday.

Greenspan, who had an eight-year alliance with Clinton and Democratic Treasury secretaries in the 1990s, praises Clinton's mind and his tough anti-deficit policies, calling the former president's 1993 economic plan "an act of political courage."

But he expresses deep disappointment with Bush. "My biggest frustration remained the president's unwillingness to wield his veto against out-of-control spending," Greenspan writes. "Not exercising the veto power became a hallmark of the Bush presidency. . . . To my mind, Bush's collaborate-don't-confront approach was a major mistake."

Greenspan accuses the Republicans who presided over the party's majority in the House until last year of being too eager to tolerate excessive federal spending in exchange for political opportunity. The Republicans, he says, deserved to lose control of the Senate and House in last year's elections. "The Republicans in Congress lost their way," Greenspan writes. "They swapped principle for power. They ended up with neither."

Read the rest.