The Counter-cyclical Stabilization Policies of the Democratic Presidential Candidates

In this post, I assess how the candidates would implement macroeconomic stabilization policy, given the big reform packages proposed by the candidates, in particular those by Senator Sanders, are highly unlikely to be passed by a fully or partly Republican Congress. On the other hand, a downturn in the next four years is much more plausible; hence, knowing the candidates’ views on macro stabilization policy is arguably more relevant.

As an aside, the growth effects arising from the implementation of single-payer universal health care, free college tuition, and social security reform as advocated by Senator Sanders (see official platform here) have been addressed in this open letter written by four past Chairs of the Council of Economic Advisers under Democratic administrations [0]; Paul Krugman has rightly characterized the economic assumptions underlying the Sanders growth and revenue projections as a left-wing version of voodoo economics (my paraphrasing of his words).

With that prologue, let’s turn to counter-cyclical policy.

Clinton: Secretary Clinton’s official economic platform website is here. One summary of her economic platform is here. A NY Times tabulation of her economic advisers from early 2015 reads like a list from mainstream macro:

Several of Mr. Clinton’s former advisers, including Alan S. Blinder, Robert E. Rubin and Mr. Summers, maintain influence. But Mrs. Clinton has cast a wide net that also includes Joseph E. Stiglitz, a Nobel laureate in economics who has written extensively about inequality; Alan B. Krueger, a professor at Princeton and co-author of “Inequality in America”; and Peter R. Orszag, a former director of the Office of Management and Budget under President Obama. Teresa Ghilarducci, a labor economist who focuses on retirement issues, is also playing a prominent role.

Focusing on professionally trained economists (Blinder, Summers, Stiglitz, Krueger, Orszag, and Ghilarducci), one can be reasonably certain that a conventional approach to macroeconomic management would be adopted. Automatic stabilizers would be retained (not true of all plans — consider Kasich’s balanced budget requirement), and discretionary fiscal policy would be used as second resort. In the background as a theoretical framework is a conventional aggregate demand-aggregate supply model.

Sanders: Bernie Sanders’ official issues page is here.

It’s hard to assess how Senator Sanders views macrostabilization policy. This is partly because Sanders refuses to name his economic advisers [1] (aside from the author of the projections of his health plan). One aspect of his policy worldview that is identifiable is monetary policy. He has been in favor of “Audit the Fed” legislation, sponsored by Rand Paul, and supported by 34 senators (all Republican). This legislation has been discussed by Jim, who makes the following observation:

The main effect of the bill would be to give Congress an additional tool to exert operational control over monetary policy. The political pressures will be very strong not to raise interest rates when the time does come to start to worry again about inflation. And when the Fed does get to raising rates, it will mean extra costs for the Treasury in paying interest on the federal debt– Congress isn’t going to like that. The primary effect of the legislation would be to give Congress one more stick with which to try to beat up on the Fed when the Fed next does need to take steps to keep inflation from rising.

An additional hint on how a Sanders presidency might approach counter-cyclical policy is provided by his previous appointments. One such, as ranking Democrat on the Senate Budget Committee is Stephanie Kelton, Professor at UM-Kansas City, a leading exponent of Modern Monetary Theory (MMT). [2] [3]

I must confess that I’ve read several accounts of MMT (e.g., [4], [5]), with little ability to determine how it all works. From one exposition by Professor Kelton, it seems that MMT invokes a rejection of the intertemporal government budget constraint:

    dt-dt-1 = [(rt-gt)/(1+gt)]× dt-1 – pt

Where d is the debt to GDP ratio, r is the real (inflation adjusted) interest rate, g is the growth rate of real GDP, and p is the primary (noninterest) surplus to GDP ratio.

In words, this constraint requires change in the debt-to-GDP ratio to equal the real interest rate growth rate gap minus the primary surplus-to-GDP ratio. In her argument, the debt-to-GDP ratio does not have to grow with deficits because the real interest rate does not necessarily rise with elevated government borrowing. Here I think the issue of “sovereignty” as defined by MMT adherents matters — the real rate is not set in the private loanable funds market, but by the monetary authority. I think the conclusion that inflation does not rise with monetary expansion is based upon the absence of observed historical correlations between debt levels and inflation.

The policy implication seems to be clear: Slack in the economy requires aggressive expansionary fiscal policy, backed up by an accommodative monetary policy that prevents interest rate increases. Output above potential GDP might suggest some fiscal restraint, but not in a manner that is symmetric (although other interpreters differ, e.g. Wray).

The underlying theoretical framework seems to be one where monetary policy is passively accommodative and the aggregate supply curve is flat. An independent monetary authority is inconsistent with this view.

More background on the advisers to the various candidates, here.

Addendum regarding a President Sanders international macro/exchange rate policy. From Ten Fair Ways to Reduce the Deficit and Create Jobs:

Establish a currency manipulation fee on China and other countries. As almost everyone knows, China is manipulating its currency, giving it an unfair trade advantage over the United States and destroying decent paying manufacturing jobs in the process. If we imposed a currency manipulation fee on China and other currency manipulators, the Economic Policy Institute has estimated that we could raise $500 billion over 10 years and create 1 million jobs in the process.

Most current estimates indicate the Chinese currency is either near, or slightly above, equilibrium, defined either using the Penn effect, or some macroeconomic balance approach. For some details, see here.

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45 thoughts on “The Counter-cyclical Stabilization Policies of the Democratic Presidential Candidates

  1. AS

    Ladbrokes is showing that as of November 8, Hilary was an even money bet to win the presidential election. Not sure how often the odds are updated. As I recall the odds did a good job of forecasting the winner in the past couple presidential election.

  2. PeakTrader

    It may be too late to raise growth and tax revenue through expansionary fiscal policy, because of faster growth with a rising Fed Funds Rate.

    The labor market may continue to strengthen, wages may rise faster, commodity prices, including oil, may stay low, and much of the new regulations may have been absorbed.

    I think, raising the minimum wage, while reduces regulations and taxes on the middle class and smaller businesses will facilitate growth.

  3. Anonymous

    This fantasy that we can grow our way out of our problems is laughable. We an aging society, and the younger generation isn’t as capable as the retiring generation. Debt to GDP continues to grow despite all the “expansionary” policies and huge deficits.

    1. PeakTrader

      The top economic priority should’ve been to close the output gap, to reduce spending on the unemployed and raise tax revenue. Unfortunately, that wasn’t the top economic priority.

      We’ve had a huge inflow of dirt poor immigrants, over the past three decades, and their children are relatively poor. So, subsequent generations may become poorer with greater income inequality. Prices were reduced and profits rose. And, there was more “entitlement” spending and more progressive taxes, particularly on the middle class.

  4. Vivian Darkbloom

    Bloggers seem to be very selective when complaining or warning about interference with Fed Independence.

    For example, has anyone objected to Michael Woodford (and Bernanke’s) suggestion about helicopter money?

    http://www.voxeu.org/article/helicopter-money-policy-option

    Also, this:

    “The policy implication seems to be clear: Slack in the economy requires aggressive expansionary fiscal policy, backed up by an accommodative monetary policy that prevents interest rate increases.”

    That could easily be a description of policy post-2008. I have not heard a lot of complaints about that from this corner. Did the Fed become dependent? They have greatly enabled and even masked large fiscal deficits (how much “profit” has been remitted to the Treasury?).

    Or, does everyone (if so, naively, I think) simply believe that the apparent coordination was only because *the Fed* wanted it?

    Bernie Sanders’ economic proposals would likely be disastrous if ever implemented; but, the recent broadsides against him by Hillary supporters seem less than objective to me.

  5. JBH

    We live in a universe where too much of anything is ultimately deleterious. It may not get you right away, but eventually it will. Too much can be rephrased as beyond optimal. There is no question that since around 2000 US debt-to-GDP has gone far beyond optimal. Hence adding debt on top of debt cannot be right. More debt springs directly from deficit fiscal stimulus. The short-term and myopic focus of conventional economics is on doing something about economic slack. Yet economic slack in the advanced stages of a debt saturated expansion is a red herring that detracts from the real problem. And that is, as the Reinhart Rogoff studies clearly and profoundly demonstrate, too much debt. Of course it is always possible to boost nominal growth temporarily by yet another dollop of credit. But this would only raise the debt ratio that much more and thus wrench even lower the growth path of the future. It would do so in many ways, not the least of which increasing the risk of an even more severe financial crisis next time. Each financial crisis permanently lowers the path of potential growth. A sequence of such crises will be devastating.

    I quote selectively from Claudio Borio’s February 10th presentation in London: The global economy is struggling to achieve sustainable and balanced expansion. A possible lens to understand this predicament is the inability of policy to come to grips with the global economy’s propensity to generate hugely damaging financial booms and busts. We cannot afford to rely on the current debt-fuelled growth model any longer. The sooner we realise this, the better.

    Bottom line: Nothing is going to raise sustainable growth without first deleveraging. Nothing!

    1. 2slugbaits

      JBH You are very confused and Exhibit A as to why business types have no head for macro.

      Nothing is going to raise sustainable growth without first deleveraging.

      If the private sector deleverages, then the public sector must increase public debt. Savers cannot save unless some other entity is willing to borrow that savings. Why is this so difficult to understand?

      the Reinhart Rogoff studies clearly and profoundly demonstrate, too much debt

      The R-R paper and their irresponsible Congressional testimony has been torn to shreds…and I’m not just talking about the silly Excel error. And oh by the way…Rogoff agrees that we needed a bigger deficit financed stimulus package.

      There is no question that since around 2000 US debt-to-GDP has gone far beyond optimal

      More nonsense. Have you ever taken in a course in optimal control theory? Evidently not. The level of debt is not what’s important. What is important is the rate at which debt is reduced. Spoiler alert! An optimal path for debt reduction will tell you to go very s-l-o-w-l-y.

      Your posts all betray some deeply held belief that the economics of the household can be applied to the macro economy. Wrong, wrong, wrong.

  6. PeakTrader

    In the 2000s, Congress should’ve tightened lending standards in the housing market, placed some restrictions on student loans, and cut taxes to fund trade deficits. It was poor government economic policies and too little tax relief. Moreover, there was diminished marginal utility in some sectors, e.g. cheap foreign goods. A related article:

    James Fallows studied American history and literature at Harvard, where he was the editor of the daily newspaper, the Harvard Crimson. From 1970 to 1972 Fallows studied economics at Oxford University as a Rhodes scholar.

    January/February 2008

    Through the quarter-century in which China has been opening to world trade, Chinese leaders have deliberately held down living standards for their own people and propped them up in the United States. This is the real meaning of the vast trade surplus—$1.4 trillion and counting, going up by about $1 billion per day—that the Chinese government has mostly parked in U.S. Treasury notes. In effect, every person in the (rich) United States has over the past 10 years or so borrowed about $4,000 from someone in the (poor) People’s Republic of China.

    Any economist will say that Americans have been living better than they should—which is by definition the case when a nation’s total consumption is greater than its total production, as America’s now is. Economists will also point out that, despite the glitter of China’s big cities and the rise of its billionaire class, China’s people have been living far worse than they could. That’s what it means when a nation consumes only half of what it produces, as China does.

    Neither government likes to draw attention to this arrangement, because it has been so convenient on both sides. For China, it has helped the regime guide development in the way it would like—and keep the domestic economy’s growth rate from crossing the thin line that separates “unbelievably fast” from “uncontrollably inflationary.” For America, it has meant cheaper iPods, lower interest rates, reduced mortgage payments, a lighter tax burden…The average cash income for Chinese workers in a big factory is about $160 per month. On the farm, it’s a small fraction of that. Most people in China feel they are moving up, but from a very low starting point.

    This is the bargain China has made—rather, the one its leaders have imposed on its people. They’ll keep creating new factory jobs, and thus reduce China’s own social tensions and create opportunities for its rural poor. The Chinese will live better year by year, though not as well as they could. And they’ll be protected from the risk of potentially catastrophic hyperinflation, which might undo what the nation’s decades of growth have built. In exchange, the government will hold much of the nation’s wealth in paper assets in the United States, thereby preventing a run on the dollar, shoring up relations between China and America, and sluicing enough cash back into Americans’ hands to let the spending go on.

  7. baffling

    “In the 2000s, Congress should’ve tightened lending standards in the housing market, ”
    are you saying the government should have increased regulations? why should the government be telling lehman, bear stearns, AIG, merril, goldman, citi, BoA, chase, etc how they should be operating their mortgage businesses?

    1. PeakTrader

      Do you believe when the Fed tightens the money supply, that’s an increase in regulations? Why should the government be supporting lenders to loan tens or hundreds of thousands of dollars to marginal borrowers, and force financial institutions to spread the risk on a global scale, which can potentially cause a severe financial crisis?

      1. baffling

        peak, the fed and congress are different entities. congress can only tighten lending standards by passing legislation. that would be the definition of regulations. the fed and congress should operate independently of one another. the fed tightening money supply is not a regulation, it is the current business environment.

        “Why should the government be supporting lenders to loan tens or hundreds of thousands of dollars to marginal borrowers, and force financial institutions to spread the risk on a global scale, which can potentially cause a severe financial crisis?”
        this is not a true statement, particularly in the months leading up to the crisis. many of the subprime borrowers were funded through the investment banks and securitization process-the private sector without government backing. goldman gained access to the fed discount window during the crisis, when it converted temporarily into a bank holding company for access to the fed funds. the process of spreading risk on a global scale and potentially leading to a severe financial crisis was the result of the private sector investment banks, hedge funds and insurance conglomerates searching for profits.

        regarding the banks who actually do receive fed support, this is why we have tried to introduce banking regulations such as dodd-frank, so that fed supported banks do not put the economy into a financial crisis. it was the financial institutions that were unregulated by the fed which precipitated the financial crisis-bear stearns, lehman, aig, etc.

        1. PeakTrader

          Baffling, so? Congress can tighten or ease lending standards whenever it wants.

          You’re incorrect. The financial sector responded rationally to what a naïve Congress imposed.

          And, the politicians/lawyers in Congress didn’t understand taxpayers would ultimately pay.

          Dodd and Frank were the two most responsible for creating too easy lending before the crisis and too tight lending after the crisis, causing a boom/bust.

          1. baffling

            “The financial sector responded rationally to what a naïve Congress imposed.”
            wrong. the financial sector responded irrationally, and you saw the result. a rational response would have considered the risks. the financial sector did not consider the risks. further, congress did not impose anything. i find it quite baffling you simply cannot admit the private sector made a bunch of extremely poor and risky decisions, which produced a bad outcome. tell me precisely what congress did to make lehman go bankrupt?

          2. PeakTrader

            Baffling, it’s not risky when everyone knows the government will bail you out.

            It’s risky when the government fails to bail you out (see after Lehman).

            You’d say anything to protect a few powerful politicians, like an entire sector or industry was irrational.

            I’ve shown you the evidence before like “By 2007, 55 percent of all loans made by Fannie and Freddie had to be “affordable,”” and stated before, the percentage of “affordable” loans should’ve been gradually reduced starting in 2004 rather than raised.

          3. baffling

            peak, you can read the report of the Financial Crisis Inquiry Commission here:
            http://fcic.law.stanford.edu/report

            the conclusions are quite interesting. a more interesting, although perhaps less factual read, is the big short by michael lewis.

            “Baffling, it’s not risky when everyone knows the government will bail you out.”
            “It’s risky when the government fails to bail you out (see after Lehman).”

            how do you know the government will not bail out a private investment bank? the government, at the time, was rather clear in its backing of commercial banks-this was a lesson learned from the great depression. investment banks were a completely different category, and to my knowledge “everyone” did not know the government would bail them out. lehman was the result of the free market capitalist ideologues who say let them fail to learn the lesson. unfortunately there were consequences to such an actions when the failure becomes a free for all. since aig was even bigger, they were not allowed to fail in disarray. lesson learned. but this is all after the fact, and not instrumental in the lead up years.

            “I’ve shown you the evidence before like “By 2007, 55 percent of all loans made by Fannie and Freddie had to be “affordable,”” and stated before, the percentage of “affordable” loans should’ve been gradually reduced starting in 2004 rather than raised.”
            this was not the cause of the financial crisis. the agency backed mortgage products, even the in the later years when they dipped into subprime, performed much better than the private sector products. the agencies followed wall street down the rabbit hole, they did not lead them down the rabbit hole. it was the private sector products which imploded. they were not backed by the government.

            the arm-subprime originated by countrywide and wamu in 2004-2005, securitized by lehman, goldman, et al, sold off to investors worldwide with rating agency AAA blessing, and insured against failure by aig was the crowning achievement in the private sector bringing down the financial system in 2007-2008. government responsibility in this area was minimal, unless you would like to argue their regulations and enforcement were not strong enough. this was a private sector market failure of huge proportions.

          4. PeakTrader

            Baffling, you still believe the effect was the cause.

            The government facilitated the growth of mortgage-backed securities, because it accelerated high risk mortgage loans over several years before the economy peaked.

            Consequently, that led to a plunge in homeownership and millions of homeowners falling underwater.

            Sure, investors made high returns from high risk securities, until the music stopped, which Lehman found out.

            It’s ridiculous to blame an entire industry for taking advantage of a naive government policy that was forced upon them, and made people a lot of money, although that’s what politicians did.

          5. baffling

            “The government facilitated the growth of mortgage-backed securities, because it accelerated high risk mortgage loans over several years before the economy peaked.”

            peak, this statement is false in its implications and explains why you do not understand what happened during this period. the government facilitated the growth of mortgage backed securities as it pertains to standard conforming mortgages, through the use of fannie and freddie. these were prime mortgages and were not the cause of the problems.

            the government did not facilitate the subprime, nonconforming mortgages and resulting mortgage backed securities. these were the domain of the private sector, and caused all of the problems. fannie and freddie finally entered the subprime area, but it was at the peak of the bubble, and these were not the products that collapsed so violently. mostly because these products had not reset at the time of the financial crisis. the CDO’s which failed, and the CDS’s which collapsed the financial sector, were private sector products. period.

            peak, i do suggest you read the material i noted and educate yourself on exactly what happened and the time line. you are trying to conveniently warp the timeline to fit a narrative that does not exist. this naive ideology that the private sector can do no harm, and any mistakes simply must be the fault of the government, is quite simply nonsense. lehman most definitely did not fail because of government policy. aig was not forced into government life support because of government policy. those events occurred because each of those companies were involved in some of the stupidest financial decision making the world has ever seen. aig was selling insurance on subprime mortgages as if they were AAA rated products! it was nonsense. the government had nothing to do with the products aig was insuring. the agencies entered the game later, but they were not the cause of this crisis.

          6. PeakTrader

            Baffling, you’ve been in complete denial and now at the point of creating ridiculous fantasies, just like the politicians, who created the crisis, and shifted blame. I suspect, you’re just trying to fool the new people, who visit this site. I’ve shown you lots of evidence before. Here’s what your own link above says:

            “The financial crisis was U.S. government housing policy, which led to the creation of 27 million subprime and other risky loans—half of all mortgages in the United States—which were ready to default as soon as the massive 1997-2007 housing bubble began to deflate. If the U.S. government had not chosen this policy path—fostering the growth of a bubble of unprecedented size and an equally unprecedented number of weak and high risk residential mortgages—the great financial crisis of 2008 would never have occurred.”

          7. baffling

            peak, rather that actually read what the report had to say, you quote from a dissenting opinion and offer it up as a statement of the report itself. to be clear, this is not a statement adopted in the report, it is the opinion of an individual from the aei, looking to promote his ideology.

            peak, all that i ask is that you actually read the report, or at a minimum the conclusions. not alot to ask. your choice of quote indicates you really have no interest in understanding the situation, only to repeat your own ideological leanings.

          8. PeakTrader

            The main report was about the effects, not the root cause, which I generally don’t dispute.

            It should be noted, an economic downturn, in itself, would cause loan defaults and delinquencies.

            However, the government created, encouraged, supported, or ignored, so many high risk loans, it made the crisis much worse.

          9. baffling

            “However, the government created, encouraged, supported, or ignored, so many high risk loans, it made the crisis much worse.”

            Why continue living in a fantasy land? Are you paid to be a conservative hack on this topic? A nice short review of the relevant characters can be found in forbes. Government policy was not the source of this disaster
            http://www.forbes.com/sites/stevedenning/2011/11/22/5086/#50a8ef675b56

            Look, in 2008 there were $15 trillion dollars in cds bets, nearly 30% devoted to subprime assets. This was a multiple of the actual dollar amount of subprime lending in the few years leading up to the financial crisis. These were zero sum bets, for every winner there is a corresponding loser. But these bets also ignored counter party risk. If your betting partner went under, it did not matter your bet was correct-you still lost. This extremely leveraged financial house of cards, many of which were simply redundant bets, was only stable if nobody went under. This situation was not the result of government policy. The government was not the one creating synthetic cdo’s on the lousiest of mortgage bonds. In fact, the synthetic cdo’s existed because the mortgage lenders could not produce enough lousy subprime mortgages to satisfy investor demand. The financial system created an artificial pipeline of this product they demanded. You argue the government pushed this down the throats of wall street. Nothing could be further from the truth.

            You want to be a free market ideologue, that is your right. But you then want to assert the free market never makes mistakes. And that is incorrect.

          10. PeakTrader

            Baffling, you’re in fantasy land believing government didn’t promote millions of high risk home loans. From Business Insider:

            “The government pushed for greater mortgage securitization in an effort to increase CRA (Community Reinvestment Act) lending. At the behest of HUD Secretary Andrew Cuomo, Fannie and Freddie promised to buy $2 trillion of “affordable” mortgages. The government was intentionally decreasing the risks to the original lenders in order to increase loans to low-income borrowers, and minorities in particular. In short, you can’t blame securitization without coming back around to the CRA.

            What’s more, an enormous amount of subprime loans were made to lower-income borrowers target by the CRA. Forty-five percent of subprime loan originations went to lower-income borrowers or borrowers in lowerr-income neighborhoods in 2005 and 2006, where the foreclosures are almost twice as likely. This suggests that the kind of low income borrowers targeted by the CRA are likely to be responsible for the majority of subprime foreclosures.”

          11. PeakTrader

            Anyway Baffling, I don’t know what you’re complaining about. If you were a low-income minority in the mid-2000s tired of paying rent and you saw a house for $200,000, that you like, you could get a loan and move in.

            Maybe, you got ripped off on a CDO.

            You could at least acknowledge the government was helping the poor for the “greater good” instead of being in complete denial, while lenders took advantage of taxpayers.

          12. baffling

            peak, if you were to read pages xxvi and xxvii from the report of the Financial Crisis Inquiry Commission, you will see quite different conclusions than you presented. the commission concluded very pointedly regarding fannie and freddie

            “We conclude that these two entities contributed to the crisis, but were not a primary
            cause. Importantly, GSE mortgage securities essentially maintained their value
            throughout the crisis and did not contribute to the significant financial firm losses
            that were central to the financial crisis.”

            “The Commission concludes the CRA was not a significant factor in subprime lending
            or the crisis. Many subprime lenders were not subject to the CRA. Research indicates
            only 6% of high-cost loans—a proxy for subprime loans—had any connection to
            the law. Loans made by CRA-regulated lenders in the neighborhoods in which they
            were required to lend were half as likely to default as similar loans made in the same
            neighborhoods by independent mortgage originators not subject to the law.”

            peak, the government did promote the idea of affordable mortgages. and that was good. the financial sector took that idea and drove over the cliff with it. that was not the governments fault. securitization itself was not the problem. the silly game of cds was the absurd part-that was not government promoted. aig sold $79 billion dollars worth of cds on what turned out to be completely lousy securities-and anybody who even took a token glance at the product they were insuring would have understood the absurdity of this trade. goldman created and sold $73 billion dollars of synthetic cdo’s from the pool of cds on the original set of cdo’s. those two companies themselves effectively placed $150 billion dollars of triple b rated subprime slime insurance into the market. the subprime mortgages which constituted this mess were effectively originated, packaged, sold and insured by the private sector. not the government.

          13. PeakTrader

            You’re not familiar with government accounting.

            “Two-thirds of these (high-risk) mortgages were on the balance sheets of government agencies, or firms required to buy them by government regulations.”

          14. baffling

            from subprime mortgage crisis on wikipedia
            https://en.wikipedia.org/wiki/Subprime_mortgage_crisis#Role_of_Fannie_Mae_and_Freddie_Mac

            “Several studies by the Government Accountability Office (GAO), Harvard Joint Center for Housing Studies, the Federal Housing Finance Agency, and several academic institutions summarized by economist Mike Konczal of the Roosevelt Institute, indicate Fannie and Freddie were not to blame for the crisis.[263] A 2011 statistical comparisons of regions of the US which were subject to GSE regulations with regions that were not, done by the Federal Reserve, found that GSEs played no significant role in the subprime crisis.[264] In 2008, David Goldstein and Kevin G. Hall reported that more than 84 percent of the subprime mortgages came from private lending institutions in 2006, and the share of subprime loans insured by Fannie Mae and Freddie Mac decreased as the bubble got bigger (from a high of insuring 48 percent to insuring 24 percent of all subprime loans in 2006).[265] In 2008, another source found estimates by some analysts that Fannie’s share of the subprime mortgage-backed securities market dropped from a peak of 44% in 2003 to 22% in 2005, before rising to 33% in 2007.[260]”

            peak, apparently we have a discrepency in size. your source?

            further, as noted in the report of the Financial Crisis Inquiry Commission, the subprime in the fannie/freddie portfolio performed much better than that in the private sector. not all subprime is equal. it was subprime which originated outside of the fannie/freddie requirements which was so toxic. that was the private sector.

            you can fault fannie/freddie for being in the mortgage business, but their primary impact was on the prime mortgages. those were not a problem. the problem stemmed from the private sector and its financial engineering. go read the big short, to gain an understanding of how unethical/stupid the private sector free market behaved during this era. government policy did not make them behave that way.

          15. PeakTrader

            Baffling, obviously, you didn’t understand the accounting gimmicks, like the one I posted above. And, you provide smoke screens rather than the actual political objective that led to the housing crisis.

            The political objective was to replace the Nasdaq bubble with a housing bubble. And, Congress blew up the bubble after 2004, to create more low income lending, rather than tighten lending standards to prevent the crisis.

          16. baffling

            peak, you are treading on conspiracy theory ground now.

            again, take a read into the big short. it is rather entertaining. it is also rather disgusting. and it will make you rethink your ideology about the perfection of the free market capitalist system. you are smart enough to understand what actually happened, and who to blame. don’t let ideology keep you in the dark.

        2. Hillary 2016!

          The govt can only tighten? So when they demanded banks lend to unworthy borrowers that was tightening lending standards? Lol

          1. baffling

            “The govt can only tighten?” that is not what was stated. improve your reading comprehension. and exactly how did the government demand banks lend to unworthy borrowers? revisionist history.

  8. Peter K.

    I like JW Mason’s analysis better than yours.

    http://jwmason.org/slackwire/can-sanders-do-it/

    “The bottom line is this. Ten years ago, the CBO expected GDP to be $20.5 trillion (correcting for inflation) as of the end of 2015. Today, it is $18.1, trillion, or about 12 percent lower. Similarly, the employment-population ratio fell by 5 points during the recession (from 63.4 to 58.4 percent) and has risen by only one point during the past six years of recovery. Either these facts — unprecedented in the postwar period — reflect a shortfall of effective demand, or they don’t. If they do reflect a lack of demand, then there is no reason the expanded pubic spending and downward redistribution that Sanders proposes cannot close the gap, with a period of high growth while output and employment return to trend. (The fact that such high growth hasn’t been seen in the postwar period is neither here nor there, since there also has been no comparable deviation from trend.) Alternatively, you may think that the shortfall relative to previous growth rates reflects a decline in potential output. But then you need to offer some explanation of why the growth of the economy’s productive capacity slowed so abruptly, and you need to apply this belief consistently. I think it’s more reasonable to believe that the gaps in output and employment reflect a demand shortfall. In which case, the Sanders plan could in principle have the kind of results Friedman describes.”

    and Jamie Galbraith

    http://big.assets.huffingtonpost.com/ResponsetoCEA.pdf

    Senator Sanders had a New York Times editorial criticizing the Fed for the December hike. Hillary has said nothing about the Fed and would presumably continue the Obama’s Fed’s policies. A Sanders Fed would be better than a Hillary Fed or an Obama Fed and would ensure more demand.

    1. PeakTrader

      Yes, but why is demand too low? Perhaps, productivity gains went to regulations, taxes, and lawsuits instead of wages. Perhaps, the flood of low skilled immigrants depressed low skilled wages. Perhaps, taxes were too high, because U.S. consumers bought foreign goods and foreigners bought U.S. Treasury bonds shifting up to $800 billion a year from consumers to government. Perhaps, government created household debt through health care prices and student loans, made it harder to borrow after the financial crisis, even with lower interest rates, and created disincentives to work and take risks, e.g. to start a business.

  9. Anonymous

    Are you suggesting that the prominent economists that Hillary uses would refuse to help Bernie if he were to be elected? That does not make sense to me – we would likely have very similar stimulus policies under either candidate.

  10. 2slugbaits

    Bernie Sanders reminds me of Dennis Kucinich. His heart is in the right place even if his economics is suspect and uninformed. That said, part of me would rather have a President Sanders who has to be told why had can’t pursue a liberal agenda than a President Clinton who has to be convinced via triangulation arguments why she should pursue a liberal agenda. The problem is that a President Sanders is a longshot at best and his nomination risks giving us President Trump/Cruz/Rubio. For me that’s the real reason why Democrats should nominate Hillary.

    Truth in advertising. On a personal level I like Bernie Sanders. He and his wife have been guests at my home. The first thing you notice is that his suits are even more wrinkled and off-the-rack than mine. A man after my own unkempt fashion sense. He’s also a dynamo of energy for a man his age. My brother is one of his campaign managers and I’ve heard Bernie give his stump speeches. I’m too much of a cynic to not feel alienated from his crowds, but boy oh boy he can really get the Whole Earth Foods and Occupy types going. It’s hard to imagine Hillary trash talking Goldman Sachs and CITI with the same conviction. Come to think of it, I don’t recall Hillary Clinton ever really pushing Wall St. reforms during her 8 years as a senator from New York. And that’s Hillary’s problem. No one doubts here smarts and wonkiness. What they question is her willingness to kick Robert Rubin to the curb.

    1. Jake fomerly of the LP

      2slug- Why wimp out? Especially when Bernie is more electable than Hillary, as polls show time and again?

      “We will go to the moon in this decade, not because it is easy, but because it is HARD.” I see to recall another former New England Senator saying that. And guess what, IT HAPPENED, and it happened because people put the dedication and resources behind such measures. These are choices, not impossibilities.

      On a related note, I find this article by Neil Irwin on center-left econ wonks being skeptical of Sanders to be very good. It makes me wonder how much of this “skepticism” is simply a defending of the Obama record and these economists’ past arguments, and also is an acceptance of a political and economic system that many of us find unacceptable and unresponsive to the average person’s needs.?

      1. Menzie Chinn Post author

        Jake formerly of the LP: As someone who never served in the Obama administration, I can safely say if I got the analysis, I would exhibit a similar amount of skepticism as evidenced by the four CEA Chairs. I urge you to read the study for yourself, and interpret the analysis in the IS-LM aggregate demand-aggregate supply framework you know. The analysis implicitly assumes either (1) the AS curve is quite flat, and/or (2) the current output gap is very large and very negative, sufficiently so that sustained 5.3% growth does not mean we exceed potential even after a decade; it also presumes an accommodative monetary policy which results in nothing more than a reduction in the multiplier. (Recall what AD-AS in long run implies for the multiplier).

        I also commend to you Peter Dorman‘s quick review.

        1. Jake formerly of the LP

          Dr. Chinn- I agree that sôme of Friedman’s assumptions seem quite rosy and worthy of criticism, and I appreciate the follow-post you made.

          But that’s an entirely different question from whether or not something is possible, or if Medicare for all would unlock some added economic output (I think it would).

          I also note that the Krugmans of the world seem willing to score, criticize and belittle Sanders’ proposals, but don’t seem so willing to do the same for Clinton’s. Likely because they don’t want to make that comparison

          1. Menzie Chinn Post author

            Jake of the LP: I agree there are two components of the many critiques. One is political plausibility. Another is economic. I am arguing on the second. Krugman has critiqued both aspects. The CEA Chairs critiqued not the political but economic plausibility.

            I suspect that many of mainstream Democratic economists have not critically assessed Clinton economic plans because the projections do not stretch credulity in the same manner as the Sanders plans do.

  11. mje

    I disagree with the indication that the Yuan is “fairly valued.” the evidence for it is that China has a trade surplus vis a vis The United States. In fact, China admits manipulating the currency by maintaining a $ 3 Trillion foreign reserve.

    1. Menzie Chinn Post author

      mje: If a bilateral trade surplus is proof of unfair value, well, there are a lot of manipulators. And if reserves are declining (they used to be $4 trillion), is that “anti-” proof of being a manipulator?

      1. mje

        There are a lot of manipulators. Please remember the “Plaza Accord, of the mid 1980’s which brought the U.S. dollar down then subsequently the dropped the U.S. trade deficit to 1 % of GDP toward the end of the 1980’s. Also, it was the policy of the Clinton Administration (Rubin) to have a high dollar policy so by the end of the 1990’s the trade deficit ballooned. I cannot believe that you do not remember this history.

        In fact, China “devaled: the current last summer to…increase exports, and there are rumors that it will do so again!

        1. Menzie Chinn Post author

          mje: If the definition of a currency manipulator is one that uses either monetary policy or foreign exchange intervention to influence the exchange rate, then pretty much every country in the world is a currency manipulator. However, I do thank you for being explicit in your definition.

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