From Ed (We Are Not in a Recession) Lazear and Keith Hennessey, “Bush ended financial crisis before Obama took office — three important truths about 2008”, FoxNews (9/16):
The financial crisis was caused principally by unprecedented capital flows into the United States (and other developed economies).
…
In September 2008 we, on behalf of President Bush, were part of a team that asked Congress to write a $700 billion check on behalf of taxpayers to bail out the failing largest banks. President Bush didn’t want to do this. We didn’t want to do this. Congress didn’t want to do it (and said no the first time). Our reservations were based on the potential cost to taxpayers and the moral hazard created by bailing out failing institutions and some of their creditors. Even today this program is famously unpopular, but the evidence is that it worked.
…
It was President Bush’s task to stop the financial panic that was occurring in the autumn of 2008. He and his administration succeeded.
…
All the major financial sector rescue policies were created and implemented during the last five months of the Bush administration.
The Bush team put Fannie Mae and Freddie Mac into conservatorship, proposed, enacted, and implemented the TARP and its main component, the Capital Purchase Program.
Treasury guaranteed money market mutual funds. The FDIC expanded its guarantee of deposit insurance and created new guarantees for small business accounts and interbank loans.
The Fed created new mechanisms for commercial paper and began paying interest on bank reserves. Fed, the Treasury, and FDIC took specific actions (many of which were loans and “bailouts”) for AIG, Citigroup, Goldman Sachs, Morgan Stanley, Washington Mutual, American Express, CIT, General Motors, and Chrysler.
…
Permit me a few observations.
First, it’s not so clear that by January 2009, the financial system had been saved; consider the three month LIBOR-US Treasury spread (TED spread). There was clearly still a lot of distrust, as shown by the TED spread (recall, it’s likely the TED spread understated the degree of risk, given the distortions in the market). By the end of the Bush Administration, the spread shrank to where it had been in the immediate run-up to Lehman.
Source: Bloomberg via Econbrowser.
Second, the article also resurrects the “Blame it on Beijing” view of the origins of the crisis. As if all that capital flowing into America came out of nowhere — that housing boom, deregulation of financial markets, etc. had nothing to do with actual deregulatory actions pushed by the Administration. More on the “Blame it on Beijing” thesis here and here. (Heck, I got seemingly infinite numbers of offers for credit cards in 2007, but I didn’t take ’em all, borrow to the max, and then default.)
Third, I agree that the measures undertaken in the immediate aftermath of Lehman were extremely important, including the conservatorship of the GSEs, and implementation of TARP. See the discussion by Phill Swagel of crisis management during the height of crisis.
But, Lazear and Hennessey blur the distinction between Fed actions and those of the Administration. To say the Bush Administration ended the crisis overstates the case (to say the least).
Finally, the entire article reminds me of the person who builds a house in the middle of a big area of dry grass, lobbies against putting any regulations that might require tile rooftop, goes on and puts on a wood shingle rooftop, fails to clear away the dry brush surrounding the house, and then — when the house catches on fire — claims victory when one room is saved because a lawn hose was trained on that part of the house.
More from Professor Lazear, on the beginning of the recession [1], on the size and timing of the 2009 stimulus package [2] on the recovery [3] [4], and on structural unemployment [5] (note: he is on both sides of the issue here).
Surely the TARP bailout exaggerated rent seeking behavior, and in doing so contributed to market inefficiencies. Or are such phenomenon too nebulous for you, and therefore invalid.
Menzie,
This is getting to be a bad habit. You and I essentially agree again. Right after 2000 (remember Y2K, UGH!) the Federal Reserve began massively expanding the money supply. Congress and the regulatory bureaucracy, including Fannie and Freddie were pouring gasoline on a fire that was just beginning to roar in the housing and credit markets. Voices from many different corners were screaming that there was going to be a credit crisis but the Keynesian based intellegencia can hear nothing but the empty jingle of dumb, ignorant money.
Both Republicans and Democrats were falling all over themselves to see who could out Keynesian the other, but in the end Henry Paulson won. I encourage you to carefully read the article by Phil Swagel that Menzie posted. From the beginning of the article to the end the overwheling theme is that the Treasury Department had no idea what they were doing but they were going to do it with all the gusto they could muster.
The FoxNews article does mention one important event. When Paulson proposed his three page TARP bill the American people set the congressional phones on fire in opposition. Initially it appeared that TARP would pass easily as the usual suspects lied about the support, but on the first vote the House voted it down. In a panic the Keynesians circled the wagons and, using a trick that would have made James Madison puke, the Senate took another spending bill from the House, gutted it of its provisions, and returned the TARP bill back to the House. Of course the three page bill had now become a bill with pork piled high. On the second vote enough House members were intimidated so that they passed TARP.
On passage of TARP the stock market crashed and continued to fall and fall in the greatest decline since the Great Depression. The credit crisis was in full free fall.
There is no question that it was the Bush administration that pushed our bloated economic bubble over the ledge. For anyone to try to make an argument at this point rationalizing that fact is almost criminal.
The only problem is that Democrats traditionally have no idea what they are doing so they always seem to copy the worst policies of the Republicans. Once the Democrats gained control of the House, the Senate, and the presidency they took the Bush administrations failed plans and multiplied them simply worsening the worst economy since the 1930s.
Menzie – from your earlier post:
“Well, I think this last point leads us to my critique. Was it really sophisticated capital markets in the US, or a mania in which either agents made implausible assessments of future risk/return tradeoffs, or were engaged in “looting” the system by exploiting implicit guarantees and building up contingent liabilities for the taxpayers, that sucked in capital from the rest of the world.”
I agree with Krugman and Wells on the true source of the crisis. Bernanke had the right idea as well, but by attributing Asian excess savings to the “Asian crisis” he misleads. The huge build up in foreign reserves happened in Japan and China, neither of which were victims of the Asian crisis. China’s currency policies in particular forced capital flows onto the ROW – they built up fantastic foreign reserves to keep the yuan undervalued and used capital controls to prevent the capital from returning.
The “deregulation did it” story is highly questionable. Apparently, similar housing bubbles also appeared in markets with fairly good banking regulation. I doubt lax regulation was any more responsible for the housing bubble than it was for the dot-com stock market bubble.
In my view, what happened is that the U.S. used expansionary monetary and fiscal policies in the wake of the dot-com bust, but much of the AD that was created was lost to current account deficits. Our housing bubble helped soak up deficient global AD, created in part by the Asian savings glut. But the main difference between a market supply and demand result and what actually happened is not U.S. deregulation, but Asian official reserve interventions and capital controls. That is, the capital was not “sucked in” here, it was forced out in Asia.
Careful, Menzie, someone might actually read the Lazear and Hennessey paper. Say, something like;
———–quote————
It is hardly obvious that deregulation, or even lack of regulation, was a key component of the crisis.
First, the trouble spots in the economy tended to be in the most regulated sectors, not the unregulated ones. Highly regulated banks and a
large insurance company were the major vulnerabilities in 2008, not unregulated hedge funds. It is always possible to argue that the regulated firms were not regulated correctly, but that is exactly the point.
Determining appropriate regulation is a large part of the problem and blanket calls for more or better regulation have little value.
Second, financial institutions in other countries failed. This suggests that any explanations for the crisis that rely on regulatory policies or
practices specific to the United States are at best incomplete and at worst incorrect. The American Net Capital Rule, for instance, did not cause Fortis, Dexia, or Northern Rock to fail, and it is quite unlikely that U.S. housing or financial policies caused a housing bubble in Spain.
———–endquote———–
It even gets worse for Menzie immediately after what I’ve quoted. But those interested will have to read it for themselves.
Concerned Citizens Brigate: [sic] Yes, agree that the bailout induced moral hazard problems. But I also am with Jeff Frankel that the time to act is before the crisis.
Patrick R. Sullivan: Truth be told, I didn’t read the paper, just read the article. Hmm. Trying to think…Bear Stearns initial troubles started with…hedge funds! And trying to remember, what SIV’s stand for…And were Bear Stearns and Lehman Brothers regulated by FDIC/Fed or by the largely toothless SEC? My advice (for don as well) — read this book rather than that pamphlet.
By the way, did you agree with Lazear in 2008 that the data were definitive that we were not in a recession? Just curious — if you were/are with Lazear, I am not surprised you were persuaded by the pamphlet.
Remember, the head of the SEC, a former GOP congressman from SoCal, stated in a hearing after the financial crisis began that the experiment in self-regulation had been a failure.
Ricardo +1
You Sir are savvy.
The FED has indeed become a BIG problem/liability. They are the elephant in the room.
The other BIG problem is the Vampire Squid (G Sachs) which controls our political classes.
I had read the Foxx article earlier and frankly was not impressed..
The govcession of 2008 of was the result of banks and their partners the investment “banks”; whether they were regulated or not…Throw in CONgress and their minion the regulator as well…
Hoover Institute just announced a trade for Professor Chinn for Lazear, Hennessey and an economist to be named later…
I had read the Foxx article earlier and frankly was not impressed..
The govcession of 2008 of was the result of banks and their partners the investment “banks”; whether they were regulated or not…Throw in CONgress and their minion the regulator as well…
Hoover Institute just announced a trade for Professor Chinn for Lazear, Hennessey and an economist to be named later…
The word missing from the regulation discussions is FRAUD. One reason the foreign banks failed is because “regulated” U.S. institutions sold them securities that were rated AAA but whose contents were far from AAA due to fraudulent lending and borrowing practices.
Deregulation played a part, however, because laced on top of all those fraudulent securities were oodles of unregulated derivatives making all the participants capable of threatening the destruction of the system, should anyone try to question their fraudulent and risky business practices.
However, I must agree with Menzie that after letting FRAUD run rampant across the U.S. for several years, the Bush administration can’t take credit for addressing the subsequent economic disaster. On the other hand, the Obama administration has been dreadfully slow to prosecute the frauds… Pot, meet kettle?
Shikha Dalmia : The Myth of the Scientific Leftist.
Shikha Dalmia is a brown woman, and thus someone who leftists think should have no choice but to be a leftist herself (being a two-fer of both brown and female).
That she has noticed how leftists promote science and facts only when it agrees with their political agenda, always trips up Menzie. He is unsure what to make of it.
The Hennessey Lazear paper goes to the core of the crisis. It makes 19 observations. And does so in clear simple language. Toss in a 20th for omissions, and the paper can be scored 5 points for each observation tallying to 100%. Observation 1 says two recessions have been conflated into one. But the episode is really one single long drawn-out piece (2 ½ pts). Obs. 2, 3, 4 (5 pts each). Obs. 5 virtually ignores the shadow banking system, and does not mention the initial seed of the crisis – Clinton’s 1995 National Homeowners Strategy. See http://theaffordablemortgagedepression.com/2010/03/11/origin-of-the-housing-bubble-the-national-homeownership-strategy.aspx. Also, investment bank leverage was systemically far higher than ever in history, though HL say it did not exceed the peak in the 1990s (0 pts). Obs. 6 about the crisis being caused principally by foreign capital flows is unconvincing and very misleading. This is widely known as Bernanke’s savings glut hypothesis. Numerous recent papers, especially from the BIS, convincingly debunk this. Moreover, there’s no mention of the Fed’s role in providing excess liquidity from 2002 on. Without this, the crisis would never have been as severe. Fed policy was one of the handful of necessary conditions (0 pts). Obs. 7 through 10 (5 pts each).
Obs. 11: “The financial crisis was largely resolved by the time President Obama took office in late January 2009.” Well, it all depends on “largely.” Certainly it was not wholly resolved. The stimulus and the bank stress tests were needed too to rebuild confidence. I would say that the panic didn’t truly end until the stock market bottomed in March. But HL’s observation is pretty robust, backed up as it is by a list of a dozen immensely important programs that were implemented by the Fed and Treasury. The bank stress tests and the fiscal stimulus in the Obama administration then put the final cap on the crisis. My close sense at the time, from late-January 2009 until March when the market bottomed, was that the financial system could still have collapsed. HL are not clear enough on this point (4pts). Obs. 12 through 15 (5 pts each). Obs. 16: ‘“The deepest recession since the Great Depression” does not mean the two are comparable in size.’ The 4.7% versus 26.7% comparison of the recessionary drops for sure put the two in stark relief. But the larger story is yet to be told. The Great Depression was a decade long episode. Recovery growth coming off the deep trough was (naturally enough) tremendous. The full decade of the 30s is the better litmus. So the real comparison won’t come until 2017 when the two decades 1929-1939 and 2007-2017 can be laid side by side. Arguably, we are in a stealth depression today. These two episodes will look more similar by the measure of cumulative growth over the respective decades as time goes on. Deduct 2 points for a score of 3. Obs. 17 does not mention that at the margin it was still possible for the financial system to have collapsed without the stimulus and the stress tests that did so much to rebuild confidence (4 pts). Obs. 18: “The exceptionally slow recovery has magnified the economic losses of the 2008–09 recession.” A very important insight, which implicitly recognizes the current recovery is indeed a stealth depression. Which will probably go on, barring the election of an extremely pro-growth president(s), well past 2017 (5pts). Obs. 19: “While the U.S. economy is growing, it is not returning quickly to its prior level.” Quite true, but whereas HL say there are two interpretations for this (expressed as either/or), in fact the matter is more complex. Both interpretations have weight. Moreover, the current recovery is embedded in a larger deteriorating structural context which has been ongoing for many decades, and picking up steam the past 30 years on a number of fronts including trade deficit, hollowing out of manufacturing, work ethic, big government, etc. (4pts).
Then there is the matter of omissions. The most glaring being no mention of the Fed’s announcement of QE1 in December 2008 which was earthshaking. Deduct 2 ½ points for this. So on points it’s a low B. But grading on the curve, a solid A. Few papers or books so neatly, compactly, and correctly address the unfolding of and ongoing ramifications of this crisis.
This should crush the oppressive myth that deregulation was one of the cause of the 2008 govcession..
http://neighborhoodeffects.mercatus.org/2013/09/24/the-myth-of-deregulation-and-the-financial-crisis/
@Darren
Dalmia is a reporter turned analyst for the Reason Foundation, a right-wing think tank with the usual ties to Fox. She is a hack that actually still trolls the idea that climate change is up for scientific debate. It’s amazing she has the gall to give out lectures about what it means to accept scientific facts.
I did like reading some of her work though. Most of her immigration articles are actually coherent, but her articles on healthcare are perfect examples of hack writing. Like this one :
“If France and Germany are not spending even more on health care, one big reason is rationing. Universal health care advocates pretend that there is no rationing in France and Germany because these countries don’t have long waiting lines for MRIs, surgical procedures and other medical services as in England and Canada. And patients have more or less unrestricted access to specialists. But it is unclear how long this will last.”
Isn’t that lovely? These countries spend less because they are rationing healthcare. Although they aren’t doing that now, but they are sure to do so in the future. Apparently, in her “scientific” world view, all that is needed to reduce prices of products now is the belief that these products will be scarcer in the future. I guess even basic economics is too difficult.
The linked article makes three assertions:
First, the principal cause was not a specific U.S. policy but instead a global economic phenomenon.
Mostly true. As Slugs reminds us, the bubble included out-of-control lending in Iceland and Ireland; housing bubbles in the UK and Spain; and an everything bubble in Greece. However, the crisis affected really only the OECD countries. No explanation has been forwarded by anyone (except me) for this.
Second, the TARP worked.
I believe TARP did work, and played an important role in stabilizing the financial system. It is certainly standard financial crisis stuff, but TARP did work, in my opinion.
It was President Bush’s task to stop the financial panic that was occurring in the autumn of 2008. He and his administration succeeded.
President Obama faced a different set of challenges, which included addressing the severe macroeconomic recession that flowed from the financial crisis, beginning the cleanup of the financial system after the crisis, and proposing, enacting, and implementing financial reforms.
I think these statements are true. By March 2009, when Obama was beginning to materially influence policy, the recession was only one quarter from the trough and the financial panic phase of the crisis was over.
The authors split the financial panic from the related recession, and point out that the Bush administration did address the panic, and did so successfully, at least by the time Obama took office. I did not think this was a controversial point or needed to be highlighted separately, but apparently the authors thought it did.
I’m not sure how you define the exact end of a crisis, because fear persists for a time after the policy takes effect, and that’s reflected in the slow decline in the TED spread above.
As I recall, the panic began to subside once it became clear that the FED would provide as much credit as necessary to prevent the financial markets from siezing up.
I also recall Paulson and Bernanke working together to craft the coordinated policy that ultimately worked. They were not working in isolation of each other, so you can’t say the Bush administration deserved no credit for FED policy.
Given the declining TED spread in 2009, and if the various policies that ulimately ended the crisis were developed while Bush was in office, then it’s not a stretch to say the financial crisis, or at least the panic, effectively ended before Obama took office.
We still need to separate the insured deposits of households from investment banking activity at the big banks. At least prevent them from being used as collateral that can be leveraged for purposes of investment banking activities.
‘By the way, did you agree with Lazear in 2008 that the data were definitive that we were not in a recession?’
At the time he made the statement, Spring 2008, he was right; GDP growth was positive. Without the collapse of September, the NBER wouldn’t have even noticed the blip in December 2007.
It’s a really bad idea to comment before reading the paper in question, too, guy.
Btw, how does ‘regulation’ work in today’s world where;
http://www.dailyfinance.com/2013/09/24/fed-leak-chicago-traders-got-no-taper-decision-news-early/
———quote——–
The doors were locked at 1:45 p.m., and Fed staffers handed out copies of the statement at 1:50 p.m., allowing reporters a few minutes to digest the complicated document before reporting on its contents. At 1:58 p.m. television reporters were escorted out of the room to a balcony where cameras had been positioned. The Fed’s security rules dictated that television reporters were not allowed to speak before precisely 2 p.m. Print reporters were told they were allowed to open a phone line to their editors at headquarters offices a few moments in advance of the hour, but not allowed to interact with people on the other end of the line until exactly 2 p.m.
On top of those precautions, every media person entering the lockup — including two employees of CNBC — was required to sign an agreement that read: “I understand that I may make no public use of the documents distributed by Federal Reserve Board (FRB) staff or the information contained therein, including broadcasting, posting on the Internet or other dissemination, until the time the FRB has set for their public release.”
All of the security precautions were taken to prevent the details of the Fed’s decision from leaving the building before the precise deadline to make sure that editors, technicians, producers and even computer techs in media offices all over the country could not learn of the decision ahead of time.
On Wednesday, that tiny sliver of time saw a burst of trading. Nanex said as much as $600 million of assets changed hands in Chicago in the milliseconds before the rest of the market there was aware of the decision by the Fed.
————endquote———
Don’t tell me, ‘It was the repeal of Glass-Steagall that did it!’
Let’s play hypothetical:
Consider a McCain win, and he disbands Fannie & Freddie. What happens to the housing market? Is it up 10% from its early 2009 levels, or is it down from there? How does that impact banks balance sheets, and future origination business? Do people, seeing prices continuing to fall trust housing or do they refuse to buy?
Also, consider, why did a panic develop? How much worse condition was Lehman in March 2008 than it was when it failed in Sept 2008? Was the decision to let Lehman file for bankruptcy a better option than they route we took with AIG? Saying a worst-case situation was avoided is not the same as saying that the proper course was taken through all of 2008 & back into 2007.
The Bear Hedge funds needed bailing out in June 2007! Loud sirens of warning over a year before Lehman filed for bankruptcy.
Patrick Sullivan: Let me refer you to this post which illustrates (last figure) what Professor Lazear knew in May 2008, when he made his pronouncement. If you still hew to your view, then, well, we have different ways of interpreting data. I would not have made such a definitive statement.
This paper by Hennessey and Lazear is one of the best I’ve read this year. One of their points is that the Bush Administration dealt with the financial crisis and that by the time the Obama administration came in, the financial crisis was largely in the rear view mirror. I think that’s right, although Menzie is denying it.
The most important point is that almost all the policies to that were put into place to stem the financial crisis were put into place by the Bush Administration. Those policies were a joint effort of the Fed and the Administration and were led by Treasury. Let’s look at the list of what the Administration accomplished before January 2009:
-Creation and implementation of TARP with most funds release and disbursed in particular to major banks, GM, Chrysler, and their captive finance companies
-Fannie and Freddie into conservatorship
-Treasury exchange stabilization fund to guarantee money market mutual funds
-Fed/Treasury creation of TALF
-Treasury Capital Purchase Program
-FDIC expanded deposit insurance, guarantees on new interbank loans, and guarantees on small business accounts
-Treasury/Fed facilitated sales of weaker banks to stronger banks
Once the new Administration took over, it did not need to put any new programs in place, since the Bush Administration had largely taken care of the financial crisis. The Obama administration just continued the the Bush programs and instead turned its attention to the recession, regulation, and health care.
The fact that no new programs were needed after January 2009 is a much more powerful argument than the fact the the TED spread wasn’t completely back to normal. Who would expect it to be in a recession? But I’d just mention that the TED spread is not the best measure of the health of the financial sector. The problem with it is that the spreads on Treasuries reflects the macro environment. During the crisis, default swap spreads on Treasuries got as high as 60 bps or so(higher than Campbell soup), so it’s not true that government bonds have no default risk. Also, treasure spreads can move in because of a general flight to quality, representing the general macro environment rather than being specific to the financial sector.
A better measure is the Libor-OIS spread. OIS represent the cumulative cost of borrowing in the daily fed funds market and are essentially credit and liquidity risk free. Thus, the Libor-OIS spread is a much more pure measure of credit and liquidity risk in the banking sector. Libor-OIS subtracts spreads that reference the same borrower. TED subtracts spreads that reference different borrowers.
The short-term Libor-OIS is best, 1 month. When the terms get longer, the spread starts to correlate with the general credit market.
I think the 1-month Libor-OIS spread was still a bit elevated in January 2009, as I recall, but not by as much as the TED.
stryker,
I wouldn’t give the Bush administration too much credit. You had a financial meltdown occuring worldwide. Even GW “Brownie your doing a heckuva job” Bush needed to see action was required from the Federal government. Note most of the action was directed by the Fed and Treasury. Not too sure how much W even was involved in this decision making.
But it is disingenuous to suggest the financial crisis was in the rear view mirror when Obama came into office. The stock market collapsed in Sept 2008, and continued to fall through the remainder of the year into the lows of March 2009. Only then did some sense of recover begin, and this was only after the ARRA Recover Act was passed in February of 2009. If the Bush administration deserves so much credit, why did it take a huge stimulus bill to stop the carnage and begin to reverse course on the damage done during the Bush Administration.
And the use of Libor to determine risk spread is also iffy, if you consider the banks were fixing the rates through the financial crisis.
Steven Kopits,
You and I usually agree but I am totally lost how you can say TARP worked.
Can you name one indicator that got better because of TARP?
Can you explain why the very day TARP was passed the market started down and then fell almost 50% in the next few months?
Can you tell us what the propaganda and Paulson told us TRAP moeny was supposed to be spent on and then what it was actually spent on?
Can you explain why unsound banks were propped up and why sound banks were forced to take the money or forced to buy failed brokerage houses without the right to inspect the financial condition?
Steve, I am afraid you have drunk the Koolaid on TARP.
Hans wrote:
“Hoover Institute just announced a trade for Professor Chinn for Lazear, Hennessey and an economist to be named later…”
Hans,
Menzie doesn’t want to go to California. He wants to go to Minnesota.
Lazear was speaking in the second quarter 2008. What the BEA saw shortly thereafter;
http://www.bea.gov/newsreleases/national/gdp/2008/gdp208a.htm
‘Real gross domestic product — the output of goods and services produced by labor and property
located in the United States — increased at an annual rate of 1.9 percent in the second quarter of 2008 (that is, from the first quarter to the second quarter), according to advance estimates released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 0.9 percent.’
Lazear was right, at the time he spoke.
On January 4th 2008 JDH changed the Econbrowser’s emoticon to a frown. Basically, JDH nailed it. I recommend some of Lazear’s defenders review what JDH said a full four months before Lazear’s May 2008 miscall.
Then readers should go to Menzie,‘s post from May 31st, 2008, “GDP on the Eve of Recession: Then and (Maybe) Now.” Menzie made a pretty good case why we should not trust the revised GDP figures given other sour data trends.
The recession was both predictable and predicted by many…just not Lazear.
Ricardo –
TARP was passed on Oct. 8, 2008, a couple of weeks after the failure of Lehman. It was the fog of war and an unbelievably stressful time for all involved. I don’t have any particular expectations that policy would be optimal under the circumstances, but in fact, the various steps taken by the Fed, Congress and the Administration did stabilize the situation.
According to Wikipedia, as of December 31, 2012, the Treasury had received over $405 billion in total cash back on TARP investments, equaling nearly a non-inflation-adjusted 97 percent of the $418 billion disbursed under the program.
So the funds invested in TARP were essentially returned.
More Wiki: TARP was intended to allow the Treasury to purchase illiquid, difficult-to-value assets from banks and other financial institutions. TARP was intended to improve the liquidity of these assets by purchasing them using secondary market mechanisms, thus allowing participating institutions to stabilize their balance sheets and avoid further losses.
Now, you may argue that the banks should have been allowed to fail. As Gorton makes plainly clear, societies do not allow their financial institutions to fail during a financial crisis–or if they do, they take down society with them.
I would recommend you read Gorton’s “Slapped by the Invisible Hand” (or “Misunderstanding Financial Crises”), and then comment in light of his thesis. I still consider Gorton to be the last word on financial crises.
http://www.frbatlanta.org/news/conferen/09fmc/gorton.pdf
I am prepared to be wrong on this, but I think that TARP was at worst neutral, and at best helpful.
I would add that I see this Obama vs Bush thing regarding the financial crisis (fall 2008) as a tempest in a teapot. Had Obama been President, events on the ground would have forced his hand, just as they did Bush’s. There are no atheists in a foxhole.
Stryker is baffling,
You are confusing a financial crisis with a recession. The financial crisis was in the rear view mirror but the recession was still ongoing, as Lazear and Hennessey acknowledge.
As for your speculation that Bush wasn’t involved, the reality is that Bush was involved in everything and in fact is smarter than you are, as Keith Hennessey explains.
You also don’t seem to realize that the TED spread that Menzie used also contains libor. My point is that you should subtract OIS rather than the Treasury yield.
Menzie and 2slugbaits,
You want to keep bashing Lazear. Why don’t we compare what Lazear said in May of 2008 to what Yellen said in May 2008?
Lazear’s view was summarized on May 8 2008 as follows in the WSJ.
“The White House’s top economist said he’s confident the U.S. economy hasn’t dipped into recession, and expressed optimism that stimulus checks could bolster growth in the current quarter, earlier than expected.”
Here is what Yellen had to say on in her speech on May 13, 2008:
“This brings me to my bottom line for the outlook. Starting in the fourth quarter, the economy slowed to a crawl. With stimulus from monetary and fiscal policy, economic performance may improve later this year. Nonetheless, the economy is still likely to turn in a very sluggish performance for the year as a whole. With the unemployment rate currently at 5 percent, it is a little above my estimate of its sustainable level, and the weak performance I expect this year is likely to push unemployment up further.”
In other words, Yellen thought that the economy was not currently in a recession and may improve later in the year, just like Lazear. The difference between the two is that Yellen expresses more uncertainty about the forecast and is more pessimistic but they fundamentally end up in the same place.
Both Lazear and Yellen made a reasonable forecast based on the data they had. The fact that they both got it wrong does not invalidate their views in any way.
Rick Stryker My take is that Lazear was “confident” we were not in a recession. And as you said, Yellen was uncertain. I don’t think those two assessments are equivalent. The economy was sending lots of mixed signals, so uncertainty, or at least humility was the appropriate posture.
Here’s what I think is a better explanation for Lazear’s apparent confidence. Recall that in Feb 2008 the Administration had already concluded that a recession was waiting in the wings, and that was the Administration’s rationale for the Economic Stimulus Act of 2008. By “coincidence” the Treasury started cutting those tax rebate checks just 6 days before Lazear wrote his op-ed in the WSJ. In other words, Lazear was cheerleading. Readers of the WSJ expected a thoughtful reflection on the economic situation from a leading economist. What they actually got was old-fashioned political spin.
Rick Stryker: Let me repeat Ed Lazear’s pretty definitive statement:
and again, so you can read it word for word:
And let me note, again, three of the four indicators that the NBER BCDC looks at were below peak, and the modal WSJ forecast for 2008Q2 was negative. And, then, read again:
Menzie,
Let me repeat Yellen’s statement:
“Nonetheless, the economy is still likely to turn in a very sluggish performance for the year as a whole.”
and again so you can read it word for word:
“Nonetheless, the economy is still likely to turn in a very sluggish performance for the year as a whole.”
Yellen said this in spite of the fact that three of the four indicators that the NBER BCDC looks at were below peak, and the modal WSJ forecast for 2008Q2 was negative. And then read again:
“Nonetheless, the economy is still likely to turn in a very sluggish performance for the year as a whole.”
Yellen thinks its likely that we are not in a recession. Lazear thinks its pretty clear that we are not in a recession.
You are making a big deal about differences in confidence in the forecast. They both turned out to be wrong. Who cares how certain they were a priori? It’s only really different if one of them got it right and one of them got it wrong.
If you really think this nuance is so important, I won’t have an issue with you continuing to say Ed “We are not in a recession” Lazear when referring to Lazear if you also say Janet “It’s likely we are not in a recession” Yellen when referring to Yellen.
(This comment applies equally to you 2slugbaits.)
Hi Steven and Ricardo,
Just a couple of comments on TARP.
Wikipedia is correct that the program started out as a means to buy illiquid assets, which were thought to be the source of the strains in the banking system. But it’s worth pointing out that once the program was passed, the view shifted that the problem was not illiquidity of assets but rather counterparty risk. TARP was then used instead to recapitalize the banking system.
I agree that Gorton’s books are essential reading on financial panics and crises. Very few people understand the run on the shadow banking system that Gorton explains very well or his related point that the recent financial regulation legislation does not address the real problems of the financial panic. However, Gorton writing in “Misunderstanding Financial Crises,” does not think we have the evidence at this time to assess whether TARP and the other programs were really beneficial or not.
If you look carefully at Lazear’s and Hennessey’s point on TARP, they are saying that the goal of TARP was to provide temporary access to taxpayer capital in order to make the banks strong enough to withstand the panic. But importantly, the taxpayers would get their capital back. Indeed, in the case of the banks, the taxpayers did get their capital back. So, it’s certainly a success in that limited way. But Lazear and Hennessey don’t demonstrate the stronger claim that the capital infusions are what actually stemmed the panic because they made the banks strong enough. I’d agree with Gorton that we don’t have the evidence to believe this at present.
(By the way Ricardo, I’m a big fan of Ludwig von Mises)
I agree, Rick.
But again, I think we have to be careful about projecting “peacetime” standards onto a live fire exercise. Under such stress, several options will be tried, with uncertainty about the efficacy of any of them. As a group, these policies worked, although I will concede that, if one had the luxury of some very deliberate and measured implementation, different policies might have emerged.
The really big mistake was the liquidation of Lehman, but even for that, the Treasury and Fed were relatively short on tools at the time.
So, if we say that TARP put $400+ bn into play and cost us net $20 bn, then I would say that was a worthwhile attempt, and probably helped, at least modestly.
I was in grad school during the crisis and wanted desperatly to know more about what was really happening. No one comes close to Gorton in providing info on shadow banking repo and all the related issues. The reason for my comment is not to restate what has already been said about his work in this area but to be sure we are clear about who Gorton is.
The converation here has focused on both causes of the crisis and the politics of the recovery. In keeping with the causes it is important to note that Prof. Gorton played just as significant a role in creating the crisis than he has in explaining it.
Rick Stryker: Seriously, I add the nickname for Lazear because his statement was so outrageously definitive. By comparison, Yellen was responsibly cautious. In the second paragraph, she states:
And at the beginning of the outlook section:
I’d say that the difference is more than just a bit of “nuance”.
“Finally, the entire article reminds me of the person who builds a house in the middle of a big area of dry grass, lobbies against putting any regulations that might require tile rooftop, goes on and puts on a wood shingle rooftop, fails to clear away the dry brush surrounding the house, and then — when the house catches on fire — claims victory when one room is saved because a lawn hose was trained on that part of the house. ”
If Bush had built the house, rest assured, the brush would have been cleared.
Rick,
Thanks for your post. You are right about the change in purpose of TARP.
Steven,
Sorry but your posts are not persuasive.
The Monday after the weekend Lehman was allowed to go bankrupt most of the North American assets were picked up by Berclay’s. There was a slight dip in the market on the Friday before and Monday after but by the next weekend the markets had essentially recovered. The myth of Lehman being the cause of the crash is simply not supported by the evidence. It is simpy a myth floated by the financial authorities to cover the fact that the real precipitation came after TARP.
Concerning taxpayers getting back “their investment” in TARP, how many of your investments that only return 97% of your principle do you consider successful?
Thanks for the link to the Gorton Paper. I have saved it and will spend more time with it when I have the time. Superficially, it is the seems to be the normal establishment spin. The “shadow banking system” was in fact saved by TARP and the Obama stimulus spending, but at what expense. Goldman Sachs and the others reaped huge profits as the average man suffered. Real estate deleveraged and who paid the price; who faced the foreclosure? Was it GS or any of the other shadow banks? No, they were saved but the little people paid the price. And has saving the shadow banks brought recovery? Unemployment is still high, higher than the mythological unemployment rate with it massive non-participation rate.
I am sorry Steve, but looking at the 1920-21 crash and recovery I see the right way of dealing with a crash. Looking at the current crisis I see a perpetuation of the mistakes that caused the crisis to begin with.
The government is preventing recovery, Sarbanes-Oxley, TARP, stimulus, minimum wage increases, Dodd-Frank, Obamacare, taken in total it is surprising we are not doing worse than we are.
Steve, if you look at the history of the stock market you will see the decline in 2008 started with the passage of TARP not the bankruptcy of Lehman.
Menzie,
OK, if you think this difference is so important, let’s stop comparing Yellen’s entire statement to one Lazear quote from a newspaper article. I wonder if Lazear would be more responsibly cautious if we could get a more complete statement. Let’s tune in to his March 7 2008 press conference and pull out some selected quotes:
“Q And what is the prospect of the economy heading into a recession?
CHAIRMAN LAZEAR: Again, we think that the growth rate this quarter will be low. There are indicators suggesting that growth will pick up, and pick up quickly. So the question is how quickly will it pick up. We think it will pick up — as I mentioned, we think it will pick up by the summer. The consumer is going to get a pretty big influx of cash in May; we think those checks will go out — it will go out to a large number of Americans, that will help the retail sector, it will help a variety of sectors, and we expect that to stimulate the economy.
Q What’s the answer to the question, though? Do you think there will be a recession?
CHAIRMAN LAZEAR: As I said, we are predicting much slower growth for this quarter. Recessions are things that are declared by other people — National Bureau of Economic Research — tends to happen well, well, a long time after the actual activity. So what we’re focused on is economic growth and making sure that the economy turns around.
Q Okay. Can I follow up? I’m sorry, I already interrupted. (Laughter.) This is different than what you’ve said before. Before from the podium, you’ve said — or other presidential advisors have said that there will not be a recession. Have you downgraded your forecast for the economy?
CHAIRMAN LAZEAR: We have definitely downgraded our forecast for this quarter. I’m still not saying that there is a recession. There is no denying that when you get negative job numbers, realistically the economy is less strong than we had hoped it would be. That’s the reality. That’s why we initiated the stimulus package that we did.
The question as to whether the economy will turn around and turn around in second quarter or turn around in third quarter is one that — you know, I mean, we can guess on it, but we think that the activity will pick up and pick up in a strong way by this summer.
Q Does it matter —
CHAIRMAN LAZEAR: Go ahead. I’ll catch him later. Go ahead, sir.
Q Does it matter if it’s technically a recession? I mean, you seem to have left, by not predicting significant increased growth until the third quarter, you’ve left open the possibility for two negative quarters. But does it matter?
CHAIRMAN LAZEAR: Well, as I said, we would be disappointed even if growth rates were positive, but were low. And we are expecting low growth this quarter. Again, this is not unexpected. This was forecast not only by us; I think it was forecast by almost all of — people out on the street, all the independent forecasters. So this is consistent with the view out there. There is a bit of a revision down, I think as a result of some of these negative numbers.
But, again, I don’t think we want to overreact to this. Recognize that the unemployment rate is at 4.8 percent. Four point eight percent is below the average for the ’90s, ’80s and ’70s. So we’re still at a very low level of unemployment. That means jobs are available; people are able to find work. And by the way, that conforms with our anecdotal evidence, as well. When we talk to people who are in business, they tell us that it is still quite difficult to find talented workers. ”
Here is another quote:
“Q So how would you describe those analysts now who are out there saying — looking at today’s numbers and saying, this is it, this proves it across the line, we’re in a recession? Are they wrong? Are they overreacting? Are they premature?
CHAIRMAN LAZEAR: Well, again, what I would say this proves to me is that we are going to have a weak growth quarter. And whether you call that a recession or not is something that we won’t know for many months. We will know in a short period of time what the number is, at least what the initial estimate is of growth this quarter. And there is no doubt, I don’t think in anybody’s mind, that the growth rate will be low.
It is for that reason that we initiated the policies that we did. And as we look forward and we ask what kinds of things do we want to do, we think that this growth package that the President signed will actually work. We think it will stimulate the economy. We are not alone in that. If you look at the consensus of forecasters you will see that almost all of the forecasters are predicting the kinds of economic growth levels that we’re talking about for the summer, as well.”
Note that although Lazear does not think the economy is in a recession, he’s very averse to saying so definitively at this point. And his point is that whether the economy is or is not technically in a recession, it’s still very weak and requires stimulus, which he thinks will work.
We don’t have the full context of what he said to the WSJ. But these quotes show that he’s just as cautious as Yellen was.
Rick Stryker: Well, back in March, I would allow for the possibility we’d miss a recession (as indicated in this March 10 post). It is a substantially more measured assessment than Martin Feldstein’s noted in March 14. But back in March, I had a different view than I had in May.
Steven,
Yes, I agree it was an emergency and policy makers did the best they could given the extraordinary circumstances and limited tools they had.
I’m not sure whether TARP was beneficial or not but let me give you the argument against TARP.
TARP depends on the idea that adequate capital is very important in a financial crisis. However, as Gorton argues, systemic financial crises are about cash on hand, not capital. Capital is important for insuring solvency but even high amounts of capital cannot stop a run. Gorton notes that there is virtually no evidence of a relation between capital and bank failures in a systemic crisis.
But even if we don’t accept that, there is the further problem of how policy makers would know how much capital is needed. Determining the right amount of capital for a complex financial institution is an extremely hard problem requiring data, computers, models, etc. And yet, the capital infusion levels had to be decided quickly. Policy makers may be smart and experienced, but how could they have gotten this right? And even if they did manage to get it right, how would the public know it’s right? How then could the capital infusions stem the panic?
There are also consequences of the policy that Paulson was aware of and worried about. To avoid stigmatizing the weak banks, TARP had to be given to all banks. But the cost of that is the strong banks and indeed the whole financial system was stigmatized. Historically, the political atmosphere after the financial panics of the 1800s was always poisonous. TARP accentuated that problem because it allowed politicians and pundits on the Right and Left to convince the public falsely that TARP represented a transfer of tax payer funds to the financial system rather than the reality, which was a transfer from the financial system to the tax payers.
As a result of this poisonous political atmosphere, it was impossible to have a reasonable debate about what was needed in financial regulation. The myth arose that the panic happened because there was too little regulation. The solution became more regulation.
But the problem was not too little or too much regulation. The problem was that we had the wrong regulation that had not adapted to the changes in the financial system. Rather than developing the right regulation, we took the substantial regulation that we already have and just decided to do a lot more of the same. And TARP helped to bring about this unfortunate outcome.
This is the world we live in. If most people had been responsible for policy, and then in the conduct of those duties failed to alert the responsible people of a material risk, they would be fired, and they would not be taken seriously after they were fired.
This happens to auditors and others not infrequently in the private sector.
But in the world of politics and economics there are no such consequences. Thus advocates of the Iraqi War are not called into question when they argue for the next war. And those who failed to see the crisis warning WHEN THEY HAS A POSITION OF POWER feel no reticence in opining confidently about how the crisis they didn’t foresee should have been resolved.
In fact, this is the central irony: conservatives go on and on about moral hazard and accountability, never once admitting the fact they have never been held accountable for their own disasters.
No one is more adverse to moral hazards that economists.
This might be a good time to read Calomiris and Haber. Their new book will be out in January, but last April Calomiris gave a preview at FRB Atlanta;
http://www.frbatlanta.org/documents/news/conferences/13fmc_calomiris.pdf
Rick –
If TARP was about net neutral (US govt out about $20 bn), doesn’t that suggest value was transferred to the banks?
In what sense did TARP poison the atmosphere? How did TARP promote more regulation?
I agree that, time and time again, we see that regulators, industry commentators, and politicians argue that more capital and regulation will make the system safer. If you follow Gorton, this is clearly untrue. The crisis arose because i) banks cannot issue risk-free securities and ii) the tenor of bank assets and liabilities are mismatched. This is inherent in the nature of banking and cannot be regulated away.
In 2008, there was no “deposit insurance” for the shadow banking system, thus it was prone to a run–and this did in fact occur. Dodd-Frank and other subsequent regulation did not address this weakness, to the best of my knowledge. Thus, the shadow banking system remains vulnerable to a run today. Dodd-Frank et al created the impression of having dealt with the risk of a run, when in fact it didn’t. Meanwhile it created a lot of other unnecessary drag on the system.
But is all this attributable to TARP? Or is it attributable to a financial crisis and a lot of banking experts, regulators, and politicians who haven’t read Gorton?
Nonsense, Fladem.
If the Republicans hadn’t been held accountable, then they wouldn’t have lost the White House and both houses of Congress. Were that true, we wouldn’t have had Obamacare, and Republicans wouldn’t be threaten to shut down the government.
If you’re a conservative (fiscal or otherwise), the fallout from the Great Recession, in terms of policy and politics, was horrific.
Rick Stryker You included this quote from Lazear: We think it will pick up — as I mentioned, we think it will pick up by the summer. The consumer is going to get a pretty big influx of cash in May; we think those checks will go out — it will go out to a large number of Americans, that will help the retail sector, it will help a variety of sectors, and we expect that to stimulate the economy.
This pretty much proves my point. Lazear’s op-ed in May was driven by the need to cheerlead the May tax rebates. The Administration was pinning its hopes on the stimulus from the rebates. As I said, I find it very hard to believe that it was just a coincidence that Lazear picked to publish his op-ed at the same time that the Treasury was cutting checks and direct deposits. Lazear wanted people to feel confident about the economy so they would go out and spend those tax rebates. That’s cheerleading, not economic analysis.
Steven,
I was referring to the Capital Purchase Program, that part of TARP that provided capital injections to 707 financial institutions. Although the rest of TARP ultimately will likely be a net loss to the taxpayers, you will see if you click on the link that Treasury currently estimates that the Capital Purchase Program has made $26 billion in profits for the tax payers. People don’t commonly realize this however, since they don’t distinguish the Capital Purchase Program from TARP in general.
I was not trying to argue that TARP caused the poor direction of regulation, but rather that it contributed to it. Early on, people started making the argument that deregulation had encouraged excessive risk taking in the financial sector, with the resulting losses supposedly made up by the taxpayers through TARP. The solution politicians offered was too impose much greater regulation in order to protect the tax payer. Politicians, pundits, and newspapers thundered that the tax payers had bailed out the financial system, which tended to confirm the theory in people’s minds that increases in the kinds of regulation currently in place were needed. In that kind of inflamed environment, it became very difficult to have a reasonable debate about what was really needed. Someone like Gorton (and others) just couldn’t be heard.
The fact that TARP may have encouraged poor policy subsequently might be acceptable if it was necessary to stave off a financial panic. But the rest of the argument I made is that capital doesn’t stave off a panic and even if it did, policy makers can’t tell how much capital to infuse. So, there is no counterbalancing benefit.
Patrick Sullivan,
Yes, the new Calomiris and Haber book looks like it will be very good. Calomiris really excels at knowing the history of banking as well as having a deep understanding of the institutional details. I believe understanding the history and knowing how things really work is more valuable than models and econometrics.
Rick – Ah, see what you mean. But this issue is primarily the warrants, no? Dividend paying preferred equity doesn’t seem so onerous. But the warrants seem odd.
Menzie,
You seem to think that being “responsibly cautious” is the essential difference and that by May 2008 the situation should have been much more clear.
Let’s jump forward to July then and compare Yellen and Lazear. In Yellen’s speech to the University of California San Diego Economics Roundtable, she had this to say on July 7, 2008:
“Now I’d like to pull all of these threads together to give you my outlook for the economy. Activity has been weak since late last year, and, given the three shocks I’ve discussed, I expect the economy to grow only modestly for the remainder of the year, but to pick up next year. The earlier policy easing by the Federal Reserve will help cushion the economy from some of the effects of the shocks, and the fiscal stimulus program is helping at present. Over time, the drag from housing will wane and credit conditions should improve.”
I invite you to read that speech to verify that the “responsibly cautious” caveats are no longer there. Yellen is feeling more certain that there is no recession by July.
Now let’s see what Lazear has to say in the press briefing on July 28:
“CHAIRMAN LAZEAR: Thank you, Jim. I’d like to talk to you today about our forecast. GDP is forecast to grow at 1.6 percent this year. We believe that this forecast is realistic and consistent with others from both private and government forecasters. It is clear that 1.6 percent growth is below the average for the United States, but the positive growth that we are forecasting for 2008 reflects the resilience of the American economy in the face of significant shocks.
The economic stimulus that the President signed in February is a contributing factor to forecasts that sustain positive growth. Headline inflation is expected to moderate over the next few months, which should bring the rate for 2008 to around 3.8 percent. The 2009 inflation rate should be considerably lower, and we are forecasting 2.3 percent. Much of this reflects expectations that increases in energy and food prices that we saw this year will not be repeated. GDP price inflation will be significantly below headline levels at 2.2 percent.
The 1.6 percent GDP growth number is revised down from 2.7 percent that we forecast last autumn. There are three primary reasons. First, the rapid rise in oil and other commodity prices has put downward pressure on the economy. Second, tightness and reorganization of credit markets has affected business investment and other forms of borrowing. The extent of the credit market problems that materialized over the first half of 2008 were not built into the autumn forecast. Finally, housing has continued to be a drag on the economy and has subtracted more from GDP than was expected. Offsetting these drags on GDP growth is the expansion of exports, which has contributed significantly to the positive growth we have seen in recent quarters.
The unemployment rate is expected to remain close to its current levels into 2009. Although these levels are elevated relative to the last couple of years, they are not high by historic levels and are currently below the average for the 1990s. Unemployment rates should decline thereafter, eventually reaching what we believe to be long-run sustainable levels of 4.8 percent.
Interest rates, which are currently low, are forecast to revert to their long-term levels over time. This employs — I’m sorry — implies that the forecasted rate of 4 percent for 10-year Treasury notes will eventually rise to 5.3 percent, consistent with our inflation forecast and with historic relationships.
All forecasts are subject to uncertainty, and this one is no exception. We believe it reflects the best information and statistical methods available, and we have confidence that it provides accurate estimates of the key variables.
Thank you. We’d like to take your questions now.”
Lazear is more detailed in his forecast but it’s essentially the same as Yellen’s. Both agree that there is no recession. And this, time it’s Lazear who caveats by noting that “all forecasts are subject to uncertainty.”
According to your argument, both Lazear and Yellen should have been even more unsure by July. But they are in essential agreement.
There is no real difference between the two. If you want to use a nickname for one, you really should use a nickname for the other. I don’t think either deserves a nickname, since a wrong forecast does not invalidate someone’s views.
2slugbaits, I haven’t forgotten you. If you think Lazear was cheerleading in March 2008, how do you explain the agreement between Lazear and Yellen in July? Note how Yellen agrees that the fiscal stimulus is helping. Could it be possible that Lazear really believes what he is saying?
Steven,
Actually, the warrant proceeds have been about $8 billion and the dividends and interest income have been about $18 billion. The most recent Treasury monthly report to Congress lays out details on the disbursements and P&L not only for the banking programs, but also the credit market programs, the housing program, the automotive industry financing program, etc.
It is good to see so many commenters challenging Menzie’s need to have economics take a back seat to leftie politics.
Rick Stryker: Gee, is it a coincidence you omitted this paragraph from the speech?
Do you even read what you link to?
Rick Stryker Note how Yellen agrees that the fiscal stimulus is helping. Could it be possible that Lazear really believes what he is saying?
Nowhere did I say that the tax rebates weren’t helpful, at least to some extent. One could argue about whether those rebates were large enough or should have been backed by additional spending, but I don’t think there’s any disagreement that those rebates had a positive effect. That is not the issue. The issue was whether or not Lazear was cheerleading in May 2008. One can afterall both believe in something and still cheer for it. If Lazear didn’t confidently believe in his May forecast, then he was lying to WSL op-ed readers. If Lazear did confidently believe it, then you might as well concede the point that Lazear simply blew the forecast big time.
You still seem to think that a “confident” forecast is the same as an “uncertain” forecast. The other stryker has been accusing you of not supporting your posts with links. I think that stryker is wrong; however, sometimes I question whether or not the English language is your native tongue because some of your interpretations of what is being said frequently leave me slack jawed in disbelief. This is one of those times. I do not see how anyone familiar with the English language could conclude that Yellen and Lazear were making equivalent economic assessments.
Menzie,
Of course I read that but you didn’t read my statement or the speech closely enough. My point was, to quote myself:
“According to your argument, both Lazear and Yellen should have been even more unsure by July. But they are in essential agreement.”
(Of course I mean more unsure about whether the economy was in recession.)
Yellen is discussing both up and downside risks around her forecast in the speech. You quoted the downside risks. But you neglected to quote the upside risks to inflation she mentions. Allow me to quote:
“On balance, I still see inflation expectations as reasonably well anchored and I anticipate that consumer survey measures will come down once oil and food prices stop rising. But the risks to inflation are likely not symmetric and they have definitely increased. We cannot and will not allow a wage-price spiral to develop.”
Between May and July, Yellen has become more concerned about inflationary pressures developing. And she thinks the inflation risks are asymmetric on the upside. But you can’t believe that and also think the risk of being in a recession has increased.
It’s clear that by July Lazear’s and Yellen’s views have converged. Lazear got to Yellen’s July position a little earlier–that’s all.
You are trying desperately to wriggle off the hook here by making these absurd distinctions between Yellen and Lazear. As Darren is suggesting, the real distinction between the two is that you don’t agree with the politics of one of them.
Rick Stryker: Actually, it seems everybody but you thinks there is no distinction. I don’t see Yellen anywhere saying the two words, “no” and “recession”, conjoined. And that is the key point. If you want to say their views are the same, go ahead, but I don’t think most people with a comprehension of English and reading the WSJ article would argue they are the same. In fact, I’d say you’re trying to wriggle out of the virtually indefensible absolutist statement that Lazear made in the WSJ.
For your additional reading, please see Jeff Frankel’s assessment of Lazear’s WSJ statement (Frankel was, and remains, a member of the NBER BCDC).
I think this exchange makes me ever the more determined to continue to refer to Ed (“We are not in a recession”) Lazear in every post I can.
I have little respect for the views of most “serious people” as regards the housing bubble. Looking at price to rent ratios for housing, I started shorting the DOW in 2006 (there was no Shiller index then), waiting for the moment when “If a thing can’t go on, if it simply can’t continue….it won’t” to come true. Of course, I lost a lot before things finally went my way, but that’s just because I’m an economist. I never doubted the bet. To me, it was clear that housing was in a bubble and that there would be serious repercussions. Not all of my predictions panned out – I thought serious measures would be taken against Asian currency manipulation when unemployment became serious.
Going forward is much less exciting – I see only very slow growth and high unemployment for the foreseeable future, with a small chance for substantial inflation or a ruinous euro crisis. The next big thing will be when the full faith and credit falls seriously into doubt. Unless we do something to reverse current account deficits and entitlements, it seems inevitable. The debt ceiling crisis we suffer periodically will seem like a very tame animal compared to the wrenching dislocations that are coming our way.
FWIW, I am again shorting the DOW.
Menzie,
I’m saying that it’s a distinction without a difference but you and 2slugbaits keep talking semantics. Let’s try to look at it from the point of view of a policy maker by imagining this scene:
……………………………………….
President Obama is playing his daily 27 holes of golf. On the 7th hole, he hits the ball into the rough. Cursing his bad luck, he goes to find his ball and as he bends over to retrieve it, his blackberry falls to the ground. The President sees that there has been a string of bad economic news recently. “Better call my economic advisors when I get a break,” he says to himself.
Fortunately for the country, there is a slow party on the 15th hole and the President has a few free minutes. After getting an update from the IRS on some top secret projects, he calls his economic advisors, Dr. Ivana B Hedged and Professor Al B. Sure.
“What’s going on?” the President barks. “Are we in a recession?”
“The data are pretty clear that we are not in a recession,” Professor Sure responds. “True, the economy has been very weak but we think the easier monetary policy and the fiscal stimulus we have put in are working. We will still see sluggish economic growth over the rest of the year but with moderating inflation. We think growth will be better in 2009.”
“I saw that quote in the WSJ,” the President replies. The press seems to think you said that we are definitively not in a recession. Is that your view?”
“Of course not,” replies Professor Sure. “I said pretty clear. Not absolutely clear. I didn’t say we are certain we are not in a recession. It could happen of course but I’d be surprised if the NBER committee looked back on this period and called it a recession. I think the policies are working”
“What do you think Dr. Hedged?” “Well,” she replies with some deliberation and hesitation, “the economy has been very weak but we think the easier monetary policy and fiscal stimulus have been appropriate. I expect moderate growth over the remainder of the year. I think inflation will moderate but we need to be vigilant on any acceleration of inflation. I expect growth to improve in 2009. But I want to emphasize that there is an unusual amount of uncertainty in understanding where the economy is right now and whether the forecast is right.”
“Ok, fine,” the President replies. “But are you recommending that we do anything different? How do you differ from Professor Sure? You seem a lot less certain. Give me something I can act on.” “I think the current policy stance is appropriate for the situation,” she answers. “We just need to be cautious and watch the situation carefully.”
The President shrugs. “Of course we’ll always watch the situation. Sounds like the usual CYA.” he thinks to himself. Not seeing any essential difference between the views of his advisors that he can act on, he gets back to the more important question of how to avoid the water trap on the 15th hole.
A year later the President is ecstatic. He’s just birdied on the 4th hole and as he reaches down to retrieve his ball from the cup, his blackberry falls out of his pocket. “We’re in a recession?” the President exclaims. “How could this have happened?” The President thinks back to his meeting on the golf course a year ago. Who should he blaim? Should it Professor Sure for not recognizing the uncertainties? Or should it be Dr. Hedged for recognizing the uncertainties but not recommending a different policy? Actually, the President realizes, there was no difference in their views that he could act on. Suddenly, the solution hits him. “I’ll just blame the Republicans,” the President thinks to himself. “That always works.”
Menzie,
I’m saying that it’s a distinction without a difference but you and 2slugbaits keep talking semantics. Let’s try to look at it from the point of view of a policy maker by imagining this scene:
……………………………………….
President Obama is playing his daily 27 holes of golf. On the 7th hole, he hits the ball into the rough. Cursing his bad luck, he goes to find his ball and as he bends over to retrieve it, his blackberry falls to the ground. The President sees that there has been a string of bad economic news recently. “Better call my economic advisors when I get a break,” he says to himself.
Fortunately for the country, there is a slow party on the 15th hole and the President has a few free minutes. After getting an update from the IRS on some top secret projects, he calls his economic advisors, Dr. Ivana B Hedged and Professor Al B. Sure.
“What’s going on?” the President barks. “Are we in a recession?”
“The data are pretty clear that we are not in a recession,” Professor Sure responds. “True, the economy has been very weak but we think the easier monetary policy and the fiscal stimulus we have put in are working. We will still see sluggish economic growth over the rest of the year but with moderating inflation. We think growth will be better in 2009.”
“I saw that quote in the WSJ,” the President replies. The press seems to think you said that we are definitively not in a recession. Is that your view?”
“Of course not,” replies Professor Sure. “I said pretty clear. Not absolutely clear. I didn’t say we are certain we are not in a recession. It could happen of course but I’d be surprised if the NBER committee looked back on this period and called it a recession. I think the policies are working”
“What do you think Dr. Hedged?” “Well,” she replies with some deliberation and hesitation, “the economy has been very weak but we think the easier monetary policy and fiscal stimulus have been appropriate. I expect moderate growth over the remainder of the year. I think inflation will moderate but we need to be vigilant on any acceleration of inflation. I expect growth to improve in 2009. But I want to emphasize that there is an unusual amount of uncertainty in understanding where the economy is right now and whether the forecast is right.”
“Ok, fine,” the President replies. “But are you recommending that we do anything different? How do you differ from Professor Sure? You seem a lot less certain. Give me something I can act on.” “I think the current policy stance is appropriate for the situation,” she answers. “We just need to be cautious and watch the situation carefully.”
The President shrugs. “Of course we’ll always watch the situation. Sounds like the usual CYA.” he thinks to himself. Not seeing any essential difference between the views of his advisors that he can act on, he gets back to the more important question of how to avoid the water trap on the 15th hole.
A year later the President is ecstatic. He’s just birdied on the 4th hole and as he reaches down to retrieve his ball from the cup, his blackberry falls out of his pocket. “We’re in a recession?” the President exclaims. “How could this have happened?” The President thinks back to his meeting on the golf course a year ago. Who should he blaim? Should it Professor Sure for not recognizing the uncertainties? Or should it be Dr. Hedged for recognizing the uncertainties but not recommending a different policy? Actually, the President realizes, there was no difference in their views that he could act on. Suddenly, the solution hits him. “I’ll just blame the Republicans,” the President thinks to himself. “That always works.”
‘Do you even read what you link to?’
Now that is funny! (Coming from a guy who admitted he did not read the Lazear-Hennessey paper.)
Patrick R. Sullivan: Well, I linked to the Fox news article, not the paper, and that was what I was laughing at. I agree, it would be nice if we all read all the references for each and every article, but few do. In fact, I bet you didn’t read each and every link to this post, and there are only ten in this one.
Don,
“I thought serious measures would be taken against Asian currency manipulation when unemployment became serious. ”
I would find it hilarious if the greatest currency manipulator in the history of time demanded action against Asian currency manipulators. Otherwise your post could have been written by me.