The Weak Dollar Does Not Support Higher Energy Prices!!!!!

The pricing of oil in dollars creates an incredible amount of confusion among people who should know better. For example, USA Today tells us that: "how long the weak dollar can support energy prices, if demand is still weak, remains to be seen."

This one deserves a big "huh?" If the dollar falls in value against other currencies, then other things equal, oil should rise in price measured in dollars. That would be necessary to keep it from falling in price measured in euros, yen, and everything else. If the dollar is falling in value against other currencies, then the dollar price of oil must rise just to keep it constant measured against other currencies. So even with some weakening of demand for oil, we should expect the dollar price to rise, if the dollar continues to fall.

It is also worth noting that oil is not necessarily sold for dollars. If the Saudi government signs a contract to sell oil to a European, Japanese, or Brazilian firm, it can agree to accept any currency it chooses. Generally this trade is done in dollars, but there is no rule that requires the trade take place in dollars and often it does not.

--Dean Baker

The Chinese are Morons Argument

The argument that China is worried that it will lose money on its dollar holding because of a fall in the value of the dollar implies that the Chinese are morons. There can be no doubt that the dollar will fall and that the Chinese will lose money on their dollar holdings. The only thing that keeps the dollar from falling now is the decision by the Chinese government to buys hundreds of billions of dollars a year. Of course China can keep the dollar from ever falling as long as it is prepared to buy ever more dollars, just as it could have kept shares of Pets.com at $100 if it continually bought more shares. (By the way, the dollar will fall because of our trade deficit, not the budget deficit. If we had the same trade deficit and the budget was in surplus by $1 trillion a year, the dollar would still fall.)

The only plausible story for China's buying of vast amounts of dollars is to support its export market to the United States. It could do much better investing its surplus in euros, yen, or almost any other currency in the world or just about any commodity. China knows it will take a bath, arguing otherwise is saying that the Chinese leadership is stupid. That view may be taken seriously by David Brooks, but it need not trouble serious people.

--Dean Baker

The Employment Report: It's Even Worse Than It Looks

There were few people in the media still trying to spin the "green shoots of recovery" story following the release of the June employment report yesterday, but most news reports managed to overlook one of the most important items in the data.

The downturn has led employees to cut back both jobs and reduce hours for those who still have jobs. In June the economy reportedly lost 467,000 jobs in June. This number was considered a surprising jump from the 322,000 rate of job loss in May (it should not have been a surprise, given that weekly unemployment insurance filings averaged well over 600,000). Nonetheless, the June pace of job loss was still well below the 670,000 per month average from October to April.

However, the Labor Department's index of hours worked fell by 0.8 in June, the same as the average for the October to April period. While hours are poorly measured, and this drop could be partially reversed in future months, the June data implied that employers are still cutting back work hours at the same pace as they did in the period of the economy's sharpest decline.

It is important to follow trends in both hours and employment. Obviously workers would rather see their hours cut than lose their jobs, but if workers are getting paid for fewer hours each week, then they will be seeing smaller paychecks, and therefore cutting back their consumption.

The recent data may indicate that the economy is not declining at the same rate as it did at the start of the year, but there can be little doubt that it is still heading downward at a pace that at other times would be quite scary.

--Dean Baker

Is the European Union Being Too Harsh on Latvia

Latvia was one of the great bubble countries of the world, until last year, borrowing vast sums (denominated in euros) from west European banks. The country is now seeing its economy contract at close to a 20 percent annual rate. The European Union is offering to help (how else can those loans to the banks be repaid?), but is demanding that Latvia move quickly to reduce its deficit.

The NYT reported that the EU relaxed the conditions on its loans, allowing Latvia to reach a deficit target of 3.0 percent of GDP in 2012 rather than 2011. The NYT notes a controversy over whether this pace of deficit reduction is still too fast. It would have been helpful to point out that Latvia's debt to GDP ratio was just 17 percent at the end of 2008. This would suggest that it could easily support considerably higher debt levels.

Given that Latvia's economy is likely to still be far from full employment in 2012, and that it can anticipate relatively rapid growth over the longer-term as it catches up to west European living standards, the 3.0 percent deficit target for 2012 could still be overly restrictive.

--Dean Baker

Morgan Stanley Profits: The Story on Risk Goes Both Ways

The NYT noted that one factor depressing Morgan Stanley's profit last quarter was its improved credit standing, which increased the market value of its debt. The NYT implied that this was a peculiar accounting rule.

The rule may be peculiar, but it goes both wars. In prior quarters, Morgan Stanley increased its profits (or lowered its losses) by writing down the market vale of its debt as its credit quality deteriorated.

--Dean Baker

Thomas Friedman is Right!

I just wanted to see if my computer could type those words. His assessment of the Waxman-Markey bill looks right on the money to me. It's worth reading.

--Dean Baker

Political Philosophers Take Over Congress

That would seem to be the case based on a front page Washington Post article with a subhead: "Diverse Ideology Cuts Democratic Edge." The piece is referring to a number of Democrats in the House and Senate who tend to side with the Republicans on many issues.

It could be the case that these Democrats side with Republicans on issues like health care because they have carefully contemplated issues and concluded that the Republicans were right. Of course it is also possible that they side with Republicans on issues like health care because they get lots of campaign contributions from special interest groups like the insurance companies, the pharmaceutical industry, and the A.M.A.

I don't know the answer to this question, but neither does the Post. It might be best if the Post just gave its readers the information and let them decide for themselves rather than asserting that politicians are motivated by their political ideology.

It is worth noting that the views of these Democrats are close to those of the Post (a.k.a. "Fox on 15th). It is of course more desirable for a politician to have their actions attributed to political principle rather than campaign contributions.

--Dean Baker

Now the Media Are Calling Other Governments "Socialists"

The Republicans are fond of calling any Obama administration policy that they don't like "socialist." Apparently focus groups show that it can be effective rhetoric with at least some segment of public, but it's not a terribly serious way to discuss policy.

Therefore it was surprising to see the NYT refer to some of the policies of the Argentine government as "socialist." Unless the government itself describes the policies this way, the NYT would be providing more information to readers if simply described the content of the policies without an adjective that will likely be viewed by many as pejorative.

--Dean Baker

What Does "Free Trade" Have to Do With Taxing Greenhouse Gas Emissions

That is the question that the NYT should have been asking in an article that reported President Obama's opposition to taxing imported items from countries that have not taken steps to curb greenhouse gas emissions. The point of his cap and trade program is to make items that require large amounts of greenhouse gas (GHG) emissions more expensive, thereby discouraging their consumption.

If goods can just be imported from countries that have no tax on GHG, then the point of cap and trade is undermined, as goods that require large amounts of fossil fuels will just be produced abroad. It is understandable that importers and other special interest would be opposed to measures that prohibit this sort of evasion, but that has absolutely nothing to do with "free trade."

The NYT completely misrepresents the issue by implying that this is somehow a debate over principles of free trade. It is a debate of whether special interests will be allowed to import goods to undermine the limits set by a cap and trade bill for GHG emissions.

--Dean Baker

Washington Post (a.k.a. Fox on 15th) Starts Evaluating Political Arguments for Substance

It would be great if, as a general practice, newspapers did take the time to assess the accuracy and plausibility of the arguments put forward by political figures. If they considered this part of their job, they would have pointed out, for example, that drilling for offshore oil would have never have a substantial effect on the price of oil ever, and none at all for the next decade. If they evaluated the substance of arguments that could have told readers that the projected cost of the Waxman-Markey bill to limit global warming is trivial compared to the cost of the Iraq War.

However, newspapers rarely view it as their job to evaluate the validity of the arguments by political figures. That is why it was striking to see the Post tell readers in a news story that Adam Green, the interim chief executive of Change Congress (a grassroots Democratic organization) "in an interview, was hard-pressed to articulate a substantive argument for the public plan [a public health insurance plan]."

Of course the Post (a.k.a. Fox on 15th) has not been supportive of President Obama's health care plan.

--Dean Baker

Millions, Billions, Whatever: It's Hard to Get Good Help

Bernie Madoff did not forfeit $170 billion in assets, in spite of what the USA Today headline and the first sentence of the AP article say. Obviously it was a typo (they meant millions), but it is really asking too much of the copy editors of the business section of the country's most widely circulated paper to know the difference between millions and billions.

Bill Gates and Warren Buffet never had $170 billion. Madoff might be rich, but he's not that rich.

--Dean Baker

The Mysteries of the Housing Wealth Effect

The saving rate has risen, surprise, surprise, surprise. The housing wealth effect is one of the most well-known phenomena in economics. The basic point is that people will spend more as a result of their housing wealth. Estimates of the size of the effect vary, but most are in the range of 5-7 percent, meaning that people will spend 5-7 cents each year out of every dollar of housing wealth..

Because of this wealth effect, it is not surprising that the saving rate has now risen from below zero to above 6.0 percent. (The actual increase is even greater due to some measurement issues resulting from the statistical discrepancy in the National Income and Products Accounts.) The loss of more than $6 trillion in housing wealth implies a cutback in annual consumption on the order of $300 billion to $420 billion (3.0-4.2 percentage points of disposable income). With stock wealth also falling about $8 trillion (the stock wealth effect is estimated at 3-4 cents on the dollar), it would have been shocking if saving had not increased.

Nonetheless, the media continue to report it with surprise and suggest that a turnaround is imminent, even though housing wealth is still falling at the rate of $400 billion a month. For example, the Post attributes a statement to economist Mark Zandi about more affluent homeowners: "He says they have gotten 'their savings rate where they want it' and could resume spending soon."

Of course, if they keep their saving rate where they want it, they won't start spending, they will continue saving at the same rate. (Most likely the Post misrepresented Zandi's comment.)

--Dean Baker

The Post Still Hasn't Heard of the Housing Bubble

News travels slowly to our nation's capital. In an article on the slow rate of sales of high end homes the Post never once mentions the extraordinary run-up in prices over the last decade. It's only sources are connected with the real estate industry, including Lawrence Yun, the chief economist of the National Association of Realtors.

--Dean Baker

Bernanke and BoA: Read the Accusation

The Republicans seem intent on arguing that Federal Reserve Board Chairman Ben Bernanke threatened to remove Bank of America CEO Ken Lewis, if BoA backed out of its agreement to buy Merrill Lynch. Mr. Bernanke denied the accusation.

It might have helped matters if someone had bothered to read the evidence. The Post reports part of e-mail from Jeffrey Lacker, president of the Federal Reserve Bank of Richmond: "Just had a long talk with Ben. .... Also intends to make it even more clear that if they play that card [backing out of the purchase agreement on Merrill Lynch] and they need assistance, management is gone."

Note the "and they need assistance" part of the e-mail. Is this a threat to remove Ken Lewis? It looks like a statement from Bernanke that if BoA does not cooperate in carrying through on its agreement, then Bernanke will not help him in the future if he needs it.

That seems a bit far from a threat to remove Lewis. It is simply a statement that if Lewis doesn't cooperate with the Fed, then Bernanke will not come to his assistance if he needs it.

Given the large list of questionable actions in the various bailouts, this one doesn't seem to be worth a lot of time.

--Dean Baker

CBO Reports That If Health Care Wrecks the Economy We Will Have a Very Serious Deficit Problem

The Post (a.k.a. Fox on 15th Street) only told readers the second part of this story. CBO projected that the deficit would exceed 42 percent of GDP in 2080 under its baseline assumptions. This is like telling people what the deficit would be after a nuclear war without calling attention to the fact that the projection assumes a nuclear war. If the health care costs underlying these projections prove accurate, the economy will be so badly wrecked, no one will care about the size of the deficit.

-- Dean Baker

Can NPR Reporters Say "Trillion Dollars" Like Normal People?

They seem to always have a need to emphasize the "tr" in some peculiar way. Perhaps they have difficulty with big numbers. The latest problem stems from a discussion of handling the cost of President Obama's health care reform proposal over the next decade.

Since NPR has a problem pronouncing the word "trillion," maybe it should just say "half of one percent of GDP." This would likely be more meaningful to listeners and would perhaps be easier for NPR reporters to say.

--Dean Baker

Actually, People Can Start Work Later and Retire Younger

The New York Times reported on plans in France to raise the retirement age from its current 60 years. The article included a quote from France's recovery director, Patrick Devedjian: "We start working later and later, and we stop, or at least we used to stop until now, earlier and earlier, and we live longer and longer,” Mr. Devedjian said. “Such an economic model is impossible.”

In fact, this model is not impossible. If workers opt to take the benefits of higher productive growth in the form of leisure time, a continual increase in the length of retirement and shortening of normal work lives is entirely workable. Since there is a strong correlation between income and greenhouse gas emissions, this approach is extremely desirable from an environmental perspective.

--Dean Baker

Deficits, Interest Rates and the Economy

The NYT has a lengthy front page article telling readers that President Obama wants to structure his health care reform package in a way that does not raise the deficit. It cites Robert Greenstein, the head of the Center for Budget and Policy Priorities (who is not an economist), saying that: "There’s a concern that if Congress were to pass a big health care bill that was heavily deficit-financed, financial markets could react negatively, with higher interest rates that could deepen the recession.”

Actually, it is almost inconceivable that any possible impact of a boost to the deficit from health care reform would have such a large effect on interest rates as to hurt the economy enough to offset the help that any increase in the deficit would provide to the economy. It is implausible that President Obama's advisors actually believe this. It is plausible that they believe that they could suffer political harm from raising the deficit, since many Republicans and media outlets like the Washington Post and Fox news will attack him for it.

The NYT should have found an economist to explain the relationship between deficit spending and economic growth in the context of a severe downturn like the one we are currently experiencing.

[For the record, it is perhaps worth explaining how higher interest rates, caused by larger deficits, could affect demand. There are three main channels.

Higher interest rates have some impact on investment, but most research shows that this effect is very limited. Growth in demand is a far more important determinant of investment than interest rates.

Higher interest rates can affect demand through consumption. If interest rates fall, then it is easier for people to borrow. In the current context, it is unlikely that lower interest rates will affect consumer spending to any great extent since most people have very limited ability to borrow as a result of the collapse of home prices and the loss of home equity. Also, almost everyone who has the ability to refinance has already done so.

Higher interest rates can have an effect on housing demand, although the marginal economic impact of even fairly large changes in interest rates (1.0-2.0 percentage points) is likely to be limited. The demand generated by sales of existing homes is not very large so that even a large increase/decrease in sales will not have very much impact on the economy. With the enormous inventory of unsold homes, it is almost inconceivable that building will pick up appreciably in the next couple of years.

Higher interest rates can raise the value of the dollar as foreign investors decide to hold more dollar-denominated assets. This would increase the trade deficit. However, the value of the dollar seems to be controlled far more by political decisions than market forces at the moment, so it is unlikely that it would rise much if the deficit grew.

In short, it is difficult to identify a channel whereby a higher long-term deficit can have a substantial negative impact on demand in the near future.]

--Dean Baker

Can the Post Find Any Pessimistic (i.e. realistic) Economists to Comment on the Fed?

The economists commenting in the Post on the Fed's latest decisions on interest rates seem convinced that everything is just fine. One of them, Kurt Karl, chief economist for Swiss Re, is quoted as saying: "If you were doing a progress report and had milestones every six weeks, they are right on target. ... There's no need to change their game."

Actually, the economy is not following the Fed's target. They had projected that unemployment rate in the fourth quarter of the year would average 8.9 percent. It's already at 9.4 percent and clearly will be much higher by the 4th quarter. That is about as far from the target as the Fed could plausible be.

It is understandable that the Post would want to include some wildly optimistic comments, since these represent the mainstream of the economics profession. However, it would also be useful to include some from economists who are not known primarily for how wrong they have been about the economy.

--Dean Baker

The Washington Post Still Hasn't Heard of the Housing Bubble

A front page article notes the flood of homes awaiting foreclosure and tells readers: "it masks the full extent of the foreclosure crisis and threatens to depress prices even further just as some parts of the country are hinting at recovery.

An article in the business section quotes an economist from Global Insight: "historically, it has taken a while for home prices to rebound after a major decline."

Actually, prices do not recover from a housing bubble. The Post and its expert sources should know that.

--Dean Baker

Verizon Is Censoring Beat the Press

Okay, it's probably not deliberate, but they are keeping me from blogging nonetheless. I moved a week and a half ago and Verizon still does not have my Internet working (ordered 3 weeks prior to moving). I suppose that I shouldn't blame Verizon. This is what happens when you move to a distant area three miles from the White House.

Anyhow, they promise Internet on Thursday, but I've heard that one before. Until then, BTP will be more intermittent than usual.

--Dean Baker

Congress Wants to Give You $15k to Sell Your Home to Your Brother

According to USA Today Congress is considering a bill that would give a $15,000 tax credit to anyone who buys a home. There is currently a $8,000 tax credit in place for first-time home buyers.

While the first-time buyer credit at least expands the market for homes (although it increases vacancies in the rental market, putting downward pressure on rental prices), extending the credit to all buyers would have no net effect, since the additional buyers would also be selling homes. This tax credit would effectively be giving $15,000 (three years of TANF benefits) to people to shuffle homes. This point should have been mentioned in the article.

--Dean Baker

NYT Pushes Non-Existent Signs of Recovery and Argues for Deficit Reduction

The NYT appears to be following the Washington Post's practice in running shrill calls for deficit reduction as news stories. Today the NYT tells readers that: "yet cautious signs of an economic recovery, which the White House takes as vindication, actually make the strategy [delaying measures to reduce the deficit] harder to maintain." The statement about signs of recovery are bizarre given that most economists finally recognize that the unemployment rate will cross 10 percent in the next few months and is virtually certain to remain above 10 percent for most or all of 2010.

Deficit reduction in this context would simply raise unemployment further. In addition, it would reduce spending on physical and social infrastructure, increasing the burden on future generations by lowering the economy's productive capacity.

The article also wrongly asserts that the United States needs to keep borrowing trillions of dollars from foreign investors. If foreign investors stopped lending the United States money, then the dollar would fall in value against other currencies, thereby making our exports more competitive in international markets and imports more expensive in the United States. The resulting improvement in our trade balance would give the economy a substantial boost. (Ostensibly, both the Bush and Obama administration had been lobbying China to stop investing in the United States, since this is how it "manipulates" its currency.)

--Dean Baker

Is the Obama Plan Officially "Expensive?"

The first paragraph of a Washington Post piece on a drug industry commitment to lower drug prices described his health care plan as "expensive and ambitious." One can certainly describe our current health care system as "expensive" although the Post almost never does. It is less clear that President Obama's plan, which is intended to rein in costs, should be described this way.

It would also have been helpful if the article had put the projected $80 billion in savings in context. This is equal to a bit more than 2 percent of the $3.8 trillion that the Centers for Medicare and Medicaid Services project the country will spend on drugs over the next decade. The Post quotes its unnamed source as saying: "this is real money on the table."

In the next paragraph the Post tells readers that "The concessions by drug manufacturers would essentially lower the cost of reform by a small fraction of the $1 trillion needed." That fraction would be 8 percent, assuming the commitment is met.

--Dean Baker

Health Care Protectionists Cannot Even Envision Trade

Imagine a front page Washington Post article that talked about how the United States had a shortage of small cars. The article would talk about the limited capacity of the various small car assembly plants in Michigan, Ohio and elsewhere in the country. It would then discuss the amount of lead time needed to build new plants. It would also talk about the need to raise small car prices because it is so much more profitable to build big cars.

Imagine that the article never once mentioned the possibility of importing small cars. That's the front page Washington Post (a.k.a. "Fox on 15th") editorial warning readers that: "Primary-Care Doctor Shortage May Undermine Reform Efforts."

Yes, the United States already has a shortage of primary care physicians. Any serious reform plan will make this shortage worse by cutting back our excessive reliance on specialists. However, primary care physicians can be trained (to our standards) anywhere in the world. There are millions of very smart people in the developing world who would be delighted to train to U.S. standards and work for the $170,000 year (net of malpractice insurance) that our primary care physicians. (Developing countries could train 2-3 physicians for everyone that came to the United States if we placed a modest tax [e.g. 10 percent] on the earnings of foreign-trained physicians and repatriated it to the home country.)

If the Post were not such an ardently protectionist newspaper (don't they know about Smoot-Hawley and the Great Depression?), it would be writing about the potential to increase the number of foreign trained primary care physicians in the United States by removing legal and professional barriers. However, trade never even enters the Post's discussion. It was only interested in telling readers about problems with President Obama's health care plan.

--Dean Baker

The Economist Gets the Arithmetic of Shorter Work Time Wrong

The Economist warned readers of the error of trying to reduce unemployment by cutting work hours or other such methods, referring to the "lump of labor" fallacy -- the idea that there is a fix demand for labor to be spread around. While the Economist has an arguable case in normal times, it does not have an arguable case in a prolonged period of high unemployment like the current situation.

In the current situation, the notion of a fixed demand for labor (absent some exogenous stimulus) is very much on the mark. We can have 100 million people 40 hours a week or we can have 111 million working 36 hours. Of course, the world is a bit more complicated than this, but the basic arithmetic does hold.

Given that the unemployment rate is almost certain to keep rising for most of the rest of the year, and we are unlikely to see the unemployment rate cross 9.0 percent again for at least a year and a half, it would be nice if our politicians in Washington would start doing some arithmetic and think about this obvious way to deal with the unemployment problem.

--Dean Baker

Does the Public See Obama as "Ineffective on the Economy?"

That's what the headline of an NYT article told readers. The poll that is the basis of the article asked the question: "So far, do you think President Obama's have made the economy better, made the economy worse, or haven't his policies had any effect on the economy yet?"

The NYT reports that 48 percent answered that his policies have not had any effect yet. That is very far from describing Obama as "ineffective on the economy." It is hard to have very much effect on a downward plunging economy in after 5 months in office. It has been less than four months since President Obama's stimulus was signed into law.

Apparently most of the poll's respondents understand enough about how the economy works to realize that it unreasonable to expect policies to have much effect in such a short period of time. Interestingly, of those who did think the policies already had an effect, more than twice as many (32 percent versus 15 percent) thought the effect was positive rather than negative.

It requires some very creative reporting to turn this poll result into a headline asserting the public sees Obama as ineffective on the economy.

Does the Post Really Know That Timothy Geithner Threw a String of Obscenities at Bank Lobbyists?

Readers might be asking that question. In a front page article on the Obama administration's financial reform proposal the Post told readers that:

"On May 8, lobbyists representing many of the nation's banks and hedge funds huddled with senior White House advisers in the Roosevelt Room, seeking to snuff out an administration plan to increase the Fed's authority to regulate them, when Treasury Secretary Timothy F. Geithner stuck his head in the door.

Fresh from meeting with Obama, Geithner asked the lobbyists what they were up to. When they explained they preferred that a council of regulators, rather than the central bank, safeguard the financial markets, Geithner silenced the discussion with a string of obscenities, according to people who were present."

It might be helpful if there were some names associated with "people who were present." Presumably this group would be bank lobbyists and Obama administration officials. Both sets of people have an interest in making the reform proposals seem harsher on banks than may actually be the case. Hence, it would be very beneficial to them to have the Post write on the front page that Geithner threw a strong of obscenities at bank lobbyists, whether or not it was true.

The likelihood of spreading self-interested falsehoods is substantially reduced by associating names with such statements, which is why most newspapers try to avoid anonymous assertions of this sort.

--Dean Baker

Reforming Bond Rating Agencies: NYT Misses the Boat

One of the factors that allowed for the proliferation of garbage finance in the bubble was the fact that bond rating agencies were willing to give investment grade ratings to complex financial instruments that they did not understand. They had incentive to do this because they were being paid by the banks whose junk they were rating.

The NYT correctly points out that the Obama plan does not change this "issuer pay" system for the rating agencies. For some reason it doesn't discuss the most obvious reform: simply changing who picks the rating agency.

If the rating agency was selected by someone other than the issuer, for example the stock exchange that lists the company's stock, then the rating agency would no longer have incentive to bias its rating, since the issuer would not control whether it could be selected for future business.

Changing the party who selects the rating agency is much simpler than changing the party who pays, since it doesn't involve any money. (There would be a trivial amount of money needed to run a bond-rating agency assignment desk.) It is peculiar that the NYT did not discuss this obvious reform of the current system.

--Dean Baker

Fox on 15th (a.k.a. "The Washington Post") Adopts Republican Talking Points On Obama Financial Regulation Plan

In yet another front page editorial, the Washington Post headlined its article on the Obama administration's regulation plan: "Obama Blueprint Deepens Federal Role in Markets." The very first sentence begins: "the Obama administration last night detailed a series of proposals to involve the government more deeply in private markets... ."

The increasing government role in markets line fits well with the Republican talking points but has nothing to do with reality in this case. The government is already huge involved with financial markets. The Post probably missed it, but the Treasury and the Fed have been lending trillions of taxpayer dollars to financial institutions through the TARP and the Fed's various special lending facilities.

Government involvement in financial markets is not presently at issue. The issue is whether the government will impose any effective regulation to go along with its subsidies. This is comparable to getting a home inspection before buying a house. The decision to enter the housing market was the decision to buy the house, not the decision to get the inspection.

--Dean Baker

Has Anyone Noticed the Housing Bubble?

The Obama administration's regulatory reform proposal includes many positive features, but it ultimately will not make the financial system safer for the simple reason that it conceals responsibility rather than holding regulators accountable for their failures. The basic story of this crisis was not that the regulatory authorities lacked the ability to rein in this disaster before it was too late. Rather, the basic story is that the regulatory authorities -- most importantly the Fed -- opted not to use their power to rein in the housing bubble.

The discussion of financial issues has largely worked to hide the centrality of the housing bubble to the crisis. If there had been no credit default swaps, collaterized debt obligations, subprime or Alt-A mortgages, but the housing bubble had still grown to $8 trillion, we would be pretty much in the same economic situation that we are today. Residential construction would have collapsed due to a huge glut in the market and consumption would have plunged as a result of the loss of $8 trillion in household wealth. The financial problems created by failed regulation do complicate the picture, but the fundamental picture is a very simple one of a collapsed bubble sending demand plummeting.

Politicians and regulators have a direct interest in portraying the crisis as being the result of an inadequate regulatory apparatus rather than failed regulators, because failed regulators should get fired. However, by not holding failed regulators accountable, this reform proposal is setting the grounds for the next crisis.

Even a perfect regulatory structure will not work, if the regulators do not do their job. They will not have an incentive to do their job, if there are no consequences for not doing their job.

In this case, we have seen the most disastrous possible regulatory failure -- this is like the drunken school bus driver who gets all his passengers killed driving into oncoming traffic -- and no one is held accountable. The message to future regulators is therefore to simply go along with the powers that be (i.e. the financial industry) and you will never suffer any negative consequences.

It is remarkable that this perspective is completely absent from the coverage of President Obama's regulatory reform proposal. The media failed dismally in its coverage of the housing bubble. They appear to have learned nothing from this failure.

--Dean Baker

Health Care Reform Arithmetic for the Numerically Challenged

The Congressional Budget Office (CBO) came out with preliminary projections of the impact of Senator Kennedy's health reform bill. CBO had a projected cost of $1 trillion, with an addition 16 million people getting insured over this period.

Republicans were quick to put the cost at $62,500 for each additional insured person. This is a good joke, but has no place in serious policy discussions. The relevant question is the cost per year ($6,250). If the projections were done over 20 years, then the cost would be $125,000 per insured person using the Republican methodology.

It is also important to remember that the number of people who are uninsured at least part of the year is over 80 million. The generally used number of 45 million uninsured refers to the number of people who go the entire year without insurance. Presumably there will be a reduction in the number of people who are uninsured for part of the year as a result of the Kennedy plan.Serious analysis would take this into account also.

--Dean Baker

NPR, the IMF, and the Global Savings Glut

The Obama administration is having a tough time getting its request for $108 billion for the IMF through Congress. Bank bailouts are rapidly losing popularity. And bailouts of foreign banks are probably even less popular than bailouts of U.S. banks.

But, NPR is rushing to the rescue. It had a piece this morning telling listeners that it was important to get the IMF more money to help the poor countries of the world. The piece never mentions the fact that the bulk of the IMF lending at present is going to East European countries, not the developing world.

The basic problem is simple. The West European bankers proved to be every bit as stupid as the Robert Rubin-Citigroup crew in dishing out loans. The main outlet for their bad loans was Eastern Europe, where they made enormous loans denominated in euros.

It is very difficult for the countries of Eastern Europe to maintain their exchange rates against the euro without large amounts of assistance. However, if they let their currencies fall against the euro, then the default rates on the loans from Western European banks will explode.

Of course West Europe is rich enough to bail out its own banks, but the governments in countries like France and Germany know that their people will not stand for this sort of handout. In steps the IMF, with a big assist from NPR, which managed to not even mention East Europe in the piece.

NPR made one major misrepresentation that is worth noting. It referred to a "global savings glut" which it attributes to developing countries' fears that the IMF won't have enough resources to bail them out in a crisis, and therefore their need to self-insure. WRONG!!!!!!

Developing countries only began to accumulate massive amounts of foreign exchange (i.e. savings) after the East Asian financial crisis in 1997. There was no talk at the time about the IMF not having enough money. Rather, the explicit motive of most of these countries was to accumulate enough reserves that they would never need to turn to the IMF for a bailout.

The conditions that the IMF imposed on the East Asian countries, who had previously been the superstars of the developing world, were seen as being so onerous that other countries wanted to make sure that they never were forced to turn to the IMF for help. Therefore they deliberately kept their exchange rates under-valued so that they would run huge trade surpluses, which let them rapidly build reserves.

In short, the IMF's conduct was a major cause of the global imbalances that led to the current economic crisis. NPR turns history on its head in telling listeners that more support for the IMF is the solution.

--Dean Baker

Fox on 15th (a.k.a. "The Washington Post") Strikes Again

Departing from normal news practice, the Washington Post put another editorial complaining about President Obama's deficits on the front page. The subhead says it all: "Concern Mounts in White House as 2010 Elections Loom."

Who is concerned? The story doesn't tell us. Who says that they are concerned? The story doesn't tell us. In short, it's not clear that there is any news here.

But, the Washington Post wants to highlight the budget deficit, so it won't let such details stand in the way, after all there were protesters in Wisconsin calling President Obama a socialist. That's enough for a front page news story in the Washington Post.

Needless to say, the Washington Post has no problem ignoring completely far larger protests that don't agree with its editorial agenda, much less putting them on the front page. It is incredible that at a time when close to 15 million people are out of work that the Washington Post can continue to obsess about the deficit.

Of course this is also a paper that highlights on the front page that it is now easier to hire nannies. There is no doubt which side the Washington Post is on.

--Dean Baker

On Vacation

I'm escaping from Washington and the blogging world for the next two weeks. I'm back on June15th, barring unpleasant encounters with wildlife.

Until then, don't believe anything you read in the newspaper.

--Dean Baker