From a U. of Chicago email announcing the establishment of the Milton Friedman Institute:
The Milton Friedman Institute will occupy buildings that currently house the Chicago Theological Seminary on the north side of 58th Street between Woodlawn and University.
In this week’s New Republic, Joshua Rosner raises a good question vis-à-vis the mortgage crisis: “Did so many people need to own homes in the first place?” He writes,
The dream of home ownership has long been part of the American experience, but, as the federal government steps in to artificially support borrowers and lenders with tax credits that encourage more spending or with public spending that keeps over-indebted borrowers in unaffordable homes, we ought to consider whether it’s time to wake up from that dream.
Indeed, we ought to consider what role the federal government has played in creating this mess. By stimulating home ownership while failing to account for the reasons home ownership is valuable to society, Washington has simply sought to buy our votes with our own debt.
One thing Rosner doesn’t do in the article is to look at why the government was so interested in promoting home ownership. I have to believe that a large part of that answer has to do with Wall Street’s appetite for mortgage debt. As Michael Lewis narrated in Liar’s Poker, the boom in mortgage lending in the 1980s was almost single-handedly engineered by Salomon Brothers’ Lewis Ranieri, but it probably never would have taken off were it not for a tax break that Congress passed on Sept. 30, 1981, which savings and loans could take advantage of only by selling their mortgages. As Lewis writes, “It amounted to a massive subsidy to Wall Street from Congress. Long live motherhood and home ownership!”
But there’s another, odder reason why certain people in the government might have been eager to promote home ownership. The key evidence for this comes from Alan Greenspan’s memoir, The Age of Turbulence:
I believed then, as now, that the benefits of broadened home ownership are worth the risk. Protection of property rights, so critical to a market economy, requires a critical mass of owners to sustain political support.
For a discussion of just how bizarre this reasoning is, see my analysis here.
There’s a pretty surprising mistake in today’s NYT story about yesterday’s interest-rate cut. The offending sentence comes in the second paragraph of Steven R. Weisman’s article:
The Fed’s action brought the federal funds rate — the rate it charges banks for overnight loans — to 2 percent, from 2.25 percent, the lowest level since November 2004.
The problem is that clause between em-dashes. The “rate [the Fed] charges banks for overnight loans” is not the federal funds rate, it’s the discount rate. The federal funds rate is the rate that banks charge each other for overnight loans, which rate the Fed is able to control through open-market operations.
As the headline of this post indicates, I was about to put this down to a brief slip of editorial attention, but looking back through the NYT archive, it looks like a fairly common error on the paper’s part. Here’s a similar sentence from an article Weisman wrote a few days ago:
The committee also lowered the federal funds rate, the rate it charges banks for overnight loans, by three-quarters of a point, to the current 2.25 percent.
And here’s another from an article in March, this one written by Edmund L. Andrews:
The central bank lowered its federal funds rate — the rate it charges banks for overnight loans — by three-quarters of a percentage point, to 2.25 percent, and left the door open to additional rate cuts in the months ahead.
In case you don’t trust me on this, here’s how Reuters (correctly) described the federal funds rate in a story about yesterday’s cut:
The central bank’s action takes the bellwether federal funds rate target, which banks charge each other for overnight loans, to 2 percent — the lowest since December 2004.
And for good measure, here’s the AP’s version:
The latest Fed move brought the federal funds rate — the interest that banks charge each other — down to 2.25 percent, the lowest since late 2004.
Today, while cleaning house, I came across a cache of older magazines ripe for recycling and spotted this headline on a copy of the May 2006 Harper’s: “The New Road to Serfdom: An Illustrated Guide to the Coming Real Estate Collapse, by Michael Hudson.” Curious, I looked inside, and sure enough found this item of startling prescience:
With the real estate boom, the great mass of Americans can take on colossal debt today and realize colossal capital gains–and the concomitant rentier life of leisure–tomorrow. If you have the wherewithal to fill out a mortgage application, then you need never work again. What could be more inviting–or, for that matter, more egalitarian?
That’s the pitch, anyway. The reality is that, although home ownership may be wise choice for many people, this particular real estate bubble has been carefully engineered to lure home buyers into circumstances detrimental to their own best interests. The bait is easy money. The trap is a modern equivalent to peonage, a lifetime spent working to pay off debt on an asset of rapidly dwindling value.
Most everyone involved in the real estate bubble thus far has made at least a few dollars. But that is about to change. The bubble will burst, and when it does, the people who thought they would be living the easy life of a landlord will soon find that what they really signed up for was the hard servitude of debt serfdom.
It doesn’t surprise me that this article left no mental trace if and when I came across it two years ago. Its subject and style are so completely of a piece with the the kind of economic articles that one expects from Harper’s that I probably gave it no more heed than I’ve given similar examples from this month’s issue (Wendell Berry’s “Faustian Economics: Hell hath no limits” and Kevin Phillips’s “Numbers Racket: Why the economy is worse than we know”). In fact, if I’ve got one real criticism of the Harper’s editorial approach to policy subjects, it’s this: their authors cry wolf so often that it’s nigh impossible to separate the signals from the noise.
And yet you’ve got to hand it to Hudson: writing two years ago–one full year before anyone had really begun to wonder about the state of the real estate market–he got things exactly right. Check out his website for some of his more recent work.
Kudos to Paul Krugman for recognizing how silly it was for Hillary Clinton to suggest bringing Alan Greenspan back to address the current crisis. After his column earlier this week I’d begun to wonder if he’d ever allow himself a word against her. Apparently so:
OK, this is pretty dumb. Hillary Clinton wants a high-level commission to analyze ways to resolve the mortgage crisis — including Alan Greenspan.
Yes, I know people still listen when Greenspan speaks — and John McCain once joked about taking Greenspan’s advice even if he’s dead. But for those in the know, AG is a key villain in the whole affair.
I mean, why not add Charles Prince, Stanley O’Neal, and Angelo Mozilo to the commission?
If you want to understand what’s at stake with the current economic crisis, and why it could very easily go from bad to 45-trillion-dollar bad, you could do worse than to read the two articles from the New York Times Sunday Business page on credit default swaps. Nelson D. Schwartz and Julie Creswell lay out the basic story in “What Created This Monster?” and Gretchen Morgenson explains the implications of the Fed/JPMorgan bailout of Bear Stearns in her Fair Game column.
Here’s the key grafs from each article (at least as they appear from the very distant sidelines where I’m sitting). From Morgenson, who’s discussing the possibility that JPMorgan had effectively sold insurance on Bear Stearns’s bonds via credit default swaps, and therefore had a very direct interest in making sure that Bear didn’t end up in bankruptcy:
An interesting side note: It’s likely that JPMorgan, the biggest bank in the credit default swap market, had a good deal of this kind of exposure to Bear Stearns on its books. Absorbing Bear Stearns for a mere $250 million allows JPMorgan to eliminate that risk at a bargain-basement price. JPMorgan declined to comment on the size of its portfolio of credit default swaps.
And from Schwartz and Creswell, who are discussing the reason the Fed had to get involved:
Bear Stearns held credit default swap contracts carrying an outstanding value of $2.5 trillion, analysts say. “The rescue was absolutely all about counterparty risk. If Bear went under, everyone’s solvency was going to be thrown into question. There could have been a systematic run on counterparties in general,” said Meredith Whitney, a bank analyst at Oppenheimer. “It was 100 percent related to credit default swaps.”
And finally, check this article for a look at the fight that’s already brewing: how to implement regulations that will help keep all this from happening again.
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