The Washington Post reports on a new trend for middle class white families with children to live in cities.The fourth sentence tells us that: "In the national imagination, it [Manhattan] was a place of artists, musicians, socialites, Wall Street bankers -- or of hustlers, runaways, addicts, murderers. But it was not on the radar of the typical white, middle-class couple as a place to raise children.

Those who read a bit further will find that the median income for a white family with children living in Manhattan was $280,000 in 2005, roughly $300,000 in today's dollars. That's enough to place this family well up into the top 2 percent of the country's income distribution.

That's not middle class by the usual meaning of the term. There may be more rich white people with children living in Manhattan today than a decade ago, but this article, which includes discussions of private school admissions advisers ($15,000 fee), 3000 square foot luxury condos, and nannies who specialize in twins, is not talking about middle class people.

--Dean Baker

I have had a policy of never commenting on news stories that mention me or CEPR to avoid the obvious problem of a conflict of interest on this blog. I complain to reporters directly if I think they misrepresented my comments. I am going to make an exception to correct an unusual error.

Yesterday, ABC News on-line incorrectly attributed two quotes to me. I did not say that: "In order to understand Obama's economic policies, you have to be a mystic, ...There's no beef."
Nor did I say: "There's a lot of beef in Clinton's policies but she wants to take us back to the '70s -- free medical care, tax the big corporations. ... If you add up what all her proposals are going to cost, it's just not possible."

After this was called to my attention, I contacted the reporter and the on-line version was quickly corrected to show that these quotes came from University of Maryland professor Peter Morici.

Anyhow, I'm sure that this was not malicious, mistakes like this happen occasionally and the correction was made as soon as it was called to their attention. I just wanted to set the record straight.

--Dean Baker

The Post tells us that: "the argument over the housing crisis illustrates broader differences in economic philosophy between McCain and his Democratic rivals." The article continues: "on taxes, McCain has reversed his opposition to President Bush's 2001 tax plan and now supports making the cuts permanent."

So, Senator McCain must have had a philosophical conversion after his 2001 votes, realizing that low tax rates for the wealthy are the basis for economic growth. Of course, there is an alternative possibility. Tax cuts for the wealthy are near and dear to the Republican funders who are essential to getting the Republican nomination. It's possible that Senator McCain decided that he better change his views on tax cuts, if he is going to win the Republican nomination.

I wouldn't be so cynical as to suggest that Senator McCain would abandon his economic philosophy for political advantage, but maybe we shouldn't rule out this possibility. How about if the Post just reported the politicians' statements and positions on issues and spare us the speculation on their "economic philosophy?"

--Dean Baker

One of the reasons that we're sitting here in a recession, facing the worst financial crisis since the Great Depression (according to Alan Greenspan) is that most reporters never reported on the housing bubble as it grew to ever more dangerous levels. The most cited source on real estate markets during the years 2002-2006 was David Lereah, then the chief economist with the National Association of Realtors, and the author of the 2005 bestseller, Why the Real Estate Boom Will Not Bust and How You Can Profit From it. I have yet to see any mea culpas from reporters or editors, indicating that they now recognize that relying on a guy who works for the realtors, as their main source on the housing market, may not be good journalism.

As Congress considers bailouts, reporters don't seem to have picked up their game. One of the main proposals on the table is the Dodd-Frank bill to have the government effectively buy up many of the bad mortgages and issue new ones to low and moderate income homeowners. This proposal, or a version of it, appears to be gaining considerable support in Congress and the two Democratic presidential candidates.

Is this proposal a good idea? If anyone has provided some serious analysis, I have missed it. The obvious question in my book is who does it help. The answer to that will depend on the market in which the mortgages are issues. The answer will be very different in markets like Detroit and Cleveland, where there was not much of a bubble, as compared to cities like San Diego and Phoenix, where the bubble is half deflated.

Anyhow, the point is not to give the story here. The papers and broadcast media should be presenting some analysis of these proposals to their audience. It hasn't been visible so far.

--Dean Baker

The WSJ is too polite to ask this question, but I'm not.

--Dean Baker

Market Place commentator Will Wilkerson, a CATO Institute researcher, complained about the Monday morning quarterbacks who are criticizing Alan Greenspan for not recognizing the housing bubble and taking measures to burst it.

The real story here is that competent analysts recognized the housing bubble at the time. Their warnings were ignored not only by Alan Greenspan and the Fed, but also by most major media outlets like Market Place radio. It is unfortunate that Market Place would try to attempt to mislead the public by airing such an ill-informed commentary.

The housing bubble was easy to recognize and it could have been deflated before it grew to such dangerous levels. The public should know this fact.

--Dean Baker

I almost let this one slide with all the nonsense about the housing market meltdown. The NYT ran an editorial this week discussing the drug Cerezyme, which is used to treat Gaucher disease. Genzyme, the manufacturer of the drug, charges $300,000 for a year's dosage.

The editorial missed the key point: the drug does not "cost" $300,000 a year to produce. Most likely it costs no more than a few hundred dollars. The issue is the cost of the research necessary to develop the drug. The absurdity of charging patients $300,000 a year for a drug that is needed for life or health only arises because of the perverse way in which the government finances medical research.

The editorial should be looking to alternatives to patent monopolies for financing drug research. If the research had been paid for upfront and the drug was sold for in a competitive market, the NYT would not be wasted ink writing about problems affording it.

--Dean Baker

That would have been the appropriate headline for a real news article on the release of the Social Security and Medicare trustees report, not "Trustees Project Serious Financial Challenges for Social Security and Medicare."

There was nothing in these reports suggesting any qualitative deterioration in the financial state of these programs compared to their situation last year. The trustees claim, reported in this article, "that financial pressures will begin much sooner when the programs begin paying out more in benefits each year than they collect in payroll taxes" is simply a lie.

Under the law, both programs have distinct streams of funding in the form of a dedicated payroll tax. They have accumulated a large surplus from this tax which is available to be used to cover projected shortfalls in the decades ahead (Medicare already faces a shortfall). The fact that the expenses exceed revenue for a specific year makes no difference whatsoever for either program, as long as it has money in the trust fund to cover this shortfall.

President Bush's trustees are either ignorant of the laws governing the operation of Social Security and Medicare or they deliberately misled the public, presumably to gain support for cutting these programs. Either way, the inaccuracy of their assertions is extremely newsworthy.

[Addendum: Since there is enormous confusion on this point, it worth noting that the year 2017, when President Bush's trustees first project that SS expenditures will exceed payroll taxes, has no special meaning for either SS or the federal budget.

As noted above, under the law, 2017 has no importance for Social Security's finances. There is a negative effect on the unified budget whenever the SS surplus declines from one year to the next. This is projected to begin to happen next year and continue for the next 32 years, until the trust fund is depleted. What matters is the fact that surplus is declining or the annual deficit is decreasing. This is the money that must be offset by either spending cuts, tax increases, or additional borrowing. Crossing zero is meaningless.]

--Dean Baker

That's a reasonable question. Rex Nutting at Market Watch raises some important issues, why doesn't anyone else?

--Dean Baker

I am serious. Steven Beard, an analyst interviewed on Market Place this morning, said that the data on existing home sales, which showed a modest increase in sales in February, could mean that the crisis in mortgage backed securities is over.

Excuse me, but do the "experts" on Market Place have any clue what they are talking about? This release shows house prices in the Midwest and West falling at more than a 20 percent annual rate over the last three months.

Okay kids, what happens when house prices plunge? That's right, people default on mortgages. They have homes that are worth less than they owe. Rational people often decide to give their $300k home back to the bank rather than pay off a $400k mortgage.

In other words, February's data on existing existing home sales should have told any real expert that we are likely to see much greater problems in the mortgage market in the future. Where does Market Place find these "experts?"

--Dean Baker

NPR told us that there was good news in the increase in existing home sales reported last month. Sales did in fact rise, although it is reasonable to wonder about the extent to which weather was responsible. Sales in the Northeast rose by 11.3 percent. Since the weather for the months in which contracts were signed (December and January) was unusually good, this could explain much or all of the reported upturn.

However, the bigger part of the story is the sharp price decline reported in the data. This price decline was somewhat obscured by the surge in sales in the Northeast, which has prices that are much higher than the national average.

By region, over the last three months, median house prices have been dropping at annual rates of13.5 percent in the South, 21.4 percent in the West, and 25.6 percent in the Midwest. They rose at a 6.3 percent annual rate in the Northeast.

The sharp rates of price decline are probably good news in the sense that they are part of a necessary price adjustment, but it's not clear that this is the reason the media gave them so little attention. Even now, few news accounts seem to acknowledge that the economy had a housing bubble which must deflate.

--Dean Baker

Actually Senator Clinton's proposal was far more ridiculous. She suggested having former Federal Reserve Board chairman Alan Greenspan and former Treasury Secretary and current Citigroup honcho Robert Rubin lead a commission (along with former Federal Reserve Board chairman Paul Volcker) to analyze the country's current economic crisis.

There is certainly no one more directly responsible for the current crisis than Alan Greenspan, who allowed the housing bubble to grow unchecked for almost a decade. Also, as the country's preeminent bank regulator, he looked the other as the predatory mortgage market exploded.

While Greenspan is undoubtedly villain #1 in the housing bubble story, Robert Rubin has claim to #2 status in his post near the helm of Citigroup. Citigroup provided the secondary market for many of these predatory mortgages with its creative financial engineering and structured investment vehicles.

Senator Clinton also called for the government to deliberately prop up house prices. Economists routinely ridicule such efforts at price controls even when they are applied to items that are of far less importance to the economy.

It is remarkable that none of the media accounts of Clinton's proposal noted the absurdity of placing figures who were central to the creation of the current crisis on a commission to deal with the crisis. Nor did it present any analysis by economists of the extraordinary proposal to create a system of housing price supports. This might have warranted more press attention than the sermons of Senator Obama's minister.

--Dean Baker

The WSJ tells us that Democrats in Congress "are pushing measures to help struggling homeowners." Is that true?

The proposals discussed would use government money or government guarantees to buy up bad mortgages at prices that are almost certainly much higher than what they would command on the market. The plans would allow homeowners to renegotiate their mortgages and pay less than they do today. However, in bubble inflated markets (which have still only partially deflated) they would still pay far more in housing costs than they would to rent a comparable unit. Since prices are still falling, they would also have almost no chance of ever accumulating equity.

For these reasons, it is not clear that the proposals help struggling homeowners even if they do help banks. The article could do without this editorial comment.

--Dean Baker

USA Today tells us that: "It's been almost an article of faith: Any recession this year will be mild and brief."

That may have been an article of faith from those who get their economic outlook from tea leaves and other mystical processes, but those of us who rely on economic data knew that a downturn was likely to be very bad and said this quite clearly.

It is unfortunate that reporters relied almost exclusively on ill-informed economists as their sources during the run-up to the recession. Remarkably most articles on the economy, including this one, continue to rely almost exclusively on economists who were surprised by the economy. While their statements of surprise can make interesting reading, it would also be useful to include the views of economists who were not surprised by the economy.

--Dean Baker

The Washington Post joins the NYT in presenting the political philosophy of President Bush on Easter Sunday, telling us that the president's back seat in the Wall Street bailout efforts is "a matter of principle."

Sure, maybe the president has developed a carefully thought out economic philosophy, but let me suggest an alternative hypothesis. The financial industry gives much of its money to Democrats (ever hear of Robert Rubin?), unlike the oil industry, the defense industry, or the pharmaceutical industry. It's just possible that President Bush is not as eager to come to the aid of the Wall Street big boys as he is to come to the aid of other industries because they back the Democrats.

I don't know President Bush and don't know the real motives for his actions. But, I also don't believe that the Washington Post knows the real motive for his actions. Therefore, I would recommend that they just put the possibilities on the table and let readers decide for themselves whether politicians are acting based on political considerations or are guided by some underlying philosophy.

Btw, the main feature of the $300 billion housing price support program mentioned in the article, which is backed by Senator Chris Dodd and Representative Barney Frank, is the government purchase or guarantee of up $300 billion of bad mortgage debt held by banks and other investors. It would also allow for the renegotiation of loans for homeowners, but many would still be paying far more in ownership costs than they would to rent the same home, and would still have almost no hope of ever acquiring equity in the home.

--Dean Baker

The NYT tells us that President Bush and Treasury Secretary Paulson are philosophically opposed to such restrictions, so presumably there must be someone who philosophically favors them, although the article does not identify anyone in this category.

As a general rule, it is probably reasonable to assume that most people are philosophically opposed to regulations that they perceive to be harmful to the economy. The differences arise over which measures they perceive, or claim to perceive, as being harmful.

--Dean Baker

The NYT has an article today noting how the bad news in credit markets is having an impact throughout the economy. The article, which relies exclusively on economists who were surprised by the recession, tells readers that "the size of the bad debts remains a mystery, with estimates reaching $400 billion."

Actually Nouriel Roubini and I have both estimated the amount of bad debt in the financial system will exceed $1 trillion. Unlike the economists cited in this article, we anticipated the collapse of the housing bubble and the resulting chaos in financial markets.

--Dean Baker

Subprime is so yesterday as people up and down the income ladder are defaulting on their mortgages in record numbers. After all, why pay off a $400k mortgage on a home that is worth $300K?

I thought that everyone understood this point by now. The problem is the collapse of the housing bubble. It showed up first in the subprime market because these were the most vulnerable people, but the collapse of the subprime market is just a portion of a much bigger problem.

Anyhow, word has not yet filtered through to the NYT. David Leonhardt asks the question today (I double-checked the date) "how is it that a mess concentrated in one part of the mortgage business — subprime loans — has frozen the credit markets, sent stock markets gyrating, caused the collapse of Bear Stearns, left the economy on the brink of the worst recession in a generation and forced the Federal Reserve to take its boldest action since the Depression?"

Of course, if the problems were just in the subprime market we would not be facing a meltdown of the banking system and the worst financial crisis since the Great Depression. The problems run right through the entire $10 trillion mortgage market. That is why the Fed folks are staying up late and working weekends.
If it were just subprime, they could deal with it in normal business hours and still have time for lunch.

--Dean Baker

The Washington Post has printed any number of editorials and columns that are hostile to Social Security. That is of course its right, although its unwillingness to open its pages to dissenting opinions doesn't speak well for its integrity as a newspaper.

However, it is another step altogether to deliberately misrepresent the state of the program to advance its agenda. This is what columnist Allan Sloan has sought to do today in arguing that the Social Security trust fund does not exist and therefore the program will face problems in 2017 when the trustees project that it will first have to rely on interest from the trust fund to pay benefits. Mr. Sloan told readers that this would pose a major crisis for the program. The reality is that the trust fund is projected to hold more than $3.5 trillion in government bonds in 2017, so there should not be any problem meeting benefit payments.

Mr. Sloan calls the bonds held by the trust fund "IOUs," which they are, just like any other bond. However business columnists usually don't refer to IBM IOUs or Exxon IOUs, so presumably this is Mr. Sloan's way of saying that he doesn't like the bonds held by the trust fund.

Of course what Mr. Sloan likes or doesn't like really doesn't matter. Under the law, these bonds are assets of the Social Security trust. It is completely dishonest to imply otherwise. So under current law, Social Security has full access to these bonds and can meet all projected payments through the year 2041 according to President Bush's Social Security trustees, and through the year 2046 according to the projections of the non-partisan Congressional Budget Office. (Btw, Medicare is currently being funded in part by the same sort of IOUs held by the Social Security trust fund. This has not even been raised as an issue.)

Of course, if there were enough people like Mr. Sloan, Congress could vote to change the law and effectively default on the bonds held by the trust fund. (This doesn't seem likely, since the percentage of voters who are receiving Social Security will soar in the next decade.) Since the bonds are supposed to be repaid out of general revenue, which comes overwhelmingly from progressive individual and corporate income taxes, this default would amount to a massive upward redistribution of wealth. It would transfer more than $1 trillion from the bottom 80 percent of the population to the richest 5 percent, with the bulk of this money going to the richest 1 percent.

If a Post columnist had written a column that was equally misleading about a private company, both the columnist and the Post would likely be sued for libel if they did not print a prompt retraction. However, because Social Security is a government program, it is possible to lie about it with impunity.

--Dean Baker

Its analysis this morning did not include any comments from economists who think the Fed made a mistake in allowing an $8 trillion housing bubble to grow unchecked. It did include comments from WSJ reporter David Wessel, who apparently thinks that having the government buy up mortgages -- a system of house price supports -- is a good idea.

If I had more time, I would grab a few hundred of the columns in the Post, NYT, WSJ or commentaries on NPR, expressing outrage over the waste and inefficiency of the system of farm prices supports. The exact same reasoning would apply to these proposals for house price supports, except the order of magnitude of the waste and inefficiency would be two times greater, since we are talking about a $20 trillion housing market.

Will these media outlets ever give someone the opportunity to apply their own reasoning with respect to the housing market?

--Dean Baker

Economics reporters seem to prefer relying on expert sources who are surprised by the economy. The NYT has an article today that examines the impact of Bear Stearns' collapse on New York City's economy.

At one point the article presents the comments of Alan H. Fishman, the chairman of Meridian Capital: "Nobody’s ever seen something like this, ... If you’d asked everybody how serious this was two weeks ago, they would have said, it’s serious but it will pass. Now they would say it’s very serious.”

Mr. Fishman is wrong in his assessment of what everybody would have said two weeks ago, or more precisely two months ago:

"Watch the New York housing market. Real house prices in the New York City area more than doubled in the decade from 1996 to 2006, driven in large part by the extraordinary boom on Wall Street. With the boom turning into a colossal bust, the NYC real estate market looks quite vulnerable."

--Dean Baker

I have nothing against Ben Bernanke. By all accounts he is a very decent person. His predecessor, Alan Greenspan left him with a time bomb just waiting to explode in the form of the housing bubble. The loss of $8 trillion in housing wealth was guaranteed to lead to a recession and the sort of financial meltdown that we are now seeing.

But, Bernanke did not help a very bad situation by denying its existence as long as possible. It is appropriate for reporters to ask him about his earlier comments (this statement was made in Congressional testimony less than a year ago).

At this point, the financial markets need credible analysis from the Fed, not happy talk. An important first step would be a move toward greater transparency. Why is the Fed letting banks borrow hundreds of billions of dollars in secret? What guarantees were given to J.P. Morgan as part of its takeover of Bear Stearns?

Bernanke has to start being open and honest in addressing the country's financial problems. Otherwise his words will have no weight. Reporters should demand a fuller accounting from Bernanke and the Fed.

--Dean Baker

Greg Mankiw had another column in the NYT today ridiculing people who oppose recent trade agreements, which he erroneously described as "free trade" agreements. They are not about "free trade" because they do little or nothing to eliminate the barriers that protect highly paid professionals (e.g. doctors, lawyers, and economists) from international competition and they actually raise some barriers in the form of stronger patent and copyright protection.

The NYT, like the Washington Post and other major newspapers, is incredibly intolerant of any dissent on this issue. While these papers have presented numerous editorials and columns arguing in support of recent trade deals, many of which are quite insulting to their opposition, their pages are almost completely closed to opposing views.

Here is one for those interested.

--Dean Baker

Former Treasury Secretary Robert Rubin was at a session at the Brookings Institution this morning at which said that "few, if any" people anticipated the sort of meltdown that we are seeing in the credit markets at present.

This should be newsworthy. Mr. Rubin is not only a former Treasury Secretary, he is in the top management at Citigroup and he is one of the top Democratic policy advisers. The failure to recognize the housing bubble and the danger it posed was an act of extraordinary negligence that would get people fired in most lines of work. The fact that he still doesn't recognize the enormity of this oversight even after the fact (economists did recognize the housing bubble and the dangers its collapse would pose to the financial system) is remarkable.

There were several reporters from major media outlets at this event. It would have been appropriate to note that Mr. Rubin is apparently still does not recognize that the collapse of the bubble and the resulting financial chaos was both predictable and predicted by economists who did understand the financial crisis that it would create.

--Dean Baker

The NYT told readers why the Fed had to use tens of billion of taxpayer dollars to keep Bear Stearns in business. It explained that letting the bank go under would lead to a chain reaction of collapses throughout the financial system.

This is not true. The Fed could have followed the example of the Bank of England in its takeover of Northern Rock. Northern Rock continues to function paying off depositors and honoring other commitments. The major difference is that the incompetent managers who drove Northern Rock into bankruptcy were thrown out on the street. At Bear Stearns they are still collecting multi-million dollar salaries.

The other big difference is that Northern Rock's shareholders essentially lost all their money. That's what happens when you buy stock in a company that goes bankrupt. (It is possible that when the company is resold to the public there will be some money from the sales to kick back to shareholders.) By contrast, stockholders in Bear Stearns still have $4 billion in equity, courtesy of U.S. taxpayers.

--Dean Baker

This is the second appearance in the NYT in the same day. In a discussion of the falling dollar, the NYT tells us in reference to the fall in the dollar, "yet Europe also has a silver lining. It has not been hit by skyrocketing oil prices because oil is priced in dollars and the dollar’s decline has kept oil prices down when translated into euros."

arghhhhhhhhhhh! The silver lining for Europe is that oil is not actually rising in price, or at least not by much. The dollar is falling in value. That means that it costs more dollars to buy a euro, to buy Japanese yen, and to buy a barrel of oil. It is that simple.

--Dean Baker

It had to happen sooner or later -- economists finally noticed the recession. But rest assured, most of them think that the recession will be less severe than the 1991 and 2001 recessions.

Just in case anyone had forgotten, you can find the average forecasts for 2008 from 44 highly respected economists at the Philadelphia Fed's Livingston Survey. Back in December, they had an average growth projection for the first half of 2008 of 1.9 percent. I'm too polite to give you the number from CBO that was published less than two months ago.

The moral of the story is that economists do not predict recessions. Their predictions of recessions are lagging indicators. When economists predict a recession, it is the final proof that we are in fact in recession. Reporters who cover the economy should know this and convey this information to readers.

--Dean Baker

Today, the NYT is telling us that, "oil, foodstuffs and many other raw materials are priced in dollars, and as the currency falls in value, suppliers of these commodities demand higher prices just to stay even."

Suppose all of these commodities were priced in pig intestines and the dollar fell? It would cost us more dollars to buy pig intestines and therefore it would cost us more dollars to buy oil, foodstuffs and other raw materials. Come on folks, this is real simple, it doesn't matter what currency is used to keep the accounts, if the dollar falls in value, the cost of everything will rise in dollar terms.

This piece also commits the sin of having an economist, who somehow missed the housing bubble, say that it would be bad for the dollar to keep falling. This economist is wrong yet again. The surest way to stimulate the economy is to have the dollar keep falling. It will increase our exports and decrease our imports. This process must happen in any case and it is best that it happen as soon as possible.

--Dean Baker

The WSJ told readers today that house prices rise in step with incomes. Is Rupert Murdoch trying to drive readers crazy in the middle of the worst housing crash since the Great Depression.

Write this 1000 times: "house prices rise with inflation, not family income." The point is simple. If my income goes up by 50 percent, I might be expected to buy a home that is 50 percent more expensive, I don't expect to pay 50 percent more for the same home. As a theoretical matter, if house prices rise in step with income, you would get all sorts of strange implications, like non-housing wealth would continually fall as the country consumed ever more based on its housing wealth. You would also find an ever larger gap between house sale prices and rents, since rents have generally followed the overall rate of inflation.

We can also look back over 45 years of government data and see that house prices rose at the same pace as overall inflation from the early 50s until the bubble took off in the mid-90s. We also have data compiled by Robert Shiller that shows that house prices just tracked the overall inflation rate for the hundred years from 1895 to 1995.

So, the WSJ should stop repeating nonsense (someone might actually believe it). Say it again, "house prices rise with inflation, not family income."

--Dean Baker

The Financial Times wants to reassure us. Of course, they neglected to mention that their experts never saw the housing bubble or the chaos that its collapse would create.

--Dean Baker

For those who were wondering what happened to the Democrats' promises to bring about lower prescription drug prices under the Medicare Part D plan, the Post has a possible answer. Many of the Democrats in Congress are now getting big bucks from Pharma.

--Dean Baker

When the President or any prominent politician makes an absurd statement, the media have an obligation to all public attention to it. Is the person either completely uninformed about the topic or are they just lying to advance their agenda.

This is how the media should have reported the assertion by President Bush, reported in the NYT this morning, that plans by Senators Obama and Clinton to renegotiate NAFTA if elected president could "shut down trade" (NYT words, not necessarily Bush words).

While Mexico and Canada may be unhappy over any efforts to renegotiate NAFTA, it is absurd to think that they would stop their trade with the United States in response. Such a halt would be devastating to their economies. The NYT should have sought to press President Bush or his press staff to determine whether he really believes something so ridiculous or whether he was just making up a scare story to score political points.

--Dean Baker

Listening to NPR heard this morning I heard NPR mislead their listeners on this issue twice in less than an hour. That's pretty good in the misinformation department.

The first time was in their top of the hour news. They told listeners that the dollar was falling in world currency markets. Then they told audiences that because oil is priced in dollars, the falling dollar meant higher oil prices.

This should have led to a huge "huh?" from NPR's audience. A lower value of the dollar means that it will take more dollars to buy oil regardless of what currency it is priced. In fact, we would have to pay more dollars for oil even if it were priced in pig intestines.

Later, during a Market Place segment, there was a discussion of the impact of the falling dollar on the states in the Persian Gulf, all of whom tie their currency to the dollar. The report noted that this is leading some countries to consider breaking the link between their currency and the dollar. It then said that the biggest countries, Saudi Arabia and Kuwait, are not considering this move, because oil is priced in dollars and a falling dollar means a lot more money.

Again, get out the huge "huh?" These countries get no more money, in either dollars or any other currency, by virtue of the fact that oil is priced in dollars.

Let's try this one more time. Oil is priced in dollars as a convention. We have international markets for a huge range of resources and commodities. They generally use dollars as the unit of account. That's because we have the biggest economy and the dollar was the world's preeminent currency at the time that these markets were created. (It's sort of the same story with the dominance of English internationally.)

But this is just a convention and the dollar is simply a unit of accounting. If a bushel of wheat sells for $5, then it makes no difference to people in the United States, or anyone else, if oil is priced in dollars and sells for $100 a barrel or whether it is priced in wheat and sells for 20 bushels a barrel. The price is the same.

It is also important to realize that no one is forced to trade oil in dollars. This is also a convention. But, there are many cases where governments and companies will sell oil for euros, yen, or any other currency in which they find it convenient to carry on business. For example, if Kuwait wants to sell a million barrels of oil to a Japanese company for 10 billion yen (approximately the current price in yen), there is absolutely nothing to prevent the transaction.

The vast majority of oil is still traded in dollars, but there is still a large and growing amount of trade in other currencies. This shift has almost no impact on either oil markets or the dollar. It simply removes an unnecessary exchange of currencies for the parties involved in the trade.

So the next time you hear NPR, or anyone else, say that something is the case because oil is priced in dollars, get on the phone or Internet and tell them that they don't know what they are talking about.

--Dean Baker

Steven Pearlstein usually makes sense in his columns, which is why I'm inclined to believe that he has been kidnapped and an Al Qaeda operative wrote today's column "A Bailout: For Everyone." The column makes no sense.

As I've written way too many times, the Fed's actions are keeping banks from having to write down large losses and quite likely go into bankruptcy. The result is that the bank executives, whose inept management pushed them into bankruptcy, get to keep their jobs and their salaries, which run into the tens of millions a year. Stockholders will also have more time to unload their stock before the day of reckoning, and the banks themselves may be able to unload some of their junk if they find enough suckers. With luck, they may even be able to survive the collapse of the housing bubble.

Does this bail out the rest of us? Why should any of us who are not top management at Citigroup, or major shareholders, care if it goes into receivership like Northern Rock did in England? The bank's operations will still continue. Those who have deposits there will still be able to get their money. The only difference is that there will be new management, the stockholders will have lost their money, and the bank would more quickly come clean on its bad debts.

Does the bailout do anything for the tens of millions of homeowners who have seen their life savings disappear because house prices collapsed -- in spite of the fact that all the experts said house prices never fall? How about the families who are now tapping their retirement accounts in a desperate effort to prevent foreclosure, is the Fed bailing them out?

The bubble was driven by incredible incompetence by those calling the shots both at the Fed and other regulatory institutions and in the financial sector. We should clean house as quickly as possible. This bailout is not in the public interest.

--Dean Baker

Can’t the media find any economists who don’t think that handing hundreds of billions of taxpayer dollars to the big banks and the incredibly rich people who own and manage them is a good idea? Apparently not, given the coverage so far to the Fed’s proposal to lend $200 billion to the banks using mortgage backed securities as collateral.

The workings of the Fed and the financial markets can appear complicated, so let’s simplify matters a bit to make it more clear what is going on here. Suppose that it was suddenly discovered that much of the wealth held by the country’s leading financial institutions was in fact counterfeit. Instead of having hundreds of billions of dollars of real currency in their vaults, institutions like Citigroup, Merrill Lynch, and Bears Stearns actually had hundreds of billions of dollars of counterfeit currency. Suppose further that the public did not know exactly who held what in terms of counterfeit currency, only that all of them had a lot of it. (The point here is that these banks hold mortgage backed securities, many of which are only worth a fraction of their face value, and therefore can be viewed as the equivalent of counterfeit currency.)

In such circumstances, investors would be very reluctant to accept the credit of any of the major financial institutions. They couldn’t know whether most of their assets were in fact counterfeit, and they were dealing with a bankrupt institution, or whether the counterfeit currency was only a limited share of the wealth, which would not jeopardize the institution’s ability to meet its obligations.

This is in fact the credit squeeze that we’ve have recently witnessed. The spread between the interest rates on a wide variety of assets and the interest rate on safe assets (U.S. government debt) has soared. As a result, the Fed’s effort to stimulate the economy, by lowering the federal funds rate, has been largely unsuccessful because other interest rates have remained high.

In response to this situation the Fed today announced that it would lend $200 billion to banks and other financial firms, accepting mortgage backed securities as collateral. This is effectively the same as saying that the Fed is going to lend money to banks and accept the counterfeit currency as collateral, treating it just as though it were real money.

The intended effect of this policy is to convince other investors that the counterfeit currency is in fact real currency, or at the very least that there is a really huge sucker out there (the Fed) which is prepared to treat the counterfeit currency as real currency.

So how does this story play out? Well, insofar as the Fed is successful, the counterfeit currency retains its value for a while longer. This allows Citigroup, Merrill Lynch, Bears Stearns and the rest of the big boys more time to dump their counterfeit currency on suckers who haven’t figured out how the game is played.

It is possible that they won’t be able to find enough suckers, in which case these banks will end up defaulting on their loans and the Fed (i.e. the government ) has lost tens or hundreds of billions dollars paying good money for counterfeit currency. Alternatively, perhaps the big boys are successful and can offload enough of their counterfeit money to restore themselves to solvency before the music stops. Then the Fed is repaid, but the counterfeit money now sits in the hands of other, less informed, or less inside, investors.

Either way, this is a policy of dubious merit. Why wouldn’t we want the banks to be forced to come clean and eat their losses? This is always the policy that the economists advocate when the parties in question are not the big New York banks. Does anyone remember the East Asian financial crisis when the media was full of condemnations of crony capitalism and the IMF insisted imposed stringent conditions on South Korea, Thailand, and Indonesia as a condition of getting bailed out? At that time, everyone insisted on transparency. Aren’t there any economists who still have this perspective? If so, why aren’t their views appearing anywhere in the news?

There is one other issue that is extremely important that has been completely omitted from the media’s discussion of the Fed’s actions. There are people who have shorted the counterfeit notes (mortgage backed securities and related assets) because they recognized that these assets were in fact going to lose much of their value. While these short sellers were trying to make money, they were actually performing a valuable public service. They were pushing down the price of these assets towards their true level. If we had many such short sellers in the market we would not have seen the housing bubble grow to such dangerous proportions. The same holds true of the stock bubble.

However, if the Fed acts to sustain bubbles even after they have started to collapse under the pressure of their own weight, it makes it far more risky for short sellers. This means that even investors who realize that Citigroup has nothing but counterfeit currency will be reluctant to short its stock or other assets supported by counterfeit currency. As a result we can expect to see even bigger more dangerous bubbles in the future.

This is not a pretty story and there are economists who can make this point. The media should be talking to them, not just the cheerleaders for the housing bubble.

--Dean Baker

The NYT reports that "China has a rapidly aging society that demographers warn could present significant problems. Already, the work force is defying the popular impression that the labor supply is endless. Factories have reported shortages of young workers in recent years."

What's the problem here? There is not literally a shortage of young workers, as the paper claims. The problem is that firms would have to raise their pay rate, which they don't want to do. China is not close to being short of labor in the sense that it doesn't have enough people to do what needs to be done. Wages are rising rapidly, which is what should happen in a developing country. This may put some factory owners out of business, but who cares? No one promised them that they could make money on their business.

In short there is no reason presented here for China to be concerned about having too few people.

--Dean Baker

Paul Krugman has the basic story of the financial meltdown right, but he would still like to see the Fed come to the rescue, even if it means handing over hundreds of billions of taxpayer dollars to the world's richest people.

I have a hard time following the logic. We know how to keep the financial system operating even as banks go into bankruptcy and receivership. Will there be some disruptions on the way down? Sure, but that would probably be the case even if we went the full bailout route.

We have too many custodians and waitresses who can't afford health care or child care for their kids, or to take a sick day from work, to rain hundreds of billions on the Wall Street crew who have yachts, vacation homes, nannies for their kids and teams of personal servants. These people and the institutions they run must be forced to pay the price for their own stupidity and the damage they have done to the economy.

[addendum: Since several comments ask how we keep the financial system operating even as we let the banks fail, the model is the takeover of Northern Rock in the UK. The Northern Rock boys had apparently gotten themselves in over their heads in subprime and other assets that went bad. The losses made the bank insolvent. After several bailout efforts proved insufficient, the government took over the bank and brought in new management.

The plan is to get the books in order and then resell the bank to the private sector as soon as possible. This approach has the advantage that the current group of top executives that made the bank insolvent are out of jobs, as they should be. The current shareholders will get little or nothing, since the company they own is essentially worthless. But the bank is kept operating so that there is not a chain reaction of collapses, in which firms and banks who have money on deposit with Northern Rock suddenly find themselves in trouble because they can't get access to their money in a closed bank.

In reality, I am sure that there will be complications in these sorts of takeovers, but there are complications in bailouts also. At least this approach starts by setting things in the right order. ]

--Dean Baker--

The NYT reported on a group, supported by Monsanto, which is trying to make it illegal for milk and other dairy products to be labeled as coming from cows who were not fed synthetic growth hormones. The groups claims that it is defending "members’ right to use recombinant bovine somatotropin, also known as rBST or rBGH, an artificial hormone that stimulates milk production."

While the article emphasizes the groups ties to Monsanto, which makes the hormone in question, it does not point out the inaccuracy of the group's basic claim. There are no laws that would prevent the members of this group from using synthetic growth hormone or selling it in the United States. Nor are any likely to be seriously considered any time soon.

The issue is that many consumers do not want to buy dairy products that were produced by cows that were fed with synthetic growth hormone. The Monsanto backed group is trying to deny consumers the right to choose what goes into their milk, by preventing farmers who do not use growth hormones from labeling their product this way. The issue here is the ability of the Monsanto group to restrict freedom of speech and consumer choice.

It is inaccurate and dishonest to describe it as a question of the farmers' freedom to use growth hormone. The NYT should have made this fact clear to readers.

--Dean Baker

The Post has a column today calling for housing price supports. This makes three in the last week by my count in the country's big three newspapers (NYT, WSJ, and WAPO).

The range of diversity in the views presented on this issue in these papers is about what we would expect from Pravda back in the days of the Soviet Union. Are they ever going to print the views of anyone who doesn't think that bailing out bankers and investors is a great use of taxpayer dollars?

How about printing the views of someone who was not surprised by the collapse of the housing bubble. The pages of these papers were almost completely closed to those who warned of the bubble on the way up (the NYT gets decent marks on this one). It would be nice if missing an $8 trillion housing bubble was not a prerequisite for getting your views in print in these papers.

--Dean Baker

Robert Frank had a interesting column today in the NYT on the relationship between inequality and happiness. The article does include one serious error. It notes the problems of measuring inflation through time and claims that the consumer price index would not pick up quality improvements in products and uses the changes in a Honda Accord as an example.

This is not true. The Bureau of Labor Statistics makes great efforts to measure and price in the effects of quality improvements. The process is far from perfect, but it is simply not true that prices are not adjusted for changes in quality.

The NYT discusses the impact of higher wheat prices around the world. One of the effects is that people in some parts of the world can no longer afford enough bread.

This really should not be a surprise, but it might be to the NYT editorial board. They have repeatedly condemned U.S. agricultural subsidies in strong terms, claiming that they were obstructing development in many poor countries. While there was some truth to the NYT's complaints, the reality is far more ambiguous. The higher world agricultural prices that would come from eliminating U.S. subsidies benefit producers in the developing world, however they hurt consumers. The net effect on the developing world from eliminating these subsidies is likely to be small in either direction, and there is no doubt that there are some big losers in the process.

The NYT was very misleading in implying that the elimination of U.S. agricultural subsidies unambiguously helps the developing world, as this article makes clear.

--Dean Baker

The Post tells us that the February jobs report was "surprisingly bleak." Actually, there is no reason there should have been any surprise. We are seeing an $8 trillion housing bubble deflate. It has decimated the housing market and now it it is hitting consumption. There is a large body of data -- retail sales, car sales, UI claims -- that all support the fact that the economy is going into a recession.

The only surprise in this story is that anyone would be surprised by the job loss used in February and that the Post would rely on these people as experts on the economy.

The Post's experts apparently have not even discovered the housing bubble. The article later tells readers that, "the economic troubles stem from a crisis in debt markets that developed last August and touched off a wave of home foreclosures."

Yes -- that is really what the article says. People had their homes foreclosed because of a credit crunch. How does that work? You owe $200k on your your $240k home and the bank calls you up and says that they are going to foreclose because of a credit crunch?

The Post gave virtually no attention to the housing bubble on the way up. Its economic "experts" were so ill-informed that they could not see an $8 trillion bubble in front of their face. Now, even as the bubble is collapsing and pulling down the economy with it, the Post still can't see anything.

--Dean Baker

I don't know the answer to that question, nor do I think anyone else does, except for the top management at Citigroup and a few people at the Fed. Under the rules of the Federal Reserve Board's Term Auction Facility (TAF), Citigroup, or any bank, can borrow money at an interest rate that is below the discount rate, and put up mortgage backed securities, which could be nearly worthless, as collateral.

This sounds like a good deal if you can get it. Do we want to keep our major banks operating? Of course we do, but don't we want to replace the incompetent managers that ran them into the ground and make the shareholders take their full hit? After all these people don't share their huge salaries or the gains on their stock in good times with the rest of us.

There is an even more fundamental issue. If you were one of the insiders at Citigroup who knew that the Fed was keeping the bank alive on life support, would you short Citigroup stock? Being the cynic I am, my guess is that some people in this position would short the stock, essentially burning the current shareholders for not having the same inside knowledge.

The reality of course is that none of us knows the real situation at Citigroup or any other bank that the Fed may be keeping alive with its TAF. If a bank that is borrowing heavily at the TAF goes under, it would be the next big scandal in the financial world. It would be reasonable for reporters to do some poking around and to ask Fed Chairman Ben Bernanke why he feels the need for such secrecy. Did the country get in this mess because we had too much transparency?

--Dean Baker

The NYT reports that the spread between the interest rate on debt guaranteed by Fannie Mae and Freddie Mac and 10-year Treasury bonds is at the highest level in more than 20 years, rising to 2.38 percentage points yesterday. The spread had been close to 1.5 percentage points at the start of the year and had hovered near 1.0 percentage point over much of the period from 2004 to the middle of 2007.

This jump in the spread is not surprising given both the large losses that Fannie and Freddie have incurred on bad loans and the decision by Congress to raise the caps on the loans that qualify for mortgages held by Fannie and Freddie. Congress ostensibly raised the caps on qualifying mortgages to support the housing market in areas with high house prices, but it was predictable that the higher caps would have the effect of raising interest rates on all the mortgages that already fell under the mortgage ceiling.

While some economists did raise this concern at the time, the warnings were rarely reported in the media. As a result, Congress may not have realized that it was likely hurting rather than helping the housing market when it raised the caps.

--Dean Baker

It is best to simply ignore Washington Post editorials on trade. The editorial board approaches this issue with vitriol and determined ignorance. They have no interest in a serious discussion of the impact of recent trade agreements on the United States and its trading partners.

I can say this with certainty, because to argue the case for NAFTA, the Post editorial board made the absolutely absurd assertion that Mexico's GDP "has more than quadrupled since 1987." According to the IMF, the correct figure is 84.0 percent. Any serious newspaper would have promptly and prominently corrected such an egregious error as soon as it was brought to its attention.

As I’ve said before, I don’t know whether the Post’s board is so utterly clueless about economics that they can’t tell the difference between earth shattering growth and stagnation, or whether they just will make up any numbers that seem convenient to advance their argument. Either way, the Post’s views have no place in a serious debate on trade policy.

The reason for mentioning the Post’s record on trade is that they decided to again bash the Democratic presidential candidates for their criticisms of NAFTA. The Post told Senators Clinton and Obama to stop criticizing a treaty that has benefited all three countries and to turn to a discussion of how best to manage “the unstoppable forces of globalization.”

Maybe the Post can tell its readers which forces of globalization are unstoppable. I wouldn’t know since I don’t go to their church. As an economist, I might think that the most unstoppable forces of globalization are the erosion of forms of protectionism that the Post supports and even profits from, like patent and copyright protection. With globalization and the spread of the Internet, these forms of protection will become ever harder to enforce. But, the Post is not interested in a serious discussion of removing these barriers to free trade.

It might also be good to discuss the professional and licensing barriers that protect U.S. doctors, lawyers, and other highly educated professionals from international competition, but the Washington Post fundamentalists are not interested in that debate either.

The Post just wants to condemn any political figure that doesn’t accept the trade gospel from its bible, even if they cannot support it with a shred of evidence or economic theory.

--Dean Baker

The Post tells readers today that the plan of Senate Democrats to prevent the alternative minimum tax from applying to more middle income taxpayers will increase the deficit "which is once again projected to approach record levels."

No, the deficit is not approaching record levels. The deficit hit 6.0 percent of GDP in 1983. CBO projects that Bush's 2009 budget (which includes unrealistic spending cuts) will come have a deficit of 2.3 percent of GDP. Add in 2.0 percent of GDP to include borrowing from Social Security and more realistic spending projections and we get 4.3 percent of GDP. That is not close to 6.0 percent.

The size of the nominal deficit is meaningless and if the Post reporters don't understand that fact, then they need to train them to do their job.

--Dean Baker

The Post has a discussion of some of the bills facing the Department of Homeland Security. Needless to say, none of its readers will be able to make any sense of it.

We are told that the total budget for the department is $38 billion, which is meaningful to about 100 budget wonks (It's about 1.2 percent of the total budget or $130 per person, per year), but it gets worse. We are told that to have effect screening of bags, it will cost $22 billion over 16 years. Presumably this is a one time expenditure? Is it adjusted for inflation? Can anyone make sense of this number?

The article includes other cost figures, which will also be meaningless to almost anyone who reads them. How about expressing the numbers on airport security costs as a ratio of total spending on air transportation, after all that is the sector that should pay the burden?

Why do reporters engage in this ritual of using numbers in ways that are meaningless to almost anyone who sees them? Why do editors allow this?

BTP challenge -- do you know anyone who could make sense of these budget numbers who doesn't do budget work as their day job?

--Dean Baker

The rise in weekly mortgage applications made the headlines at USA Today. It's not clear that this is exactly headline news.

The increase reported for the week was 3.0 percent. This followed a sharp 19.2 percent drop the previous week. Weekly data are always going to be erratic, but the mortgage application data provide even more room for error than most, since banks are changing their lending standards week by week. As a result, many more mortgages are being denied now than a year ago and probably even than a week ago. This means that the same number of applications corresponds to fewer actual mortgages. So, a bit of caution should be used in presenting these data.

--Dean Baker

NPR had a piece on Morning Edition that discussed proposals to help out people who are facing foreclosure. It focuses on a proposal by Mark Zandi, one of the economists who missed the housing bubble, which would have the government buy up bad mortgages through a complex auction mechanism and then issue new mortgages at lower interest rates to homeowners.

The discussion presented criticism from people who did not like the idea of government intervention, but it did not give any assessment of either the government cost per homeowner who retains their home. Nor did it discuss the extent to which homeowners would pay additional housing expenses relative to renting, to live in a house in which they will almost certainly never accumulate equity.

These are the key issues in assessing the merit of a proposal like Zandi's and they never even got discussed in this piece. A simple examination of the arithmetic would have shown that Zandi's proposal is likely to look like a bad deal both from the standpoint of taxpayers who want to see their money put to good use and the standpoint of people who want to help low and moderate income families.

--Dean Baker

The Washington Post had an editorial today in which came out squarely against using taxpayer dollars to “rescue” the housing market. Of course its rationale is not exactly right – these bailouts are far more about helping banks and investors than homeowners, but the Post still ends up in the right place.

The editorial is out of whack in that it seems to have bought the mortgage industry’s line that allowing bankruptcy judges to change the terms of mortgage contracts would lead to some huge increase in the cost of mortgages.

It just takes some simple arithmetic to realize that this assertion is nonsense. In normal times (i.e. when we are not in the middle of the crash of a housing bubble), loss rates on home mortgages are very low. Even averaging in recessions, we would probably only get a loss rate in the neighborhood of 0.16 percent annually. Most of the losses on mortgages are not the result of houses that pass through bankruptcy process. People simply default on their mortgages and let the banks take possession.

Let’s be generous and say that half of the losses, an amount equal to 0.08 percent of mortgage debt, result from mortgages that pass through the bankruptcy process. (The share could rise a bit from current levels, if the bankruptcy law is changed.) Now suppose that bankruptcy judges alter the terms of mortgages so that the losses on these mortgages increase by 25 percent (this would be huge). That would mean an increase in the losses to the banks equal to 0.02 percent of all mortgage debt. If we throw in an extra 0.01 percentage points (50 percent of their extra loses) to cover their additional risk, we get an increase in lending costs of 0.03 percentage points as a result of allowing bankruptcy judges to alter home mortgages.

An increase in the average mortgage interest rate of 0.03 percentage points is not altogether trivial but it is hardly disastrous as the Post editorial implies. This will not shut down the mortgage industry or even have a substantial impact on home buying. Of course, if we want to reduce the impact of this measure even further, we can make it time limited (recognizing that we face very unusual circumstances) so that the change in the bankruptcy rules only applies to mortgages that were issued prior to July 1, 2007, or some other recent date in the past. This may still lead to some modest hike in mortgage interest rates (we could face unusual circumstances in the future too), but an increase of 0.01 percentage point in mortgage rates would be a small price to pay to allow hundreds of thousands of people to keep their homes.

--Dean Baker

USA Today ran a piece today discussing trade policy in the context of lost manufacturing jobs in Ohio. It treats the loss of these jobs as a mystery, with some experts saying that trade played a role and others denying it. More importantly, the piece never discusses the high dollar, which is the most important reason that the United States has lost jobs through trade.

The fact that the United States lost manufacturing jobs to trade is not really in dispute. The country has a trade deficit of more than $700 billion or approximately 5 percent of GDP. This deficit is largely due to imports of manufactured goods. If the deficit were just 1 percent of GDP, as it was in the mid-nineties, and we produced goods domestically that we are currently importing, it would increase manufacturing output and employment by close to 40 percent. This is accounting, it is not really a disputable point, and USA Today badly misled its readers by implying that it is.

The other huge flaw in this article is the failure to mention the value of the dollar. The dollar rose by close to 30 percent against the currencies of our trading partners in the late nineties. This was the main cause of the explosion in our trade deficit.

If the dollar rises by 30 percent it has approximately the same impact on trade as imposing a 30 percent tariff on all goods exported from the United States and providing a 30 percent subsidy for all goods imported from the country. It is virtually inconceivable that the United States will be able to reduce its trade deficit to a sustainable level unless the dollar falls considerably further against the currencies of our trading partners.

It would have been especially appropriate to include a discussion of the dollar in this article, since the high dollar was deliberate policy of the Clinton administration after Robert Rubin became treasury secretary. Since Senator Clinton has quite explicitly identified herself with her husband's economic policies, presumably she also supports a high dollar policy.

--Dean Baker

Robert Shiller was one of the few economists to actively warn of the housing bubble. However, unlike me, he is prepared to absolve Alan Greenspan of the charge of unbelievable negligence for failing to take steps to combat the housing bubble.

In an NYT column today, Shiller argues that Greenspan could have been misled by the wrong views of others. While there is some logic to Shiller's argument, it only applies to situations where we can't know the underlying fundamentals.

This can be seen with a simple example. Suppose that we were watching a person flipping a coin, where a whole group of people was betting on the outcome. Suppose most of the bets on the first flip were for "heads" and the coin did in fact come up heads. Suppose a second, third, fourth, and fifth flip each turn up heads. Suppose that each time, the amount bet on heads increases.

If we derive all our information on the outcome of the coin flip from the opinions of others, then of course we would bet very heavily that the sixth flip would be heads. However, we also know that a fair coin will come up heads half the time and tails half the time, and this is not affected by either the prior five coin flips or the view of the betters that the sixth flip will also be heads.

Similarly, we have fundamentals that we could examine to determine whether there is reason to believe that house prices should diverge from the 45 year trend in government data and the 100 year trend in Shiller's data, that shows no real increase. There was no one in the debate that came up with any story that remotely passed the laugh test as to why house prices should have suddenly began to explode in the mid-nineties.

Given the absence of any plausible explanation based on fundamentals, Greenspan should have been able to ignore the views of those betting on a sixth head coming up and recognized that there was a housing bubble that would burst, and that it would not be pretty. If he couldn't see this, then he should not have been chairman of the Federal Reserve Board.

--Dean Baker

In an otherwise thoughtful article on immigration, David Leonhardt asserts that "the country will almost certainly need an influx of new arrivals in coming decades. The baby boomers are about to start turning 65. Someone will have to take their place in the work force — and help pay their Medicare and Social Security bills."

The United States will not need immigrants as the baby boomers retire, rather it will face a policy choice about the type of labor market and economy that it wishes to have. Currently, immigrants fill many of the lowest paying jobs, such as custodians, restaurant workers, cab drivers, house cleaners. If there were fewer immigrants, wages in these occupations would rise sharply. These would make it far more costly to go out to restaurants or to pay to have someone clean a house or hotel room. As a result, presumably people would go out to eat less frequently and be less likely to have a house cleaner in their home, but this would not lead to an economic collapse.

In terms of the finances of Social Security and Medicare, raising the wages of those at the bottom relative to those at the top would by itself substantially improve Social Security's finances. Much of the projected shortfall over the program's 75-year planning horizon is due to the upward redistribution of income over the last three decades. If real wages grow at a health pace, and the health care system is fixed, then the taxes needed to sustain Social Security and Medicare will not impose a large burden on the working population even without a large influx of immigrants.

--Dean Baker

Floyd Norris has a very nice column in the NYT today comparing foreclosures with home sales. It points out that in the areas hit hardest by the collapse of the housing bubble foreclosures now exceed homes sales.

Of course not every foreclosure results in a home being put up for sale, but most do. In fact, the percentage that do result in sales are likely to be higher today than in the past because fewer mortgage holders will bother with foreclosure proceedings on second mortgages. Because house prices have fallen so much in many areas, and a first mortgage generally has prior claim over a second mortgage, most banks no longer bother filing for foreclosure on second mortgage debt in places like Florida and Las Vegas, since they would not collect anything anyhow.

The Implication of this story is that a large number of homes will still be put up for sale regardless of how much builders cut back on construction and homeowners try to delay putting their home on the market. In other words, the folks who say that the housing market will stabilize any time soon must be smoking some really strong stuff.

--Dean Baker