Suppose computer prices are the same this year as last year. Is that a problem? Most people (including economists) would say no. Now, suppose that the computers you can buy this year cost the same as the computers you bought last year, but they are 10 percent better. Is that a problem? Well, the folks who get really concerned about deflation would say yes. (Our price measures adjust for quality.)

On the face of it, it is difficult to understand how the economy can be harmed by the fact that goods and services are improving in quality. But, those who believe that modest rates of deflation are harmful are in fact troubled by such quality improvements. If we have a measured rate of deflation of less than 1.0 percent, then prices would almost certainly be rising without adjusting for quality improvements, so the implication is that the economy is being harmed by the improvement in the quality of goods and services. Deflation does mean that real interest rates would be higher than if prices were flat with the same nominal interest rate, but demand is not that sensitive to modest changes in real interest rates.

The concern over deflation confuses cause and effect. In a weak economy prices may be falling. But it is not falling prices that make the economy weak.

The bulk of the economics profession, as well as the media, somehow managed to overlook an $8 trillion housing bubble as it was growing. Even as it is now collapsing, they are still missing it.

The economy is taking a big hit for an incredibly simple reason. Homeowners have lost an enormous amount of equity and therefore they are cutting back their consumption. When they cut back their consumption, companies lose business and profits. Some go out of business. This will lead to sharp declines in investment, which we have already been seeing.

There is no need to look to credit crunches or deflation. The problem is quite simply a massive lost of housing wealth, compounded by the recent loss of stock wealth. The only cure will be finding alternative sources of demand. In the short-term, government will have to fill the gap. In the longer term, it will be necessary to get the dollar down so that the country's trade is closer to balance.

It really is simple.

--Dean Baker

Post columnist Steven Pearlstein is complaining that the economists and bloggers who argued for the sort of direct injection of capital into the banks that Paulsen eventually carried through should not complain about the money being used to pay dividends to shareholders, bonuses to executives, or just being squirreled away for takeovers. As one of the economist/bloggers that Pearlstein might have in mind, I'll take a quick stab at a reply.

First, I would distinguish between two sets of issues. One is a question of getting a fair return on the public's investment, the second is controlling what banks do with the money. Both are important.

On the first point, the taxpayers gave the banks capital at less than half the cost that the private sector charges. We know this because we can compare the terms we gave ( 5 percent interest, warrants issues at 15 cents on the dollar) with the terms that Warren Buffet got from Goldman Sachs (10 percent interest, warrants at $1.00 on the dollar). The difference on the first $150 billion amounted to a subsidy to the banks on the order of $80 billion. I don't know of anyone on the left (or the right) who argued that we should give a gift of $80 billion dollars to the banks.

As far as the control issue, since the government was doing the banks a very big favor (keeping them in business) we certainly have a right to say that they should not pay dividends (and thereby build up capital more quickly) or write big paychecks to incompetent executives (they are incompetent, competent executives don't put their banks into bankruptcy).

I certainly would not have forced the banks to accept the money, as Paulson did. He should have asked the banks whether they wanted to take the deal or not. For the banks that said no, he could hold a press conference immediately after the meeting (the bank CEOs could attend or not, as they chose). At the press conference, Secretary Paulson would announce that J.P. Morgan, Wells Fargo, and the others had refused government money and want to make a go of it on their own.

He can then explain that this means that these banks will not benefit from the special insurance extended by the government to interbank loans and under no circumstances would their creditors receive a penny of government assistance apart from that committed by the FDIC insurance rules. He would also point out that short sellers are free to place bets on the success of these banks.

That would have been the economist/blogger solution.

--Dean Baker

I am very reluctant to believe that a U.S. president would time defense spending for political purposes, but it is hard to explain the 18.1 percent jump in the third quarter in any other way. Over the last 40 years, this increase is exceeded only by a 36.3 percent jump in the 2nd quarter of 2003 (the Iraq War) and an 18.2 percent rise in the fourth quarter of 1984, at the height of Reagan's military buildup. At a time when we are supposed to be de-surging in Iraq, it is difficult to identify any events in the world that would warrant such a large jump in military spending.

The increase in defense spending added 0.86 percentage points to GDP growth for the quarter. In other words, GDP would have fallen at a 1.2 percent annual rate in the absence of the leap in defense spending.

One of the reasons that I didn't think that President Bush (or any other president) would manipulate defense spending for political purposes is that I assumed that such an unusual jump would draw attention from the media. I was wrong. This peculiar leap in defense spending was almost completely ignored in the coverage of the GDP report.

--Dean Baker

NYT readers no doubt asked this question when they saw that Charlie McCreevy, the European internal market commissioner, was identified as "a supporter of free-market economics." What does this mean? Did Mr. McCreevy oppose the bank bailouts? Is he opposed to copyright and patent protection? Or, did the NYT just mean to tell us that, like almost everyone else, he is not a supporter of Soviet-style central planning?

It would be useful if reporters could get beyond cliches and try to ensure that their characterizations of individuals actually provide information to readers.

--Dean Baker

A Morning Edition piece said that foreclosures are at the heart of the financial crisis because they are pushing house prices down. WRONG!!!!!!!!!!!!

House prices are falling for the same reason that Pets.com price fell in 2000. There was a bubble which has burst. The public had no interest in keeping Pets.com price at its bubble-inflated price and it has no interest in keeping houses at their bubble-inflated price.

There is an interest in keeping homes occupied and helping people who have gotten themselves in a very bad situation, but there is no interest in propping up prices in bubble-inflated markets (in other markets, it is a different story).

--Dean Baker

The NYT appears to have been misled by Macroeconomic Advisers, one of the major macroeconomic forecasting firms that managed to miss the housing bubble. Lawrence Meyer, a former Fed Governor and the Vice chairman of Macroeconomic Advisers, told the NYT: “It’s unbelievable what has happened to all aspects of financial conditions in the past several weeks.” He then notes the sharp falloff in consumer and business spending.

Of course the sharp drop in consumer spending is exactly what economists would expect to happen as the result of the loss of $5 trillion to $8 trillion in housing wealth. It is also not surprising that business investment would drop in response to a sharp falloff in demand. The financial crisis has undoubtedly worsened the situation, but the driving force is the loss of housing wealth, not the financial crisis.

This article also includes an important mistake. It reports that the Fed has never before bought longer term bonds. Actually, prior to 1951 it often bought long-term bonds at the insistence of the Treasury. The Fed was first allowed to conduct monetary policy without interference from the Treasury Department in that year.

--Dean Baker

Leonhardt discusses the stock market, focusing on the ratio of stock prices relative to ten-year average earnings. This is good commonsense. It's too bad more of this didn't find its way into print a decade ago (or two years ago about the housing market).

The case for the market is actually somewhat brighter than Leonhardt suggests. If the market stays at the same PE, and the profit share of GDP does not change, then stock prices will rise at the rate of nominal growth of GDP. While GDP may did in the next year, the recession will not last forever. Nominal GDP growth is likely to average close to 5 percent over any reasonable period (roughly half inflation and half real growth). If this 5 percent growth is added to a 3 percent current dividend yield, then stocks look far better than any available alternative investment.

--Dean Baker

NPR brought on WSJ reporter David Wessel to talk about the state of the economy. When he was asked about whether the Fed's decision to lower interest rates might lead to another bubble, he said that economists learned that the problem wasn't the low interest rates, but that Greenspan kept them too low for too long.

This was incredibly painful to hear. Which economist who was too dumb to see the bubble made this comment? The problem was that Greenspan chose to not target the housing bubble. He could have done so by presenting the evidence that there was a bubble with charts and papers. This changes the incentives for the people at Goldman Sachs and Citigroup peddling junk.

The point is that the top executives are all saying "who could have known" right now, insisting that there was no way they could have seen the housing bubble and therefore should not be held responsible for nearly bankrupting their banks and costing their shareholders hundreds of billions.

However, if Alan Greenspan had been extremely visible warning of the bubble and warning that Goldman and Citigroup and the rest would destroy their banks with their mortgage related loans, and these banks were in the current situation, then the executives would all be fired, and quite likely would face lawsuits from investors for failing to exercise their responsibilities as managers.

David Wessel and the economists who missed the bubble may not agree with this assessment, but it's unlikely that they have a serious argument against it, just like they had not serious argument against the bubble. News outlets like Morning edition should try to present news, not the latest mantra among the fraternity of ill-informed economists.

--Dean Baker

The September data on existing home sales was reported as being largely positive, because sales rose by 5.5 percent from August levels. While the increase is a good sign, a closer look at the data suggests that the situation was not quite as portrayed.

Almost all of the September increase was due to a 16.8 percent jump in sales in the West. This increase was associated with a 10.1 percent plunge in the median house price from the July level. Clearly, what is going on is that banks are now dumping real estate in order to get cash. This must happen as part of a clear out of excess inventory, but this is not a jump due to a surge in demand.

By the way, it is worth noting that the condo market is especially glutted right now, with the inventory of unsold condos now equal to 14.3 months of sales.

--Dean Baker

We all know how hard it is to get by on tens of millions of dollars a year. That is why the Washington Post was near hysterical in its support of the Wall Street bailout earlier this month. They argued that if we didn't give $700 billion to the banks right away that all hell would break loose.

Those who wanted to put conditions that ensured that the money didn't go into the pockets of shareholders or top executives, or even that the bailout was done the right way through direct injections of capital (as it eventually was) were denounced as reactionary Neanderthals. So, the bailout went through and the Wall Street executives are now getting tens of millions in compensation, courtesy of average taxpayers.

Now the occasion comes to bailout the auto industry and the Post goes ballistic the other way. After all, the average autoworker makes $56,650 a year. That's almost as much as Robert Rubin makes in a day. Who do these autoworkers think they are?

There are serious issues that should be asked about any bailout of Detroit, but it is a bit obscene to see a paper that in both its editorial and news pages was an active supporter of handing tens of billions of dollars to rich Wall Street bankers suddenly turn around and get hysterical about the idea of helping workers making $57,000 a year. And remember, none of these autoworkers are responsible for wrecking the economy.

--Dean Baker

Last summer, when the market first took a swoon, the news media filled its air time and pages with the comments of financial analysts who said that people should hold their stock and that in fact the depressed prices made it a good time to buy. In fact, I dug up this BTP post which refers to BBC radio telling its listeners about the bargain basement stock prices that should encourage buying. That was back when the S&P was more than 50 percent higher than it is today.

As I pointed out at the time, a buy and hold strategy is not always best. It makes sense to look at fundamentals, most obviously the price to earnings ratio. When the ratio is very high, then there is a risk of large losses and less hope for a large sustained gain.

The media should have presented analysts making this obvious point. They rarely did. If the public took the investment advice that they receive through the media seriously, they have lost a huge amount of money in the last year as a result.

--Dean Baker

Ben Stein is back, telling people that it is important to save money in order to protect themselves against the sort of downturn that the economy is now seeing. While few would argue with the view that people should try to put some money aside, most people get paid less than Mr. Stein and do much better work.

Does anyone remember back in July when Stein told readers "we're dodging the worst?" How about the great piece from a bit over a year ago telling us about the "Chicken Littles" who were getting so worried over the problems in the subprime mortgage market.

Yeah, it's a good idea for people to save money, but most people have to work for a living. They have to perform on their jobs. The dishwashers can't break the dishes day after day and still have a job. The cab drivers can't get into accidents day after day and still be allowed to drive a cab.

It is only people like Ben Stein who have the right to completely mess up on their job all the time and still collect a paycheck, and indeed, a paycheck that is far higher than that received by the vast majority of people who actually do their job. It is a bit hard to see someone like this lecturing people who work for a living on the virtues of saving.

--Dean Baker

The Washington Post editorial board is now arguing that we should try to maintain bubble-inflated house prices. Of course the Washington Post, which completely missed the housing bubble is widely known for getting things wrong about the economy.

Readers recall when it cautioned against a stimulus package earlier this year: "Nor is there any consensus that a recession, if one comes, will be severe; Goldman Sachs thinks it's likely to be short and mild. The slowdown is being counteracted, to some extent, by "automatic stabilizers" such as increased spending on unemployment benefits and lower tax receipts."

I know this is Washington, but I still think people should be held accountable for their track record.

Anyhow, the basic point here is that the country has no interest in sustaining an over-valued housing market. There is an interest in keeping house prices from falling into a downward spiral which is a real possibility. This would best be prevented through a policy that distinguished between bubble markets that are still in the process of deflating, like Washington, D.C., Los Angeles, New York, and markets where prices are well in line with any reasonable measure of fundamentals.

For some reason, the Post seems incapable of recognizing such distinctions, which leads it to argue for an unaffordable housing policy in which taxpayer dollars would be used to artificially prop up house prices. This is really bad housing policy and really bad economic policy.

--Dean Baker

That's right folks, the Post tells us that Citigroup equity strategist Tobias Levkovich anticipates that consumption might be constrained because of "a shrinking sense of wealth, especially among the top 20 percent of wage earners, who account for the bulk of equity investments and 40 percent of consumer spending."

Mr. Levkovich is obviously referring to the loss of stock wealth due to the recent crash. However for most people, the major loss of wealth was the loss of equity in their home. This loss is already in the range of $5 trillion and will be close to $8 trillion before the housing market stabilizes. This will reduce annual consumption by between $400 billion and $480 billion.

The incompetence of Citigroup's analysts caused its stockholders to lose most of the value of their holdings and contributed to the growth of the bubble. The Post might try to rely on sources who are more knowledgeable about the economy for its articles.

--Dean Baker

Many school teachers, autoworkers, and plumbers do not like the idea of paying higher taxes so that the incompetent executives at major financial institutions can continue to collect their multi-million dollar paychecks. But, that is exactly what is happening as Congress voted tp "spread the wealth around" by redistributing tax dollars from ordinary workers to some of the very richest people in the county.

Yeah, we know about the limits on executive compensation. But these limits are a joke, that what all the experts said. People who read the Washington Post know that the limits on executive compensation are a joke because the Post ran a very good article (after the passage of the bailout) telling readers that the limits on compensation are a joke.

Since everyone knows that the limits on executive compensation are a joke, why did the Post tell readers in an article on the potential bailout of insurers that the banks who received government money "also must accept limits on executive compensation."

The reality is that these bailouts are being structured to be a massive transfer of wealth to the very richest people in the country. It is not supposed to be the media's job to conceal this fact from the public.

--Dean Baker

The Post gave an excellent illustration of how the economics profession managed to almost completely miss the housing bubble and the inevitable disaster that would be caused by its collapse. An article on Greenspan's acknowledgment that he made some mistakes cites Frederick Mishkin, a Columbia University professor and former Federal Reserve Board governor.

Mishkin is an interesting person to turn to as an authority. In 2006, Mr. Mishkin did an analysis of Iceland's economy in which he concluded that "the sources of financial instability that triggered financial crises in emerging market countries in recent years just are not present in Iceland."

At the time, Iceland had a current account deficit of 15 percent of GDP. The report claimed that this deficit was not necessarily a big problem, arguing that Iceland's system of inflation targeting provided the stability that allowed it to sustain current account deficits of this magnitude.

In the current economic crisis, Iceland's economy has been hit harder than any other wealthy country. Its banking system has completely collapsed and it has been desperately seeking a bailout from Russia or the IMF.

It would be difficult to imagine someone being more wrong about Iceland's economy than Mr. Mishkin, yet this does not damage his standing in the profession at all. Unlike custodians, cab drivers, or dishwashers, economists are not held accountable for their job performance. They can be wrong on everything they do every day of the week, and still be viewed as respected authorities by the Washington Post, and other media outlets, as well as members of Congress and others in policy positions.

This fact also supplies the answer to Alan Greenspan's claim that explosive situations like the housing bubble could not be seen:

"The Federal Reserve had as good an economic organization as exists ...If all those extraordinarily capable people were unable to foresee the development of this critical problem . . . we have to ask ourselves: Why is that? And the answer is that we're not smart enough as people. We just cannot see events that far in advance."

In fact, the problem is not that "we" cannot see events that far in advance. The problem is that the Federal Reserve Board and the economics profession as a whole functions more like a fraternity than a real forum for debate and truth seeking. Those whose views are taken seriously mimic the views of those with status and power within the profession, they do not think independently.

The failure of the economics profession to recognize the bubble and the harm that it would cause was due to the sociology of the profession. For any competent economist, the bubble was easy to see and the damage that its collapse would cause was entirely predictable.

[Thanks to Tom Schlesinger at the Financial Markets Center for calling my attention to Mishkin's work on Iceland.]

--Dean Baker

[addendum: In response to some comments down below, it is true that, while I did comment from time to time on the financial havoc that would result from the collapse of the housing bubble, I did not highlight this issue. (My first warning that Freddie and Fannie would likely go under was in September of 2002.)

There were two reasons that I did not highlight the financial crisis. First, even in the best of times housing is a highly leveraged asset, with buyers typically borrowing 80-90 percent of the purchase price. Of course it became much more highly leveraged during the bubble. When you lose $8 trillion in a highly leveraged asset, it is almost inconceivable that the lenders will not take a big hit. I didn't feel that much need to highlight this fact, since it seemed pretty obvious.

The main issue was establishing that there was a housing bubble. I had to contend with Alan Greenspan and just about the whole economics profession on this point. If I got anyone to concede that there was a serious housing bubble, it would not take much convincing to get them to believe that it would result in very serious financial problems when it burst.

The second reason that I did not highlight the financial crisis is that one tends to sound shrill in raising such issues. It is comparable to warning about the risk of school fires and repeatedly saying "children will die!" People understand that if there is a school fire, that children are likely to die and they should also understand that if an $8 trillion housing bubble crashes that the banks will take a really big hit. So, I tried my best to calmly focus on the risk of school fires, I doubt that I would have had more impact if I had been yelling about an impending financial crisis for the last 6 years.]

NPR just reported on Morning Edition that the markets are plummeting because investors are realizing the seriousness of the damage caused by the credit crunch. This calls for an extra long arghhhhhhhhhhhhhhhhh!!!!!!!!!!!!!!!!

The economy is not in a recession because of the credit crunch. The economy is going into a recession because of the crash of the housing bubble. Homeowners are losing on the order of $8 trillion in housing bubble wealth, $110,000 per homeowner. For most families, this is most of their wealth.

It was this housing bubble wealth that drive consumption and pushed the savings rate to near zero over the last four years. Now this wealth is disappearing and people are cutting back their consumption. In many cases they no longer have the ability to consume, since many households were borrowing directly against their home equity to finance their consumption. In other cases, they now realize the need to save, since they are approaching retirement and have nothing to rely upon other than their Social Security.

NPR completely missed the housing bubble on the way up. They relied almost exclusively on economists that did not know what they were talking about. Can't they find an economist who at least now can recognize the impact of the collapse of the housing bubble? The horror, the horror.

--Dean Baker

That is effectively what Mr. Paulson was quoted as saying in an NYT article today. He was asked about the generous terms for his bailout, which will give the nation's nine largest banks close to $80 billion in subsidies over the next five years. Paulson rejected the idea that he could have demanded market terms for the government's investments in the banks: "I could not see the United States doing things like putting in capital on a punitive basis that hurts investors."

It would have been appropriate to highlight this comment and perhaps even devote a separate article to it. Secretary Paulson has repeatedly condemned protectionism and warned how it can hurt the economy. There is no economic theory that shows that the economic distortions created by subsidies for major U.S. banks are any less harmful than subsidies for any other industry.

--Dean Baker

The NYT told its readers that China's per capita GDP is just $2000 a year. According to the CIA Factbook its per capita GDP is more than $5000 per year.

The difference is the CIA Factbook number is a purchasing power parity measure which tries to measure the value of China's output if Chinese goods and services had the same prices as goods and services in the United States. The measure reported in the NYT simply converts China's GDP into dollars at the official exchange rate. This provides little information about living standards in China.

--Dean Baker

Robert Samuelson desperately wants to cut Social Security and Medicare. To advance this agenda, he is pushing nonsense to young people, telling them that they should be furious about their parents and grandparents' Social Security and Medicare (seriously).

While young people have ample grounds to be angry at people like Samuelson and his wealthy friends who have rigged the rules to shift the bulk of the country's wealth into their pockets (e.g. the $700 billion bank bailout), it is close to lunacy to be angry at their parents and grandparents for getting their modest Social Security benefits. Of course Medicare is getting expensive, but that is because papers like the Washington Post protect the interests of the insurance industry and the drug companies, thereby making health care far more expensive in the United States than anywhere else in the world.

The reality is that most seniors will have almost nothing in retirement other than their Social Security and Medicare. This is largely because media outlets like the Washington Post touted the stock and housing bubbles and were largely closed to those issuing warnings of the disasters that these bubbles would cause. Most people therefore acted based on the views presented to them by the ill-informed "experts" whose voices were (and are) transmitted by these media outlets.

The basic story is that Samuelson is anxious to beat up on the victims of this disaster, but is too cowardly to mention the powerful (including his employer) who were really responsible.

--Dean Baker

The NYT is right to push for mortgage modifications, but the NYT's idea of keeping house prices at bubble inflated levels is bit off the wall. It is especially ironic given the paper's often expressed contempt for farm price support programs. The latter make much sense economically than a house price support program.

--Dean Baker

David Leonhardt has an interesting column in the NYT discussing ideas for bailing out homeowners. He could have gone much further in his analysis if he asked what bailing out homeowners means.

As everyone should know now, the basic problem is that tens of millions of people (urged on by bankers, financial advisers, economists, and politicians) bought homes at bubble inflated prices. The bubble is now bursting so tens of millions of people now live in homes that are worth substantially less than what they paid, and in most of these cases, much less than what they owe on their home.

In this context, "bailing out homeowners" can have three obvious meanings:

1) It can mean protecting homeowners and banks from the loss they incurred from the fall in their home's value;
2) It can mean protecting them as homeowners, by allowing them to get mortgage terms that allow them to stay in their homes; or
3) It can mean allowing them to stay in their homes as tenants, if they can't afford a mortgage workout at the current price.

It would be difficult to argue on either moral or economic grounds for the first type of bailout. Homeowners would not share any capital gains on their homes with the general public, nor would the banks share their profits. It is difficult to see why the taxpayers should be asked to pick up their losses.

Some prominent economists, like Alan Blinder (who is mentioned by Leonhardt) have argued for some sort of house price support program, which presumably would be comparable to a farm price support program, to try to keep house prices at bubble-inflated levels. However, such plans make much less sense economically than farm price support programs. (Blinder also called Alan Greenspan the greatest central banker of all-time back in 2005.) Hopefully, this sort of bailout for homeowners will not go far.

2) The second type of bailout focuses on workout arrangements that allow homeowners to stay in their home as homeowners. This approach centers on forcing the banks to eat most or all of the price decline associated with the bursting of the bubble. If the homeowner really can't absorb the loss, which will be true in many cases, then banks will have little alternative to eating the loss. Even if they foreclose, the bank will not be able to resell the home at a bubble-inflated price. In many cases, a workout involving a write down to current value will be the best route for the bank as well.

While the government can encourage such workouts, there is an inherent problem that if it makes workouts too easy, then people who can afford to eat some of the loss opt to instead pass the losses onto the banks. This becomes a concern for the public, and not just the banks, if the government then has to cough up money to keep the banks alive, as is the case at present.

3) The third type of bailout keeps people in their homes as tenants, but allows the bank to take ownership of the house. This bailout has the benefit of providing housing security to homeowners without giving them any real windfall. In other words, they have no real reason to lie about their economic condition to benefit from it. After all, they will still end up losing ownership of their home. (Actually, rather than become landlords, many banks may opt to do workouts, if throwing homeowners out on the street is not an option.)

This is also by far the most simple route to deal with administratively, since it can be put in place by just changing the foreclosure laws. It requires no new bureaucracy and no taxpayer dollars. The biggest obstacle is that the same financial advisers, economists, and politicians who blindly pushed homeownership even in the middle of a housing bubble still can't think about renting as a serious housing option.

One point on which it should be possible to agree is that we should want the bubble to deflate as quickly as possible. While many economists have hugely exaggerated the problem caused by deflation (who cares if prices are rising 0.5 percent a year or falling 0.5 percent a year?), there is a real problem associated with falling house prices. Declining house prices mean that the people who buy homes in the current market will see a loss on their home. If they can't absorb this loss, then the bank that makes the loan (or whoever holds it) will absorb the loss. Rather than a program of house price supports, the country would be best served by a crash the bubble policy.

The big problem in this story is that the folks who somehow could not see the largest housing bubble in the history of the world are still running economic policy. Unlike custodians and dishwashers, economists are not held accountable for their job performance. For this reason, we should expect many tough times ahead.

--Dean Baker

Actually, the world may not be that different, but the surprised economists know more about the economy's problems today than they did back in January. That is why the Post did its readers a disservice when it cited the Congressional Budget Office's (CBO) assessment of various types of stimulus from January in discussing the potential shape of a new stimulus package.

Specifically, CBO reported that spending on infrastructure (including green infrastructure projects) might be ineffective because of the long lead times involved in getting projects going. However, we are now looking at a long downturn, so that a program that takes a year or so to get started is still likely to provide a useful boost to the economy. Needless to say, if Congress has ignored CBO's advice and directed its stimulus toward infrastructure, much of this spending would now be kicking in, providing a substantial boost to the economy.

The other big change is that consumers have now seen much of their housing equity disappear. As a result, they realize the need to save. This means that a much smaller share of any tax rebate checks will be spent than might have been true before the recent financial crisis.

--Dean Baker

That is the only thing that readers of an article about the poor retirement prospects of the baby boomers can conclude. The article notes the decline of traditional pensions and the limited amount of money that workers have accumulated in 401(k)s, and it also raises nonsense concerns about Social Security. (The program is projected to be fully solvent through the lifetime of most baby boomers with no changes whatsoever.)

However, the article does not include a word about the huge loss of home equity that most baby boomers have suffered in the last couple of years. Insofar as baby boomers had accumulated any wealth at all, the vast majority was in the form of equity in their home. Much of this equity has disappeared in the last two years. It is incredible that USA Today can have a lengthy article about the retirement prospects of baby boomers and not mention this fact.

--Dean Baker

The NYT takes Senator Obama to task for claiming that Senator McCain would cut Medicare by $882 billion (@13 percent) over the next decade. The article explains that this claim is derived from Senator McCain's claim that he would pay for his tax plans by savings from Medicare and Medicaid. The article points out that Senator McCain never explicitly claimed that he would cut $882 billion from Medicare.

While the NYT can accurately say that Obama is making important assumptions in his attack that may not be correct, the more important issue is that Senator McCain is proposing a policy that will require large budget cuts and he has not told the public where he would make these cuts. While it is fine to tell readers that Obama's assumptions may be wrong, this belongs in a larger story that reports on the unspecified budget cuts that Senator McCain will need to pay for his tax cuts.

--Dean Baker

It is important not to attribute everything bad that is happening in the economy to the current financial crisis. The economy is going into a recession due to the collapse of the housing bubble. Consumers are cutting back on their consumption because they have seen $5 trillion in housing equity disappear, with another $3 trillion likely to be gone within a year. (The $8 trillion total comes to $110,000 for every homeowner.)

This effect is compounded by the tight credit conditions due to the financial crisis, but there has been a tendency in the media to attribute all the bad news in the economy to the financial crisis, as is the case with this front page article in the Washington Post. Firms will always cut back expansion plans during a downturn, even if credit is readily available. Of course, credit will be less readily available for many firms in a downturn, even when the financial system is operating normally. The reason is that weak firms become much worse credit risk in a downturn.

We can reasonably hope that the worst of the financial crisis will be over fairly soon (no guarantees). However, even after this crisis passes, we are still likely to be feeling the effects of a serious recession.

[Adam Davidson did a much better job on this issue on Morning Edition today.]

--Dean Baker

This is what newspapers are supposed to do.

--Dean Baker

During this financial crisis, at the top levels of all the major banks, where people get paid tens of millions of dollars a year, the most common refrain is "who could have known?" Okay, I don't know that anyone is saying this, but I do know that these people are not being fired en masse.

How could people who put their banks at the edge of bankruptcy, or beyond, not get fired. If this doesn't get someone fired what would? Are these people paid tens of millions of dollars to destroy tens of billions of shareholder value and put thousands of workers out of their jobs?

The reason that they don't get fired is the "who could have known?" ethic. The collapse of the housing bubble and the related fallout are treated as unpredictable events, as opposed to entirely preventable mistakes.

The reason why this is important is because the Wall Street Journal writes that that collapsing bubbles would require raising interest rates, which would in turn slow the economy and throw people out of work.

That is certainly unpleasant outcome, but let's try an alternative route. Suppose that in 2002, instead of testifying that there is no housing bubble, Alan Greenspan tells Congress that he is very worried about the unprecedented run-up in house prices. Suppose that he tells Congress that this run-up in prices cannot be explain by any changes in the fundamentals. Suppose further that he says that when this bubble bursts it is likely to lead to serious damage to the banking system because default rates will soar, leading to large losses.

Suppose that he repeated these comments again and again with supporting evidence. Suppose that Greenspan had the Fed staff grinding out papers documenting the evidence that there was a housing bubble and projecting the damage to various banks and other financial institutions from its collapse.

Will everyone panic and reverse their irrational exuberance? That would be my bet. But suppose that they don't and the housing bubble just keeps expanding. Then we arrive at this same juncture with a collapsed housing bubble and devastated financial system, in spite of the Fed's best efforts.

Does anyone think that the execs at Goldman Sachs, Citigroup, Merrill Lynch and the rest could say "who could have known?" to their shareholders, who just saw most of the value of their stock disappear? My guess is that all of these execs would be out of their jobs and facing lawsuits for neglecting their responsibilities to their shareholders.

The Fed would have taken a situation where the risks are now entirely one-sided (the Wall Street crew face no risk from going with the flow) and made them more symmetric. The Wall Street executives would then have to analyze the evidence and make their own judgment. In other words, they would have to work for a living.

I know that the Wall Street gang would consider this the height of injustice, but hey, we all have to sacrifice.

--Dean Baker

During last night's debate, Senator McCain blamed the housing market meltdown on Fannie Mae and Freddie Mac's lending practices. While Fannie and Freddie, as huge actors in the mortgage market, certainly contributed to the bubble, it is absurd to point to them as principle culprits. Their market share actually fell as the bubble grew to ever more dangerous levels, dropping from 50.1 percent in 2002 to just 34.8 percent at the peak of the bubble in 2006.
Fannie and Freddie deserve blame for failing to recognize the bubble (this is their job), but clearly they were not the primary cause.

The media should have highlighted this major gaffe by Senator McCain. This would be like Obama talking about a border between Iraq and Afghanistan or some other major error on a foreign policy issue.

--Dean Baker

Much of last night's presidential debate centered on "Joe the Plumber," Joe Wurzelbacher, a plumber who Barack Obama met while campaigning in Ohio. According to the New York Times, Mr. Wurzelbacher says that he is planning to buy a plumbing business that has profits of between $250,000 and $280,000 a year.

While this income would put Mr. Wurzelbacher above the threshold where he could expect to pay higher taxes under Senator Obama's tax plan, the increase in his tax bill would be relatively modest. Under Senator Obama's plan, the tax on income above $250,000 would increase by 3 percentage points from 33 percent to 36 percent. This means that Mr. Wurzelbacher could expect to see his tax bill rise by between $0-$900, assuming that this plumbing business would be his entire taxable income. If he has additional taxable income, then he would see a larger increase in his taxes.

It would have been useful for reporters to explain the extent to which Joe the Plumber would see his taxes increase under Senator Obama's tax proposal. It is unlikely that this tax increase will seriously impair his plans for his business as Senator McCain implied.

[Addendum: In response to a few notes, we have had far higher tax rates and much higher economic growth in years past. So, Joe might claim that he will shut his business and fire his workers if he has to pay another $900 a year in taxes, but the evidence suggests that there are plenty of other plumbers who would be happy to run the outfit even if the tax rate were somewhat higher.

And, since someone asked, I have always done my own taxes. (Actually, I never found it very difficult, but I'm not trying to rip off the country.) And, I don't make a six figure salary.]

--Dean Baker

The Post has a very good investigative piece on how Alan Greenspan, Robert Rubin, and Larry Summers prevented the Commodities Futures Trading Commission from regulating derivatives like credit default swaps.

--Dean Baker

That was how the Peter G. Peterson Foundation was described in a New York Times article today. It's not that I would ever question the motives of Mr. Peterson, an incredibly wealthy Wall Street investor who has often made incorrect assertions in his efforts to cut Social Security and Medicare.

I do however question why the NYT would see it appropriate to attribute such noble motives to Mr. Peterson and his institute but not to anyone else in Washington policy debates. Speaking for the Center for Economic and Policy Research, my own institution, we have a staff that works extremely hard for pay that I'm sure is much less than the norm at the Peterson Foundation. If the Peterson Foundation's working description in the NYT is "increasing awareness about the nation's economic challenges," then CEPR should get something like "exposing efforts to mislead the public about important economic issues." I am waiting to see that one in print.

Btw, this article also buys the line about people aged 70 1/2 being forced to sell stock at a loss in order to meet the rules on 401(k)/IRA withdrawals. My bet is that there is not a single person in the country in this boat since any person of this age will have a substantial portion of their account in bonds and/or money funds. Therefore we have the absurd situation of both candidates vying to fix a non-existent problem.

--Dean Baker

Okay folks, let's stop the nonsense. Senator McCain proposed temporarily changing the rules requiring that people begin withdrawing money from retirement accounts at age 70 1/2 because he needed something to say. No one will have to sell stock at depressed values because of this rule as the NYT implies today.

The reason no one will have to sell stock is that the law only requires a withdrawal of approximately 4 percent of the account. Virtually no one is going to have a retirement account that is 100 percent invested in stock when they are 70 years old. This means that they can make their withdrawal from money invested in money market funds or other assets. They will not be forced to sell their stock at depressed prices. Let's stop this nonsense.

--Dean Baker

Okay, it's not exactly media commentary, but Paul Krugman is a New York Times columnist. Anyhow his Nobel prize for economics is much deserved, the committee made a very good choice.

--Dean Baker

Well, if the Republicans blamed the financial crisis on Elvis Presley USA Today would probably just write it up politely and then note that the Democrats disagree. That is exactly what the paper did today in an article discussing how both parties contributed to the crisis.

The article notes that Phil Gramm, a former senator and adviser to John McCain, pushed through a law that prevented the Commodity Futures Trading Commission from regulating derivatives. It then presents Gramm's claim that the real problem was the Community Reinvestment Act (CRA), but notes that Democrats and "many experts dispute that."

It would have been worth noting that Gramm's claim makes no sense. The CRA did not even apply to the biggest actors in the subprime market. How could the CRA be responsible for forcing financial institutions to make subprime loans when they were not even covered by the CRA. It makes as much sense to blame Elvis.

In discussing the role of Fannie Mae and Freddie Mac in the crisis, it would have been useful to point out that they lost market share during the peak years of the housing bubble. Their share of the mortgage market fell from 50.1 percent in 2002 to 34.8 percent in 2006. While they did get heavily involved in junk mortgages, they lagged the private sector. They did not create the problem.

It would have been useful to mention the bubble itself. Neither party thought it was appropriate to force the Fed to take steps to burst the bubble before it reached such dangerous proportions. This was their bigggest failing.

--Dean Baker

USA Today reports that Treasury Secretary Henry Paulson warned against protectionism as being especially harmful in this economic crisis. Of course the most protected segment of the U.S. economy are highly educated professionals like doctors and lawyers who enjoy the protection of a wide range of institutional and legal barriers that make it difficult for foreign professionals to compete.

So, does Paulson plan a major initiative to combat professional protectionism in the waning days of the Bush administration? Reporters should be asking.

--Dean Baker

Middle class families pay almost no dividend or capital gain taxes. Insofar as they hold stock, it is almost entirely in retirement accounts. This money will be taxed as ordinary income at the point when it is withdrawn regardless of whether or not it came from dividends or capital gains. Current tax law provides very generous exemptions for capital gains on homes, so few middle class people will ever pay capital gains taxes on their house.

This means that when Senator McCain proposed a cut in dividend and capital gains taxes, he was proposed a tax cut for rich people. He was not "considering additional economic measures aimed directly at the middle class" as claimed by Politico in an exclusive story.

--Dean Baker

The Post, which relied on David Lereah, the chief economist for the National Association of Realtors, as its main source on the housing market during the bubble, seems determined to use the same level of dexterity in its coverage of the crash. In reporting how the credit crunch is damaging the economy, it told readers that a bank operating in New York and New Jersey said that "it would cut off the financing of the inventories of about 20 auto dealers in New York and New Jersey, dealing another blow to the reeling automobile industry."

Folks, this is not the credit crunch. This is the auto industry that is sinking due to plunging car sales. Dealers lose money when they have cars sitting unsold on their lots. Banks never make loans to businesses that are losing money, if they can avoid it. The auto industry and its dealer network are going to shrink because of both short-term factors (i.e. the recession) and long-term factors, most importantly the shrinkage of the Big Three market share. This is not pretty, but it is not the result of the credit crunch.

In the same vein, it is ridiculous to claim, as this article does, that mortgage interest rates are "stubbornly high." Mortgage interests are hovering near 6 percent. This is an extremely low mortgage interest rate, especially at a time when the inflation rate is running in the 4-5 percent range. The mortgage rate is high relative to the rate on U.S. Treasury bonds, but this is due to the fact that fear has driven these yields to extraordinarily low levels. If people were less fearful, the gap between mortgage rates and Treasury bond rates would shrink, but this would be due to the latter rising, not the former falling.

There is a need to take extraordinary measures to maintain the smooth flow of credit in the weeks and months ahead, but that should not mean that every failing business will be able to borrow as much as it wants or that every underwater homeowner can get a home equity line of credit.

--Dean Baker

The WSJ reports that Neel Kashkari, the bailout czar, told a group of Wall Street executives that the restrictions on executive compensation in the bailout bill really don't mean anything. Of course anyone who bothered to look at the bill already knew that the compensation restrictions were meaningless before the bill passed.

So why do we only see this reported in the media after the fact? (The Post already had an article last Saturday making this point, two days after the bill passed, as did USA Today.) Why didn't any reporters go up to the proponents of the bill who were touting the pay provisions and ask them whether they were fools or liars? Isn't that what the media is supposed to do?

It looks to me like the media went into full sales promotion mode on this bailout bill, but I'm open to other explanations.

[Thanks to David Sirota for calling this one to my attention.]

--Dean Baker

Presidential candidates like to appear to be doing something in response to a crisis, even if they actually don't have a clue as to what to do. Of course the real point is to fool the media so they will tell the public that you are doing something.

Yesterday the score was John McCain 1, Media 0. Senator McCain proposed temporarily waiving the rule for tax sheltered retirement accounts that requires that they begin withdrawing money at age 70 1/2. McCain argued that with the market badly depressed, this could force people to sell stocks at a large loss.

This is so considerate of Senator McCain. Except, it probably would not help a single person in the country. The rule requires that people begin making withdrawals at age 70 1/2. They don't have to close their account completely, they only have to withdraw 4 percent in the first year.

Most people always carry a mix of assets in their retirement accounts and usually begin to move away from stocks as they approach retirement. They is probably not a single person in the country who is age 70 and has a retirement account invested entirely in stocks. In other words, there is probably no one who is being forced by the current law to sell stock at a loss in order to meet the withdrawal requirement.

So, Senator McCain has come up with a proposal that would help absolutely no one (it will allow wealthy individuals to protect more of their money from ever being taxed). But, the main point is that he got some good press, not that he actually has a useful proposal.

--Dean Baker

Okay, I take it back. I know that I said that talk of a Great Depression was a ridiculous scare tactic by President Bush to get his bailout through Congress. But, I was wrong.

It is not that anything about the current economic situation can plausibly lead to ten years of double-digit unemployment. However, we are seeing views expressed by otherwise serious people that could in fact give us the sort of prolonged stagnation that we saw in the Great Depression.

Advocating spending cuts and/or tax increases in the wake of the downturn that we are now seeing make about as much sense for the economy as nuking Silicon Valley. If the advocates of such nuttiness get their way, then a Great Depression type downturn may be on the agenda.

I have always said that we do not have to worry about another Great Depression because we know how to get out of one now. (it's simple -- spend money.) The problem is that "we" may not be the ones deciding policy.

--Dean Baker

The WSJ had a good article yesterday reporting that almost one in six homeowners is underwater. This may actually be overly optimistic.

David Rosnick and I did an analysis of data from the Federal Reserve Board's Survey of Consumer Finance and concluded that 21.6 percent of late baby boomers (people aged 45-54) would need to bring cash to their closing next year.

This is a somewhat different question. We assumed that closing costs are 6 percent of the sale price (the standard realtor's fee). We also projected a real price decline of 10 percent from the March 2008 level to the middle of 2009. (Most of this drop has already occurred.) On the other side, the late boomers should rank high in home equity, having been in the work force for more than 20 years and near their peak wealth level.

There are two important implications of this analysis. One is that many current homeowners will be like first-time homebuyers in that they will lack money for a down payment.

The second implication is that bank losses on mortgages will continue for a long time. There will be millions of short sales (the median period of home ownership is 5 years, so many of these houses will be sold soon) where a seller get $50,000 or $100,000 less than the value of the outstanding mortgage. Very few of these people have any significant savings that can be tapped to make up the difference. This means that the banks will have to eat big losses on these sales.

The losses on this unprecedented wave of short sales has yet been recognized. If we assume 5 million short sales for an average of 10 percent of the sale price that gets us another $125 billion of losses ($25,000 per house). Make it 10 million short sales at 20 percent ($50,000 per house) and you get $500 billion in losses. In other words, the fun is just beginning.

--Dean Baker

I don't know the answer to that one, but I don't think the NYT does either. So why is it telling readers that the decision not to directly inject capital into banks, instead of overpaying for bad assets, is a "legacy of the longstanding belief that governments should hold equity positions in companies only as a last resort."

--Dean Baker

David Leonhardt has a good column putting the budgetary impact of the bailout in context. The deal is that the bailout is real money, but does not qualitatively change the picture in terms of the long-term deficit.

The story there is the same as before: health care, health care, health care. Leonhardt lays out the case well.

--Dean Baker

I'm waiting to see a reporter write this story, but I'm not holding my breath. The basic point is simple, given a path of future profits, if the stock market is high, it will cost our children and grandchildren much more money to buy a certain share of these future profits than if the market is low. In other words, if the S&P is at 1000, then our children will get much higher returns on their savings than if the S&P is 2000. (There is very little feedback the other way -- stock prices have little impact on profit growth-- so the assumption that the growth path of profits is independent of stock prices is probably a reasonable one.)

So, the young people out there should be celebrating the plunge in the stock market, except for the relatively small group who were anticipating inheritances from their parents. You can't please everyone.

--Dean Baker

If a news reporter deliberately makes a false statement claiming that a private company like Boeing or Microsoft is going broke, the company has the right to sue the reporter and the news agency. That is why reporters rarely make statements like Microsoft or Boeing (or Lehman Brothers, AIG, or Goldman Sachs) are going broke.

However, reporters can freely impugn the financial health of a government program like Social Security because a government program cannot sue for libel. That is why Brokaw knew that he could imply that Social Security is going broke, even though it is not true. Social Security cannot sue Brokaw even if he deliberately tells explicit lies about its financial health.

Those who are interesting in learning about the true state of Social Security's financial health can find out by looking at the non-partisan Congressional Budget Office's website.

--Dean Baker

Remember way back to last week when it was going to be the end of the world if Congress didn't pass the bailout package? Remember the Washington Post's account in which Treasury Secretary Henry Paulson told President Bush, "there is no Plan B."

Well, it looks like the Fed has discovered a Plan B. It turns out that the Fed can buy commercial paper directly from non-financial corporations needing credit to maintain operations. This will keep the credit markets working even if the zombie banks aren't up to the task. In other words, the threat of a complete meltdown in the absence of a bailout was nonsense and the media once again got taken for a ride by the Bush administration.

Of course, relying on the central bank to dish out credit to corporations is not ideal, but neither is it ideal to overpay for $700 billion of junk assets on the books of troubled banks.Too bad that the media didn't spend more time focusing on the options available, instead of selling President Bush's bailout package.

While we're on the topic of the bailout, how about a little media follow-up on the issue of limiting executive compensation. After the bill passed, there have been several articles reporting the views of various experts that the limits on executive compensation were essentially meaningless.

This provides the potential for some great news stories. Did the members of Congress not know that their restrictions on executive compensation were meaningless or did they deliberately try to deceive the public? Real reporters would be asking this question.

--Dean Baker

It's better late than never, but Howard Kurtz, the Post's media columnist still misses some very fundamental points on the media's reporting on the economy.

First, reporters should recognize that people employed by an industry lobby have an ax to grind. They are not neutral observers. This means that it was incredibly irresponsible to have David Lereah, the chief economist for the National Association of Realtors, as the Post's most widely cited expert on the housing market. Lereah was in the business of selling homes, not helping Post readers understand the economics of housing. The paper's reporters and editors should have known this.

The second point is that it is reasonable to take into account experts' past performance when assessing the quality of their analysis. Specifically, it would have been reasonable to downgrade the analysis of any expert who failed to recognize the stock bubble and the inevitable recession that resulted from its collapse. If an economist was unable to recognize a $10 billion stock bubble, there was little reason to believe that they would be capable of detecting a bubble in the housing market.

In other words, when assessing the situation in the housing market, the Post should not have relied almost exclusively on experts who were wrong about the most important economic development in the 90s. The Post seems to still be following this practice, as its economic reporting relies almost exclusively on experts who managed to overlook both the stock market bubble and the housing bubble.

--Dean Baker

The NYT has an interesting article reporting on the falloff in consumer spending in recent months. It notes that many economists were yet again surprised by this downturn.

At one point it quotes an economist attributing the falloff to the loss of $6 trillion of household wealth, with $1 trillion in the last week. It is worth distinguishing between the loss of housing bubble wealth, which is likely to be enduring, and the loss of stock wealth, which is likely to prove transitory. Consumption generally does not follow short-term fluctuations in the stock market, so in ordinary times the stock market plunge from last week should not have had an impact on consumption.

However, the fact that President Bush and other political leaders, and the media, made such an effort to highlight the stock plunge in an effort to gain congressional approval of the bailout, could result in it having a lasting impact on consumption.

--Dean Baker

That's what the NYT says. And we know that because all of the economists who missed the housing bubble say so.

This is getting to be a bit like theater of the absurd. Last week, we had the leading economists tell us that we could end up in another Great Depression. Today we are being told that the economy is stronger than in the 70s, a period in which GDP growth averaged 3.0 percent and the unemployment rate averaged 6.2 percent.The 70s were not a great decade for the economy, but no one in their right mind could compare them to the Great Depression.

If the economy is stronger than it was in the 70s, or even close to as strong, then the comparisons to the Great Depression were nonsense (as I argued).

--Dean Baker

Get it here.

Okay, this one is from way back in September, who could have known that things would turn sour?

--Dean Baker

The NYT has a piece that lays out how Fannie became over-extended in buying up risky mortgages. It implies that there was some failing with their computer models, which could not accurately capture the risks the company faced. Actually, it's problem was much simpler, they assumed that the housing bubble would not deflate.

Recognizing that there was a bubble and that it would deflate did not require any complex modeling. It was actually a very simple exercise. It is remarkable that a huge financial institution like Fannie Mae (or Freddie Mac) failed to see the bubble and/or to take account its collapse in its planning.

The purchase of risky mortgage was very much a secondary issue. If houses prices had not tumbled, the default rates on these mortgages would have been manageable and the losses would not have bankrupted the institutions.

This piece also could have been somewhat more careful in distinguishing between types of loans. While many of the high-risk loans bought by Fannie were made to African Americans and Latinos, the Alt-A category of loans including a very high percentage of investment properties, the vast majority of which were not purchased by blacks and Latinos.

Also, there were many institutions, such as the South Shore bank in Chicago, that have a long history of lending to moderate income people of color, with very low default rates. If Fannie had only been interested in increasing the availability of mortgage loans to under-served communities, it could have focused its efforts on those institutions with solid track records. (Although encouraging anyone to buy a home at a bubble-inflated price was not a good idea.) Clearly its dealings with the major issuers of risky mortgages were driven by profit, not a desire to aid minorities.
[Thanks to Yves Smith of Naked Capitalism for reminding me of the blame the poor aspects of this article.]

--Dean Baker

--Dean Baker

The Washington Post had a very good article on the front page of the business section telling readers that the restrictions on CEO pay in the bailout package will have little impact. The article quotes Graef Crystal, the country's leading expert on CEO pay, describing the treatment of CEO pay in the bill as being, "like somebody aiming a gun through the window; they've got in their sights a CEO, and then they decide to shift over a little bit and drill a shareholder instead. The CEO just keeps walking and doesn't even know he might have gotten hurt."

It would have been interesting to ask why Congress would include restrictions on CEO pay that all the experts agree are essentially toothless. It is also interesting to ask why the Post only saw fit to write about these restrictions after the bill passed.

--Dean Baker

Readers must assume that the Post has a bug in the White House since it has a front page article relating portions of conversations between President Bush and Treasury Secretary Paulson that has no sources. If the Post didn't learn about the conversation from a specific source, then it must have had direct access to the conversation, right?

Alternatively, the Post actually did have someone who was a party to the conversation relate the conversation to its reporters. But that can't be possible. Serious newspapers wouldn't just present someone assertions about a conversation as truth. Everyone, especially politicians, can be expected to have their own particular angle to a set of events. That is why reporters always distinguish between items they know directly and information they get from a source.

If the Post actually got its information from a source we might be inclined to question whether Henry Paulson really told President Bush that "there is no Plan B" when it came to the bailout package. Since this is so obviously not true, it is difficult to believe that the Treasury Secretary actually made this assertion to President Bush.

Presumably the Treasury Secretary knew that it was possible to restructure his plan (it had few details, so they clearly had not spent much time crafting it) to focus on directly injecting capital into banks, as was recently advocated by George Soros in the Financial Times. This is also the path advocated by almost every economist in the country who has spoken on the issue.

It also would have been possible to make more extensive compromises with Democrats with the existing plan, for example a more specific commitment to get equity in exchange for losses on assets, along the lines laid out by Senator Dodd in his proposal the prior week. The White House also could have given ground on the bankruptcy provision for home mortgages, reversing a special interest clause for the banking industry. This refusal to compromise is inconsistent with the behavior of people with "no Plan B."

The article also highlights the plunge in the stock market on Monday. Serious reporters know that daily movements in the stock market are driven by mass psychology (what event cased the 1987 crash?) and have almost nothing to do with the underlying strength of the economy. No one would advocate using daily stock market movements as a basis for public policy.

As was the case with its coverage of the Iraq War, the Post abandoned normal journalistic standards in its coverage of the bailout.

--Dean Baker

Economists can be an incredibly thick group when it comes to economic issues. NPR reports that Glenn Hubbard, who was formerly chief economist to President Bush, has a bailout package that would allow every homeowner in the country to refinance their mortgage at a 5.25 percent interest rate.

In addition to being a very nice gift to wealthy homeowners (unless we cap the size of the mortgage), it will not solve the problem of collapsing housing bubble. The problem is that house prices are too high. Let's try that again, the problem is that house prices are too high.

Economists used to believe in prices being determined by supply and demand. The bubble pushed house prices up by more than 70 percent above their trend level. There was no change in the fundamentals that justified this rise as some of us tried to argue to people like Mr. Hubbard back in 2002, 2003, 2004, 2005, and 2006. This meant that prices were being driven by speculation.

The bubble was extended by the predatory mortgages in the subprime market and new exotic mortgage instruments developed in these years, but the underlying problem was house prices, not the mortgages. It is remarkable that people like Hubbard did not see the bubble back when this monster was growing. It is astounding that he still does not understand it even as its collapse is wrecking the economy. It would have been useful for NPR to seek the comments of someone who did not miss the housing bubble on this plan.

--Dean Baker

The NYT has a superbly timed piece reporting on how a 2004 change in an SEC rule allowed Bear Stearns, Lehman, and the other major investment banks to leverage themselves to unprecedented levels. Among the highlights of the story is the fact that Treasury Secretary Henry Paulson was one of the main people pushing for this change in SEC rules.

--Dean Baker

Like all right thinking people in our nation's capital, the Washington Post supports President Bush's bailout. However, its single-minded pursuit of fiscal austerity led it to make an assertion that would be good grounds for defeating the package. The Post told readers that, "when you strip away all the rhetoric, pro and con, TARP amounts to a deliberate but as-yet-unquantifiable reduction in our future wealth -- for the sake of our present stability."

Actually, the other proponents of the bill are claiming that the bailout will increase our future wealth. The claim is that the bailout will prevent a sharper downturn, thereby maintaining higher levels of output. This increases national wealth, although it could mean a larger federal debt. It's not clear if the Post differs with other proponents of the bailout, and actually thinks it will lower output or whether it equates the national debt with the country's wealth. In either case, the Post appears to hold a very peculiar view of either the bailout or the economy.

--Dean Baker

The NYT has an interesting piece describing the set of events that led Secretary Paulson to request a $700 bailout from Congress. It is important to put some of the data discussed in this article in context. One of the charts accompanying the article shows the amount of commercial paper outstanding (short term loans to businesses) falling by more than $50 billion in each of the last two weeks.

While this falloff is discussed as an indicator of credit tightening, it is also partially attributable to demand conditions. The cost of corporate borrowing has definitely risen in the last few weeks. While in some cases this may prevent firms from getting the money they need to stay in business (this will most likely be true of firms that were already facing severe financial problems), the drop in commercial paper also partly reflects the decision of many firms to delay borrowing until the costs are lower.

Many firms have excess cash right now (especially with the recession leading them to put investment plans on hold), so it would be perfectly reasonable for them to delay borrowing for a few weeks in the hopes that the markets will settle down and they would be able to borrow at a lower interest rate. In other words, much of the drop shown in the chart is likely just an issue of timing, and not reflecting a lack of availability of credit.

--Dean Baker

Reporters on economics and business should know that, but from the reporting on the bailout, it is clear that very few do. There seems to be a view that stock market wealth is money from heaven.

Ownership of stock is a claim to the future profits of the corporations whose stock is owned. If the value of stocks increase because the economy is expected to grow more rapidly, and therefore future profits will be larger, then it is reasonable to say that a higher stock market is good news for everyone.

But suppose the stock market goes up because the markets think that the government will tax school teachers and fire fighters to hand money to Wall Street banks. Is this one good for everyone?

Finally, suppose that the Wall Street titans haven't a clue what future profits will be (these are the folks that pushed the NASDAQ above 5000), and a rise in the stock market is driven by irrational exuberance. In this case, the higher stock market simply means that stockholders have a greater claim on the same amount of national wealth. This would be like handing out a trillion dollar bills and giving them only to shareholders. That's good for the shareholders, but not for the rest of the country.

It would be nice if the folks who report the news understood that the stock market is not the economy.

--Dean Baker

Thomas Friedman doesn't like the people who oppose the bailout. He told readers that today.

He told Congress to stop asking questions and just hand the money to Wall Street.

"Message to Congress: Don’t get cute. Don’t give us something we don’t need. Don’t give us something designed to solve your political problems. Yes, Hank Paulson and Ben Bernanke need to accept strict oversights and the taxpayer must be guaranteed a share in the upside profits from all rescued banks. But other than that, give them the capital and the flexibility to put out this fire."

Does Freidman have any idea what the fire is or whether this package will put it out? That's unlikely, but when the Wall Street banks are in trouble, Thomas Friedman doesn't ask questions.

--Dean Baker