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

Washington DC’s Fox affiliate appears to have been taken over by Wall Street lobbyists. It has been reporting all sorts of unsubstantiated assertions that a credit squeeze is destroying the economy. You'd never know that typical 30-year mortgage is going for around 6.0 percent these days. Back when I last bought a home I had to pay 7.15 percent. But in Fox's sell the bailout campaign, there is no place for arithmetic.

Of course few people expect much journalistic integrity from Fox. On the other hand, the NYT enjoys a somewhat better reputation. However, with some of its reporting on the bailout, it's not clear this better reputation is deserved Today it told readers that “early on Tuesday, banks were charging one another the highest overnight borrowing costs ever recorded, as measured by an important rate known as Libor.”

That sounds really bad -- the highest overnight borrowing cost in history. Maybe it would have been helpful to tell readers that this data has only been compiled since 2001, a period of unusually low interest rates.

If we want a longer time frame, we can look at the history for the three month interbank rate. Bloomberg reports that the three month London Interbank rate (LIBOR) closed at 4.05 percent on Tuesday. In the same chart, we can find that it was 5.23 percent a year ago.

Those interested in a little more history can find that the LIBOR rate was over 8.0 percent for most of 1990 and actually topped 9.0 percent on some days in September of 1989.

So how scared should we be that yesterday's interest rate was almost half as large as the three month LIBOR back in 1989? It would be hard for a serious person to explain how a 4.05 percent LIBOR can shut down the economy, when the interest rate has been more than twice as high in the not too distant past. But, that won't fit the NYT credit crisis story, so you won't see the historical data mentioned.

--Dean Baker

On January 3, 2001 the NASDAQ jumped more than 14 percent. What was the basis of this euphoria? Alan Greenspan had lowered the federal funds rate by a full percentage point in a rare special meeting. Investors were convinced that this meant that the fed would prevent a recession. Two months later the economy began losing jobs and entered a recession. It didn't begin adding jobs again until the fall of 2003.

The moral of this story is that financial markets should not be viewed as the embodiments of wisdom about the economy. The big actors in the financial markets are subjects to bouts of fear and panic just like the rest of us. In fact, they might even be more subject to irrational mood swings because they sit around talking to each other all day.

The conventional wisdom in the media was that the economy would collapse in the absence of the bailout. I know of few, if any, economists who shared this view, even among those who supported the bailout. However, the disaster view undoubtedly permeated Wall Street just as the euphoria view permeated Wall Street in January of 2001.

We cannot look at the markets as an independent gauge of the impact of Congress not passing the bailout. The stock markets are reflecting the conventional wisdom in the media, they do not provide an independent assessment of the economy.

Furthermore, while the sharp one-day drop is in fact scary, it actually has relatively little direct impact on the economy. As former Treasury Secretary Robert Rubin often said, "markets go up, markets go down." Lower stock prices do not cause firms to cut back investment or layoff workers. Such decisions will be made based on their assessment of the state of the economy and their specific market.

None of this trivializes the dimension of the economic problems facing the country. However, these problems stem first and foremost from the loss of $4 trillion to $5 trillion of housing wealth due to the collapse of the housing bubble. The problems faced by the financial system are an important side-effect from this collapse, but we would still face enormous economic problems right now even if our financial system had somehow escaped unscathed.

Reporters should not allow the panicked reactions of financial markets to lead them to misrepresent the nature of the economy's problems.

--Dean Baker

Should we assume that the NYT is really concerned about the banks? That would be a reasonable conclusion after it headlines a news article, "Trying to Avoid Economic Calamity, Lawmakers Grope for Resolution."

Just to be clear, the headline writer has no clue what 535 members of Congress are trying to do in seeking to pass a bailout resolution. The writer does not know whether Congress believes that the bailout will "avoid an economic calamity," nor does the headline writer know that the package actually will prevent an economic calamity. So why make this sort of assertion?

--Dean Baker

There is nothing intrinsically bad about raising taxes if the money is used for important public services. However for an important segment within the population, tax increases of any sort are sacrilegious. Senator McCain has sought the support of this group, pledging that he would never raise taxes.

This is why it is striking that the media has not paid more attention to Senator McCain’s health care plan. For a substantial segment of the population, this plan is likely to lead to an increase in taxes.

The basic logic is that Senator McCain wants to eliminate the tax deductibility of employer provided health insurance and replace it with a $2,500 tax credit ($5,000 for a family). For most people with employer provided health insurance, this will end up being close to a wash at present. However this will change through time.

The tax credit is projected to increase at the rate of inflation. Health insurance premiums have been rising much more rapidly. Suppose that an employer currently pays $7,500 a year for insurance. (That’s approximately what CEPR pays). If health care premiums rise at the rate of 7 percent annually (the rate that they have been increasing) then in 10 years, this premium will be $15,000. For someone in the 25 percent bracket, this would imply a tax deduction of $3,750.

On the other hand, the size of Senator McCain’s tax increase will only rise with the projected rate of inflation, which is currently about 2.5 percent. In ten years this should raise the size of the tax credit to about $3,200. In this case, Senator McCain’s health care proposal would have raised our taxes by $550 (the $3,750 deduction minus the $3,200 tax credit).

A $550 tax increase for a middle income family isn’t the biggest deal in the world, if the policy is otherwise sound (it isn’t), but it is inconsistent with a no new tax pledge. Senator McCain could of course change his formulas so that fewer people would face tax increases under his health care plan, but as it stands now, he does propose increasing taxes on a substantial portion of the population. This deserves some attention.

--Dean Baker

on TPMCafe.

Contrary to what NPR told listeners this morning, the bailout has no serious restrictions on CEO pay. It has weak provisions that limit the tax deductions for very narrow categories of executive compensation. It is not clear whether these restrictions will limit any CEO's pay, however there is no doubt that executives at companies like Goldman Sachs will still rake in tens of millions of dollars even as their banks get billions of taxpayer subsidies.

--Dean Baker

Regular readers of BTP know that the Washington Post editorial board occasionally just makes up numbers to advance its arguments. For example, last year it told readers that Mexico's GDP had quadrupled since 1988 when it was trying to argue that NAFTA was great success. (It had actually grown 83 percent.)

Well the Post editorial board is at it again. Today it told readers that "the [budget] crunch actually begins much sooner than that -- in 2011, when Social Security's cash flow turns negative, because of the first wave of baby-boom retirements."

This not true, the Social Security Trustees report projects that income from designated Social Security taxes (not counting interest on its government bonds) is projected to exceed benefits until 2017. The Post just pulled 2011 out of the air to try to scare readers.

Of course, the year when benefits first exceeds tax revenue makes no difference for either SS or the overall budget anyhow. Under the law, SS is financed by a designated tax. The surplus over the last quarter century has been used to acquire more than $2.4 trillion in government bonds. According to the SS trustees, the bonds held by the trust fund will be sufficient to keep the program fully solvent until 2042. According to the non-partisan Congressional Budget Office, the program will be fully solvent until 2049. Both dates are far enough out that reasonable people need not panic, we have dealt with far more imminent SS shortfalls.

As far as the federal budget, the stress is first felt when the annual surplus of revenue over spending begins to decline. We're already pretty much there, as the recession and jump in inflation virtually guarantees that the 2009 surplus will be smaller than the 2008 surplus. Of course this is not that big an item in the federal budget, which is why the Post and no one else bothered to notice it.

The next sentence in the Post article is the highlight: "According to the GAO, the federal budget deficit -- projected at more than 3 percent of GDP next year -- is on a path to exceed 20 percent of GDP by 2050, unless we enact substantial reforms to our tax structure and entitlement programs."

Actually, if we just had a health care system that was as efficient as the health care system in Canada, Germany, England, France or any other wealthy country, we would not have to make any other fundamental changes to the "tax structure or entitlement programs." We have a health care problem, not a budget problem.

The Post obviously has an agenda to cut SS and Medicare and they are willing to mislead their readers to advance this agenda, just as they were willing to mislead readers to make the case for NAFTA.

--Dean Baker

There are numerous accounts of the bailout that discuss the possibility that taxpayers will make money on the deal when the housing market stabilizes (e.g. the print version of the Post article). This is a fairy tale.

We had a housing bubble. A housing bubble is like a stock bubble. Prices get over-valued because of irrational exuberance and do not reflect fundamentals. After the bubble collapses, prices fall back to levels consistent with their fundamentals.

In the current case, the bubble is about half deflated and house prices are falling rapidly. They are not falling because of the credit crisis. They are falling because of an enormous over-supply of housing. The vacancy rate for ownership units was already 50 percent higher than its previous record in the fall of 2006. This was before there was any credit crunch.

The fact that Alan Greenspan, Henry Paulson, Ben Bernanke and many other others in positions of authority did not recognize the housing the housing bubble in years from 2004-2006 demonstrated extraordinary incompetence. Anyone who still does not understand that the root problem is a bursting housing bubble should not be allowed near the negotiations and certainly should not be writing news articles trying to inform the public.

--Dean Baker

The NYT told readers that the Bush administration requested the $700 billion bailout "to prevent an economic collapse."

Is that so? Do we know for sure that this is not a trumped up crisis designed to help the Wall Street fat cats? I don't know the answer to that one. If the NYT does they really should share this information with their readers.

--Dean Baker

Unfortunately, I'm only partly kidding. The NYT apparently still does not recognize that there was a housing bubble. In its editorial today it argued for including reform of the bankruptcy laws to protect homeowners (good) and to support house prices (loony).

It is incredible that the NYT missed the $8 trillion housing bubble on the upside. (Actually some of its reporters did write about it, unfortunately the editorial writers apparently don't read the paper.) It is astounding that they still can't see the bubble even as its collapse is leading the country into a financial crisis and recession.

It makes no more sense to prop up house prices than it does prop up the price of Internet stocks. The big mistake was letting house prices get so out of line in the first place. The best that we can hope to do now is limit the pain to homeowners and the financial system.

--Dean Baker

The NYT is spreading fear at a very bad time. It told readers that "Credit Enters a Lockdown." The information in the article doesn't back up the case.

Much of the story seems to rest on the experience of a mortgage broker in Cape Coral, Florida. According to the broker, "The underwriters are terrified and they’re dragging their feet, and making more excuses not to close loans ... Basically, they just don’t want the deals.”

Cape Coral is on the West Coast of Florida, which is ground zero for the housing bubble. House prices in the area are plummeting. No one in their right mind would make a real estate loan in this area even if they had more money that Bill Gates.

While the banking system is clearly impaired by its mountain of bad debt, it is still expanding credit at a modest pace. For example, credit card debt grew at a 3.5 percent annual rate and a 4.8 percent rate in July. This growth is not consistent with a credit freeze up.

--Dean Baker