Did Fannie Mae Really Do It?

Triple Crisis blogger Jeff Madrick originally published this article on the Schwartz Center for Economic Policy Analysis (SCEPA) blog, a Triple Crisis partner.

An old debate has been resurrected by the publication of Reckless Endangerment by respected journalist Gretchen Morgenson and financial analyst Josh Rosner. While sadly misleading, this book has energized another round of blame-it-on-the government posturing in Washington. Two politically conservative columnists, David Brooks of The New York Times and George Will of The Washington Post, use the book to tell us in recent columns that Fannie did it. Anti-government forces are lining up with even more vigor against Dodd-Frank rules. Here we go again.

The accusation that Government-Sponsored Enterprises (GSE’s) Fannie Mae and Freddie Mac are the major causes of the financial crisis is palpably wrong. However, while the Morgenson-Rosner book is being used to make a case against government housing policy in general, at this time I want to introduce another perspective about government’s role in housing. As usual, history provides us with much-needed perspective. If government caused the mortgage distress of the 2000s, why was there even more instability and excess in residential housing and commercial real estate in the 1920s – a time without similar federal interventions?

Few know this history, but it bears significantly on the depth and duration of the Great Depression that followed in the 1930s. There was a huge run-up in housing prices in the 1920s fed by privately placed mortgages. In fact, mortgages tripled in value from $9 billion to $30 billion, according to Census Bureau Data. Additionally, a private economist in the 1950s estimated that debt as a ratio of housing prices doubled from 14 percent to 30 percent. The resulting crash depressed incomes and resulted in multitudes of financial institutions going bankrupt.

Read the full article at the SCEPA Blog.

Rich economies enmeshed in crises

Triple Crisis blogger Martin Khor originally published this article in the Third World Network.

A string of bad economic news in the past week shows the rich countries in a deepening crisis — increased joblessness in the United States, no solution in sight for the Greek debt crisis and contagion to other European countries.

There was more bad news about the global economy last week.  It looks as if the major developed economies are facing worsening problems that will not go away.

This does not augur well for the developing world, as it is still dependent on the richer economies.

An economic slowdown in the United States was indicated by last week’s data of a rise in unemployment to 9.2% and only 18,000 new non-farm jobs created in June.

President Obama’s on-going battle with the Republicans to get Congressional approval to increase the government’s debt limit and avert a default is also likely to end with an agreement to slash government spending. That will have a depressing effect on the economy.

Read the full article on the Third World Network.

The debt-ceiling limit: a guide for the bewildered

Matías Vernengo

It is very difficult to explain American politics to those that are not Americans and/or have not lived here long enough.  Add to that the confusion over basic economic principles, and it becomes almost impossible to explain the debt-ceiling debate to rational people.

As noted by James Galbraith, this is not a fiscal crisis, which should be obvious, since it was a Wall Street driven bubble.  Also, contrary to what you think the Republicans are the big government party.  The graph below shows total federal government spending as a share of GDP (in black), and some spending categories as a share of government spending (in colors).  As it can be seen total spending goes up in 1981, 1989, 2001, when Republicans assumed the administration, and down in 1993, when Clinton did.  Also, note that even if spending went up in 2009, as a result of the crisis, it did come down in 2010 (which is not a good thing, by the way) with Obama.

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Restructuring Greece's debt Crisis

Triple Crisis Blogger Kevin P. Gallagher originally published this article in The Guardian, showing how sovereign debt restructuring in Greece and beyond could get snared in trade and investment treaties.

What happens when a country goes broke? Ask Argentina: bondholders sue under trade agreements. We need a fairer system.

Greece may have managed to kick the can down the road once again, but will eventually have to restructure its debt. If Greece or any other nation restructures, they will find that one of the most glaring gaps in global economic governance is the lack of an agreed-upon regime for resolving debt crises. New research shows that in the absence of conscious global economic governance, we may be left with a de facto regime: the thousands of international trade and investment treaties that have jurisdiction over government debt. Just ask Argentina.

A number of commentators have pointed to Argentina’s “success” after its bond restructuring as a lesson for Greece. Indeed, Argentina has experienced impressive growth alongside debt restructuring. But asothers have pointed out, the two cases are not all that comparable. One additional reason for Argentina’s swift recovery is due to the fact that Argentina devalued its currency, which Greece cannot do under the euro. It is also true that Argentina happened to be endowed with key primary products in the middle of a commodity boom. Greece is not so lucky.

Read the full post at The Guardian.

Restructuring Greece’s debt Crisis

Triple Crisis Blogger Kevin P. Gallagher originally published this article in The Guardian, showing how sovereign debt restructuring in Greece and beyond could get snared in trade and investment treaties.

What happens when a country goes broke? Ask Argentina: bondholders sue under trade agreements. We need a fairer system.

Greece may have managed to kick the can down the road once again, but will eventually have to restructure its debt. If Greece or any other nation restructures, they will find that one of the most glaring gaps in global economic governance is the lack of an agreed-upon regime for resolving debt crises. New research shows that in the absence of conscious global economic governance, we may be left with a de facto regime: the thousands of international trade and investment treaties that have jurisdiction over government debt. Just ask Argentina.

A number of commentators have pointed to Argentina’s “success” after its bond restructuring as a lesson for Greece. Indeed, Argentina has experienced impressive growth alongside debt restructuring. But asothers have pointed out, the two cases are not all that comparable. One additional reason for Argentina’s swift recovery is due to the fact that Argentina devalued its currency, which Greece cannot do under the euro. It is also true that Argentina happened to be endowed with key primary products in the middle of a commodity boom. Greece is not so lucky.

Read the full post at The Guardian.

Spotlight G20: New Evidence on speculation in financialized commodities markets

Timothy A. Wise

The G20 agriculture ministers dodged most of the tough issues in their meeting last month in Paris, leaving the heavy lifting on France’s ambitious G20 agenda to finance ministers later this year. Among the dodged issues were agricultural price volatility and the so-called “financialization” of commodity markets. Despite a relatively ambitious set of reforms proposed by an interagency group, the agriculture ministers “action plan” took very few actions beyond pushing for better information on grain inventories, as Jennifer Clapp and Sarah Martin explained on this blog. Action was missing, too, on a more serious consideration of grain reserves to curb price volatility (see Sophia Murphy’s recent post).

For their part, volatility and speculation celebrated the continued inaction by further roiling commodity markets, driving global food prices to new highs. And the debate rages on over the extent to which financialization and speculation are to blame for the spike in commodity prices. As I noted in earlier posts and subsequent comments (here and here), the disagreement is less over whether financial speculation causes volatility on commodities futures markets than it is over whether volatile futures markets drive up real commodity prices.

Fortunately, new research from UNCTAD is drawing light from the heat of the debate. The June report “Price Formation in Financialized Commodity Markets,” reviews the evidence and concludes that while market fundamentals determine medium and long-run commodity prices, financial speculation can lead to significant short-term price distortions in real commodity prices.

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Digital Dumps

Jayati Ghosh

I teach in a University in New Delhi, the capital city of India. In one section of the building that houses my faculty, there is an enormous and motley collection of discarded computer-related items, stacked and piled in an unwieldy mess. This has been lying around for a while now, more than a year, not only because of the prolonged bureaucratic procedures involved in getting material “written off”, but also because no one knows what to do with the stuff once it has actually been written off.

It is a sight that that is increasingly only too common in urban India, and now even in some more prosperous rural areas of the country: ramshackle piles of dismembered pieces of discarded electronic equipment such as computers, CD players, televisions and cell phones lying around in the odd corners of offices and homes. Or else simply dumped in the open in garbage heaps, and then being painstakingly searched through by rag-pickers of all ages, who look for any elements that can be resold.

In most developing countries, where recycling occurs as a matter of course because of the widespread poverty and sharp inequality that mark our consumption patterns, this may seem as something quite obvious and hardly worthy of comment. Some may even see this as evidence of our greater ability to use and re-use material items more effectively than the wasteful West. Yet this cavalier attitude to electronic waste is a major hazard to the environment and human health.

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Global Monetarism Strikes Back

Matías Vernengo

Olivier Blanchard, the chief economist at the International Monetary Fund (IMF) announced in a triumphalist tone that “earlier fears of a double-dip recession—which we did not share—have not materialized” and defended the need for “fiscal consolidation that is neither too fast, which could kill growth, nor too slow, which would kill credibility.” For Blanchard fiscal expansion has done its job, since “private demand has, for the most part, taken the baton.”  The risks are associated to the higher prices of commodities and inflation.  The Bank of International Settlements (BIS) has added to the IMF’s view that inflation is the main risk on an otherwise recovering world economy.  In their recent Annual Report they argue that: “spread of inflation dangers from major emerging market economies to the advanced economies bolsters the conclusion that policy rates should rise globally.”  That is, add monetary contraction to the policy mix.

However, it is far from clear that private demand is sufficiently strong to maintain the recovery by itself, or that slacking capacity, beyond commodity prices, imply that inflation has become the major risk to the global economy.  The two-speed recovery – sluggish in developed countries and fast in developing countries – remains a fragile one, and the possibilities of rates of growth that are insufficient to bring back the prosperity of the boom years, and increase employment and living standards around the globe are still strong.

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Revisiting Financial Regulation

Triple Crisis Blogger C.P. Chandrasekhar originally published this post on the IDEAs Network.

Don Kohn, deputy to former Federal Reserve Chairman Alan Greenspan at the time when the financial crisis broke, has won himself an unexpected and unusual job. He has been appointed to a new committee which has the mandate to guide the United Kingdom (note not the US) to financial stability. Speaking to British MPs at a confirmation hearing he chose to confess his guilt. According to the Financial Times (May 17, 2011) , he said: ”I deeply regret the pain that was caused to millions of people in the US and around the world by the financial crisis … Most of the blame should be on the private sector: the people that bought and sold those securities, on the credit rating agencies that rated them. But I also agree that the cops weren’t on the beat. The regulators were not as alert to the risks as they could have been and, to the extent they saw the risks, were not as forceful in bringing them to the attention of management, or taking actions, as they could have been.”

Read the full post at the IDEAs Network website.

Let the Doha Round be Buried: No Agreement is Better than a Bad Agreement

Mehdi Shafaeddin

The Doha Development Round (DDR) negotiations at the WTO have reached a deadlock. Various views have been expressed on the issue in the media (including in CUTS-Trade Forum). Some believe that the DDR talks are ready for burial (e.g. Susan Schwab, former USA trade representative). Others, including Mr. Lamy (Director-General of WTO), proposed a plan “B” as an “early harvest” – agree on some LDCs issues by the end of the year and on continuing negotiation on other issues. Some others have argued that the lack of agreement on DDR will be at the cost of the credibility and legitimacy of the WTO. Yet others have been in favour of separating the credibility of the WTO from the DDR issues. Professor Jagdish Bhagwati, a guru of free trade, has proposed that the death of Bin Laden is an opportunity to close DDR, which started after September 11, successfully by the end of 2011! And life without the Doha could destroy the hope for fair trade.

Mr. J.P. Lehman correctly regarded Bhagwati’s comment as pure “fantasy”. So do I. And I do not intend to dwell on it. More importantly, to my knowledge, nobody has thoroughly analyzed the reasons for the deadlock in the negotiations. Following the collapse of the talks for the preparation of  the new Round in Seattle in 1999, Jeffrey Garten, a distinguished scholar, said that “What Seattle showed was that there is a lot more angst beneath the surface” (International Herald Tribune, 9 December 1999). Despite the initiation of DDR, such angst, I believe, has continued because of the lack of credibility in the GATT/WTO rules and in the position of its main developed country members in the process of the negotiations during DDR.

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