Back in the Bag? Back on Track?

THE BE YOUR OWN ECONOMIST ® BLOG Is the cat back in the bag? Is the bailout back on track? Today’s stock-market gains say “yes:” Dow +485, Nasdaq +99, S&P +58. Perhaps the President can sway enough House Republicans to change their votes. Maybe Nancy Pelosi will convince some Democrats to play along. We’ll see on Thursday. In any event, let’s hope for the best. And let’s also hope that the Senate agrees as well. Then what? Then we take the experts at their word that the financial system will not fail. But does that mean everything is now OK? Continue reading

Today’s Defeat

THE BE YOUR OWN ECONOMIST ® BLOG Stunning. That’s the only word for it. We all knew that the House Republicans were against the bailout. But we also thought their leadership had agreed to the deal and that the package would now go forward. Instead, the House’s Republican leadership could not keep its members in line. They voted “no.” Then the Republican leadership had the audacity to blame Nancy Pelosi for the “no” vote. That’s like blaming the U.S. for Japan’s attack on Pearl Harbor. What chutzpah. Meanwhile, while the Republicans are fiddling, Rome is burning. The stock market fell Continue reading

The Triumph Of Ideology Over Common Sense

THE BE YOUR OWN ECONOMIST ® BLOG The following op-ed appeared in today’s San Francisco Chronicle: While congressional leaders continue to struggle to produce an agreement on the $700 billion financial bailout, now is the time to ask: How did we get into this predicament? The Federal Reserve’s 2001 – 2003 expansionary policy – with its rock-bottom interest rates – triggered the real-estate boom. But lack of market regulation, oversight and supervision lies at the heart of the problem. President Reagan said, “Government is not the solution to our problems. It is the cause of our problems.” The unarticulated corollary Continue reading

$100 Oil

THE BE YOUR OWN ECONOMIST ® BLOG Today was a good day. Congress reached – or is close to reaching – agreement on the financial-rescue package. Most observers believe implementation of the package will have a salutary effect on the credit markets. Better still, oil closed at $108 a barrel. That’s above a recent low of around $90, but well below its all-time high of about $140. Say we’re in the $100 range. That’s good news, too. Maybe and maybe not. Oil fell because recession is systematically and systemically reducing demand for most goods and services. This is especially true Continue reading

Ideology Has Its Price

THE BE YOUR OWN ECONOMIST ® BLOG Many of us remember President Reagan’s favorite line: “Government isn’t the solution to our problems. It is the cause of our problems.” There was an unarticulated corollary to that doctrine: Unfettered markets are the best providers of goods and services. By and large that’s true. Markets do a good job with soda pop and software and many other goods and services. But markets can’t supply us with public goods such as fire and police protection or Golden Gate Park. And markets often operate to give us things we don’t want, such as air Continue reading

Bad Bet

THE BE YOUR OWN ECONOMIST ® BLOG The Bush Administration bet the ranch – and a lot of peoples’ homes – that the market could deal with all problems. Folks would borrow; firms would lend; houses would be built. No problem. Now we know that the market failed – and failed spectacularly. But every step of the way – even when some called for more regulation – the party line was: “No regulation.” Instead, as the crisis loomed, the administration doubled down and let the situation run: Bear Stearns, Merrill, Fannie & Freddie, Lehmann, AIG. Now we’re at the end Continue reading

Ounce of Prevention vs. Pound of Cure

THE BE YOUR OWN ECONOMIST ® BLOG The residential-mortgage market failed when millions of homeowners began having difficulty paying their mortgages, thereby imperiling mortgage lenders. That, in turn, imperiled our nation’s financial system because of the lenders’ important place in the system. Financial institutions grew reluctant to do business with one another because they mistrusted each others’ credit worthiness. As financial markets began to freeze up, the federal government proposed that it borrow $700 billion and use those funds to purchase distressed mortgages from the lenders at prices that would preserve the lenders’ solvency. The federal government – already operating Continue reading

Common Sense Triumphs Over Ideology

THE BE YOUR OWN ECONOMIST ® BLOG It appears that the Bush Administration will let common sense triumph over ideology. We hear no more talk of moral hazard and the evil of bailouts. It’s time to get to work. If a homeowner has a $500,000 mortgage on a house whose value has fallen to $300,000, whoever holds that mortgage is in trouble. The homeowner can’t or won’t pay, and the mortgage-holder can’t realistically continue to value the mortgage at $500,000. It can’t be sold for more than $300,000, either. A bailout will save the mortgage-holder by taking the mortgage off Continue reading

Back in the Real World

THE BE YOUR OWN ECONOMIST ® BLOG Rumors of a government fix for the mortgage crisis fueled today’s stock-market rally. It was a sigh of relief that Washington might finally deal with the root of the matter. But even if the financial system does not freeze up, a recession continues to unfold. Today the Conference Board announced (http://www.conference-board.org/economics/bci/pressRelease_output.cfm?cid=1) that its index of leading economic indicators declined again in August. This was the third decline in the last four months. The index, which now measures 100.8 (2004 = 100.0), is 2.7 percent below its year-ago level. Note, moreover, that the index Continue reading

Moralizing Our Way To Financial Debacle

THE BE YOUR OWN ECONOMIST ® BLOG The following op-ed piece appeared in Tuesday, September 16th’s edition of the San Francisco Chronicle, before the collapse and federal takeover of AIG. Monday’s financial meltdown brought an analogous parable to mind. Suppose your local fire department sold cigarettes and bedroom furniture, but refused to fight fires caused by smoking in bed. When the fire fighters arrived at the blazing home of a bedtime smoker, they returned to the firehouse without extinguishing the blaze. Their rationale: Avoid moral hazard. Don’t reward bad behavior. Their reasoning: We sell cigarettes and beds. We don’t tell Continue reading