John Taylor on the Blinder-Zandi attempt to analyze the impact of government intervention.
Taylor vs. Zandi on the PBS NewsHour.
Arnold Kling critiques here and here.
My take is summed up the by the quotations marks I’ve put around “measuring.” Blinder and Zandi don’t really measure the impact of government intervention. They measure what the model says is the impact. The model is based on past relationships that were unable to predict where we are now. This quote from the CBO explaining why their estimates of the impact of the stimulus on employment did not actually look at the actual data of the economy after the stimulus passed sums it up best for me:
CBO has also examined incoming data on output and employment during the period since ARRA’s enactment. However, those data are not as helpful in determining ARRA’s economic effects as might be supposed, because isolating the effects would require knowing what path the economy would have taken in the absence of the law. Because that path cannot be observed, the new data add only limited information about ARRA’s impact.
In other words–we don’t have a reliable model of the economy in its current state. The CBO concludes that we should instead look at previously estimated relationships in the economy (holding everything else constant) and that’s the best we can do. I conclude we’re incapable of holding everything else constant and therefore the CBO’s results are fake science.
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I think what Justin refers to here is Reg AB,
http://www.sec.gov/interps/telephone/cftelinter...
and the recent conflicting regulation caused by the new finreg bill
http://currents.westlawbusiness.com/Articles/20...
Rolling back the Rule 436(g) exemption required ABS issuers to obtain consent of the credit rating agencies in order to include the ratings as required by Item 1103 (a)(9) and Item 1120 of Regulation AB.
Asset-backed securities are in a six month “no action” holding period, while everybody scrambles to figure out what other crap is in Dodd-Frank, and how to comply with conflicting regulatory directives.
Fun stuff, eh?
If you haven't yet read Roger Garrison's macro book (Time and Money) you might find it interesting. Like you I have great skepticism about macro, but much in Garrison's book made sense to me after I adjusted to the fact that reading it did not allow me to enjoy a cocktail simultaneously; Garrison as near as I can tell pondered every element and placed it purposefully.
Ordering it now on amazon. Thank you sir.
Coincidentally, both “Time” and “Money” are 2 of my favorite Pink Floyd tracks (DSOTM).
[Still struggling thru Niall Ferguson's The House of Rothschild, Vol I at the moment - insanely detailed, but historically economically and financially fascinating]
I can't find anything about SEC requiring AAA ratings. It doesn't make sense because the secondary market has lower-rated RMBS and CMBS in it.
If the statement is that AAA ratings are best, then sure. Lots of funds (pension, insurance, money-market) are restricted from holding lower-rated securities, so a AAA buys you the lowest cost of capital and the widest market.
P.S. Things is going to get worser and worser. Just the ABS market is a $1 trillion (or so) dollar market. League tables form 03/04 were just under that amount. What really perplexes me is why foreign companies keep investing in the U.S. Aren't there better places to go?
Yeah, that part was new to me too.
Basel II set bank capital requirements, which stipulated certain ratings of holdings (asset quality, which incentivized the AAA-rating for most of these IBs to eat their own cooking), but I can't recall an overt AAA-requirement here.
Because FNM/FRE were de facto government-backed, the assumption was they were “most likely to get bailed out,” which turned out to be true.
The new law is clearly a major problem, because it “fixes” the ratings requirement problem (ex post), but creates a different problem with “expert liability,” a huge disincentive for ratings agencies.
I love Congress.
Not yet, that's the scary thing. You'd think so though, huh?
I wish I would start recording what I read and where. I can't find it now (of course) but there's some work going around about initial bailouts way back a long time ago and how this assumption of being bailed out – that many consider to be a relatively new thing – is actually quite an accepted practice.
The chief problem with this legislation – and much new legislation over the past few years – is the level of discretion. Rule of law is being abandoned for the rule of our betters.
We keep going like this an it is inevitable.
The other thing that I found useful as I read Garrison's book, besides not having a cocktail while reading it, were the powerpoints he has on his website for the Econ 2030 class he teaches at Auburn. There are many, but the last 5 or so were the MOST useful as I read the first 4 or so chapters of his book; here is a link that I think will work:
http://www.auburn.edu/~garriro/2syl10spring.htm
Yep.
There is no rule of law. Law is now bunk.
Not to be a downer on a lazy Sat. afternoon, but I think we're witnessing the first irreparable foundational cracks in the crumbling of Western economic society.
That's great stuff. Thanks!
I don't necessarily disagree, but I might pick the nit about “first irreparable.” As we know, there is never any recession in government size or influence, so really this all started back in the 1930s. Prior to that, there were still “caretaker” presidents, but I think Coolidge was the last one.
________________________________________
Are you referring to the Recourse Rule amendment to Basel I that governed bank's capital minima?
http://causesofthecrisis.blogspot.com/2009/09/t...
FTA:
“Under the Recourse Rule, an AA- or AAA-rated asset-backed security, such as a mortgage-backed bond, received a 20-percent risk weight, compared to a zero risk weight for cash and a 50-percent risk weight for an individual (unsecuritized) mortgage. This meant that commercial banks could issue mortgages—regardless of how sound the borrowers were—sell them to investment banks to be securitized, and buy them back as part of a mortgage-backed security, in the process freeing up 60 percent of the capital they would have had to hold against individual mortgages. Capital held by a bank is capital not lent out at interest; by reducing their capital holdings, banks could increase their profitability.”
Yeah banks knew this made them more vulnerable, but since the rule allowed it, some banks went all in and came up empty (see Citibank et al).
Not sure where regulators came up w/ the 20% risk weight, but we shouldn't really be surprised cause that's what you get when people with no incentives in the marketplace/transaction make arbitrary rules and never circle the wagons to evaluate the results.
equally unsupported by any evidence by your standards
I don't think that is entirely accurate. Look at the crash of 1987.
How bad was it compared to the latest crash?
How much “stimulus” spending was required to end the recession?
How much time did it take for the economy to recover?
I would argue that the crash was just as bad as the bursting of the housing bubble, that there was minimal government spending spent to intervene, and that the economy recovered in less time that has passed since the last crash.
That looks like evidence that managing the economy is not the government's job.
I almost put time and effort into a reply to your post.
Sure, but I've read more seemingly random regs from that agreement as well.
http://www.bis.org/publ/bcbsca.htm
Financial regulators regularly utilize arbitrary and capricious standards, and then pass the buck when they fail.
Propaganda works when it taps into emotion because emotion ignores reason.
I think I now understand. The honest man can never triumph over the dishonest man because the dishonest man can use the honest man's honesty as weapon against him.
The man who pleads to emotion can win over the man who pleads to reason because he is not restrained by honesty.
Evil always wins.
Don't you know that muirdouche is now a big fan of Wallstreet and the rating agencies like Moody's!
I think you're confusing libertarian with conservative. Hoekstra is no libertarian.
Hypothetically:
muirgeogablalahblahblahblah, you have 300 years of tropospheric satellite temp records?
Oh, that's right, in your world, the CO2-spewing industrial revolution began around 1500, and your satellite data show clear spreading and positive (and statistically significant) warming, starting around 1650, clearly captured by the first (successful) Harvard satellite launch in 1720.
These data sets are all publicly available, too.
Oh, wait, you have several trees as proxies for “evidence.”
Climate phrenology.
Agreed.
I deliberately postponed this commentary, having previously questioned Ezra Klein's credentials:
http://voices.washingtonpost.com/ezra-klein/201...
This isn't a debate I'm qualified to judge
No shit, dude. Why do you still have a job?
Climate phrenology.
LOL!!!!!
Given the WaPo's fading relevance, and their impending circulatory/revenue doom, I would expect them to at least try to employ someone with baseline economic knowledge, just in case actual weighty, newsworthy economic debates might occur.
Ezra Klein is a negative revenue seat-filler.
http://www.evtv1.com/player.aspx?itemnum=1938
The very term “stimulus” begs the question: are the gov's actions a stimulus or a depressant? My answer is that they are nothing but a depressant, and, while I can't measure it, I can explain it with a simple example.
Imagine an isolated farming community, without our government but with one of our “crises,” in which some of the farmers had failed because of a crop blight. The successful would displace the unsuccessful farmers, and replace their blighted, useless crops with healthy, useful ones. But our government would prop up the unsuccessful farmers, enabling and encouraging them to go on producing useless at the expense of useful crops. And when that failed to restore prosperity, the government, rather than admitting that there had been anything wrong with its policy, would insist that there hadn’t been enough of it, and there must be even more production of useless at the expense of useful crops, until there were none but the useless, and mass starvation.
With Federal Reserve Chairman Bernanke and Treasury Secretary Geithner managing the operation, we call it a stimulus, but, with private citizen Madoff, a Ponzi scheme. In either case, the aim was to maintain “confidence” through a constant flow of money from productive to unproductive activity. And while we finally realized that our confidence in Mr. Madoff had been misplaced, we still hail Messrs. Bernanke and Geithner as saviours, on the theory that we would have starved without their blighted, bitter, toxic harvests.
Their “regulation” to prevent a recurrence of crop failures doesn’t undo their perpetuation of them. And while all that was ever needed was for the control of production to pass from incompetent to competent hands, their “regulation” simply passes it to the most incompetent, from the market altogether to commissars.
The impact of governmental regulation and economic intervention in general can not be measured. Only historical action is measurable. Action that might have happened under different circumstances will remain unknown and unmeasurable.
For example, the impact on the cash for clunkers program can be measured in so far as how it affected new car sales, but what couldn't be measured were the losses to the industries that suffered due to the government subsidy.Similarly, anti-dumping laws passed on an item like steel might show that a certain number of “american” jobs were “saved” at steel mills. That data is historical and easily traced to the government regulation, but when companies who used the higher priced steel lay off workers, that data is hard to measure. When consumers have to pay more for products containing steel, they may not have the same marginal income left over for other things. They will not purchase certain good and services. This decision to forego buying something has a cost that is unmeasurable.
The Blinder-Zandi's of the world are useful idiots, but it seems we are the idiots for taking them seriously.
Just wanted to add my voice of praise to Roger Garrison's work. He's clearly a brilliant teacher and scholar. I'm a finance person by training with a micro minor, so a micro approach to macro seems very natural.
Perfect!
The last paragraph in your post is the stuff of Hayek…he would be impressed. Good job.
Daniel, you are so wise. Don and Russ are lucky to have your mentorship.
First, I confess to be a rank amateur on econometrics, so I cannot comment on the quality of the design of the models in question. What I'd like to know is the predictive capability of the most widely used econometric models:
Which models used in 1980, 1990, 2000 and 2005 were the most accurate for predicting where we are today in terms of GDP, unemployment, composition of the economy, debt burdens etc.?
How well did those models' predictive value compare to the guesses of people well-versed in economic history who made predictions without using models?
How well against the predictions of leading business people?
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