Month: May 2014

David Dayen: “Hedge funds figured out u can buy troubled mortgage funds at huge discount…

…restructure loans, keep people in homesThey’re basically just doing 30’s era-HOLC stuff, which Geithner called “unicorny.” This could have been done to scale.

Matthew Goldstein: http://dealbook.nytimes.com/2014/04/30/troubled-mortgage-funds-on-rise-but-face-headwinds/ In the world of hedge funds, distressed mortgage funds are suddenly hot…. Donald R. Mullen Jr., the manager of Goldman Sachs’s subprime mortgage trade during the housing bubble, is raising $1 billion for a fund to be managed by his investment firm, Pretium Partners. Deepak Narula’s Metacapital Management also plans to start a fund to invest in delinquent mortgages…. The hedge funds Ellington Management Group, One William Street Capital and Angelo, Gordon & Company are either already in the market or planning their own funds. Other institutional investors that are active in the so-called nonperforming loan market include the Blackstone Group, Oaktree Capital and Lone Star Funds. Bloomberg News first reported about Metacapital, which has traditionally invested in mortgage securities and a few years ago was one of the top-performing hedge funds, moving into home loans. The appeal of the distressed mortgage market is understandable for managers looking to generate above-normal returns for their wealthy investors. Even though home prices have rebounded some in many areas hardest hit by the housing bust, there are still more than four million loans on which borrowers are delinquent. Hedge fund managers are wagering that after buying some of these troubled home loans at a substantial discount, they can reach an agreement to restructure the loans in a way that allows borrowers to resume payments — generating sufficient cash flow and decent returns…

Twenty Questions Tim Geithner’s Stress Test Should Answer About His Tenure at the U.S. Treasury:

1. Why was the “Rubin Question” not asked? Why didn’t every meeting end with: “What do we need to do today in order to create room to maneuver in case our assessment of the economy is wrong?”? Why was there no contingency plan for what to do if the administration’s view of the economy turned out to be wrong, and if the recession was either not relatively shallow nor followed by a strong, rapid recovery?

2. Why did the Treasury’s loans to banks via the TARP come with neither bankruptcy-control rights (i.e., the ability to throw the organization into the courts if the government was displeased) nor shareholder-control rights (i.e., the ability to replace the boards of directors and the top management if the government was displeased)? He who pays the piper should call the tune, right?

3. Why was the Treasury’s first priority in January 2009 not filling the post of Director of the FHFA with somebody smart who understood the depths of the housing finance crisis, the housing finance crisis’s role in causing and maintaining the catastrophe, and the potential macroeconomic benefits to be gained from resolving the housing finance crisis?

4. Why was the Treasury’s second priority in January 2009 not filling the Federal Reserve with Keynesian macroeconomists to balance the austerity-minded regional reserve bank governors, and not thus giving Ben Bernanke and his successor room to maneuver to pursue technocratic dual-mandate policies?

5. Why was the Treasury’s third priority in January 2009 not setting-up the game table to make enacting a second round of fiscal stimulus easy, should the Recovery Act turn out (as it did, and is Christina Romer warned at the time) to be less than half as large as it should have been?

6. Why did the spring 2009 PPiP program never go much of anywhere? It seemed to me at the time to be a very wise way–albeit a very risky way–to utilize TARP money.

7. The Treasury senior-executive team that was assembled seemed to me to be relatively light on all of (a) Wall Street trading and management experience to actually interface with the financial firms to which the TARP money had been committed, (b) Fed-watching experience, (c) macroeconomic policy expertise, and (d) health-care finance expertise. Given that running the TARP, attempting to bring the Federal Reserve’s FOMC to a state of understanding of the economy, spurring a strong and rapid recovery, and implementing health-care reform were the administration’s top priorities, why were the Treasury’s senior executives–excellent people, all–who they were?

8. Former Obama OMB Director Peter Orszag has said if he had properly understood and internalized the lessons of work like Rinehart-Rogoff on the likelihood of slow recovery after financial crises he would have taken a significantly different position in the Obama administration NEC’s policy debates in 2009-10–a position closer to Romer-Summers than to Geithner. early 2009 and would have argued that the Recovery Act should have contained significantly more long-run insurance against an “L”-shaped recover.[1] How many of what clearly were, in retrospect, unforced macroeconomic policy errors by the Obama administration due to this failure to understand the likelihood of a prolonged, slow “jobless recovery”?

9. What were the three biggest unforced macroeconomic policy errors of the Obama administration, and why were they made?

10. The Obama administration began with two among the most-senior policymakers–Lawrence Summers and Christina Romer–having deep understanding of the macroeconomics of full employment and inflation and of the two episodes, the Great Depression and Japan’s “lost decades”, thought to be relevant to the U.S. situation at the end of the 00 decades. When they left in 2010 that expertise was not replaced at the most senior level. Why not? Why no Blinders or Tysons?

11. What was the thinking behind the decision that Ben Bernanke should–after 2007-9–be offered a second term as Federal Reserve chair? In retrospect, is that thinking still defensible? If not, why was that thinking convincing at the time?

12. I understand that Neil Barofsky at SIGTARP was regarded by the Treasury as somewhat of a loose cannon, but why was that relationship handled so badly?

13. I understand why the Treasury might think that Michael Barr was a better choice to run the CFPB than Elizabeth Warren, but why was that relationship handled so badly?

14. Why did the Obama administration in 2011 think that the way to strengthen the economy was to pursue a long run “grand bargain” rather than to pursue short-run expansionary exchange rate, bank regulation, housing finance, and monetary policies?

15. Why was the Obama administration so certain in 2011 that Boehner wanted to come up with a reasonable long-run entitlement reform and tax increase deal, and that its key negotiating strategy should be to make anticipatory concessions in order to make sure the deal was sweet enough for Boehner to be able to convince his troops to take it?

16. Why was there never any explanation of what would happen in the event of a potential breach of the debt ceiling other than “default is unthinkable”? That line put Obama in a very poor bargaining position. The Republican leaders in the House could then pass what they wanted and adjourn–leaving the Senate with no option but to endorse it or to breach the debt ceiling. Obama would then have no option but to sign the House bill or breach the debt ceiling. Can anybody explain to me this throwing-away of the administration’s power to threaten not to sign whatever was on the president’s desk when the click ticked down to zero?

17. I understand that there was no macroeconomic policy between July 2009 and April 2010 because health-care reform soaked up all the oxygen. But why was there no macroeconomic policy in the Obama administration between April 2010 and November 2010?

18. I remember a phone conversation with Tim Geithner about Obama’s decisive turn to and endorsement of “austerity”–the passage in Obama’s 2010 State of the Union address that went: “Families across the country are tightening their belts and making tough decisions. The federal government should do the same. So tonight, I’m proposing specific steps to pay for the trillion dollars that it took to rescue the economy last year.Starting in 2011, we are prepared to freeze government spending for three years…” Geithner told me: “I know that [senior administration official X] and [senior administration official Y] really think that I was an [expletive] for not strongly opposing that, but I did not support it.” If the Treasury Secretary did not support it, how did it get approved by the NEC? If it did not get approved by the NEC, how did it get into the State of the Union text? Who did support it? Why did they support it?

19. I remember a phone conversation with Tim Geithner in which Geithner said that entrenched and incumbent FHFA head Ed DeMarco would “push the limits of the reasonable envelope” with actions to accelerate and encourage the refinancing of underwater mortgages. Why did Ed DeMarco not do so? Why did Tim Geithner think he would?

20. Why was it not the first priority in deciding on the Federal Reserve chair to pick somebody who had had a substantially-correct understanding in 2007-9 of what was happening to the economy?

[1] Peter Orszag writes in to correct the record…

As I see it, former Bush II CEA Chair and McCain and Romney advisor R. Glenn Hubbard can either:

• Stop saying that Romney’s fiscal plan was “essentially” Simpson-Bowles; or
• Stop saying that Romney’s fiscal plan was to extend all of the Bush II 2001-3 tax provisions indefinitely.

Trying to say both simply makes him look silly:

Glenn Hubbard: Mitt Romney adviser: Tim Geithner’s lying: “[Tim Geithner’s] going to go out and say what he wants. It just happens to be a lie…. Geithner is making it up. It’s pretty simple. It’s not true…. I was asking him something like, how can Romney’s plan be off base because it’s essentially the Bowles-Simpson structure and Bowles-Simpson actually raises revenue. But I wasn’t suggesting that we’re trying to raise taxes…”

My view?

It is that, most probably, the most likely plan that Mitt Romney had in his heart of hearts for what to do had he become president was to be unwillingly forced to raise taxes by the “necessity” of not going over the fiscal cliff–not even for a quarter–at the start of 2013. It was to propose a “clean” permanent extension, have that fail in Congress, blame the Democrats for filibustering it, reach a compromise that did not indefinitely extend all of the 2001-3 tax provisions, and then say: “I didn’t raise your taxes: the Democrats did, and I had to sign their bill in order to get you the half a loaf I got you. I would have gotten 2/3 of a loaf if only I had a Republican senate to work with.”

But I wasn’t there. I don’t really know. Glenn Hubbard was. It would be nice if he would tell us: providing us with some sense of how a Romney presidency really would have been different on the ground than an Obama presidency would be a definite mitzvah.

And there is also the question of what Romney’s plan would have been if the Republicans had had effective control over the senate and he had been president in January 2013. I leave that as an exercise for the reader…

Simon Wren-Lewis: Sticky prices: How We Confuse Students, and Sometimes Ourselves: “In week one I talked about time periods in macro, and how the ‘short run’ was the length of time ‘it takes prices to fully adjust’….

[This] is at best highly misleading… the short run is the length of time it takes… monetary policy to achieve the real rate of interest implied by the RBC, or Classical, model.  Calling this the time period it takes prices to fully adjust only makes sense when monetary policy involves some kind of nominal anchor…. The big danger in equating Keynesian economics with sticky prices is that students forget about the crucial role monetary policy is playing…. Yet the linking of the short run with sticky prices is ubiquitous…. Mankiw… says:

In the long run, prices are flexible and can respond to changes in supply or demand. In the short run, many prices are sticky at some predetermined level. Because prices behave differently in the short run than the long run, economic policies have different effects over different time horizons.

Continue reading “Morning Must-Read: Simon Wren-Lewis: Sticky Prices and Teaching Macroeconomics: How We Confuse Students, and Sometimes Ourselves” →

Ten Questions Tim Geithner’s Stress Test Should Answer About His Tenure at the Federal Reserve:

1. Why in 2007 did the Federal Reserve Bank of New York not understand that the risk associated with “originate to distribute” mortgage-backed securities and their associated derivatives had not left the financial sector?

2. Why in 2007 did the Federal Reserve Bank of New York not understand that the risk associated with mortgages ha not been distributed but rather concentrated into the highly-leveraged too-big-to-fail banks?

3. Why in 2007 did the Federal Reserve and the Treasury not use their regulatory powers to force the too-big-to-fail banks to substantially raise equity?

4. Why at the start of 2008 did the Federal Reserve not do what Greenspan did in 1997–not shift preserving short-run price stability to a lower priority than maintaining financial stability?

5. Why did the Federal Reserve effectively lower its target rate for nominal GDP growth at the start of 2008?

6. Why in the spring of 2008 did the Federal Reserve not require all the peers and near-peers of Bear Stearns to substantially increase their equity?

7. Why in the spring of 2008 did the Federal Reserve not develop a plan for how it would “resolve” the situation if additional too-big-to-fail entities (cough, Lehman) became the object of a bank run?

8. Why, if the Federal Reserve did not believe it had the legal authority to properly “resolve” Lehman in the fall because it was then not just illiquid but insolvent, did the Federal Reserve not “resolve” the top-big-to-fail Lehman situation in the summer, when Lehman crossed the line from being solvent-and-liquid to insolvent-but-still-liquid?

9. How, if the Federal Reserve did not have the power to “resolve” the insolvent Lehman on Sunday, did it acquire to power to “resolve” the insolvent AIG on Tuesday?

10. Why did the Federal Reserve effectively, again, lower its target rate for nominal GDP growth in the fall of 2008?

Should-Reads:

1. Paul Krugman: Already in the Lowflation Trap: “Dean Baker, reacting to Neil Irwin, feels that he needs to make the perennial point that zero inflation is not some kind of economic Rubicon. Below-target inflation is already a problem, and a very serious problem if you don’t have an easy way to provide economic stimulus…. Europe’s low and falling inflation isn’t a problem because it might turn into deflation–it’s a problem because of what it’s doing right now…. It’s not that something could go wrong, but the fact that it already has gone wrong. And remember, above all, that the risks aren’t symmetric. Controlling inflation may be painful, but we do know how to do it. Exiting deflation or lowflation is really, really hard, which is why you never want to go there.”

2. Simon Wren-Lewis: Economists and methodology: “A feeling that the methodology being used is unproblematic, and therefore requires little discussion. I cannot help giving the example of macroeconomics to show that this view is quite wrong. The methodology of macroeconomics in the 1960s was heavily evidence based. Microeconomics was used to suggest aggregate relationships, but not to determine them. Consistency with the data… governed…. The methodology of macroeconomics now is very different. Consistency with microeconomic theory governs… and evidence plays a much more indirect role. Now… I know enough to recognise this as an important methodological change. Yet I find many macroeconomists just assume that their methodology is unproblematic…. Most methodological discussion of economics is (and should be) about what economists do, rather than what they think they do. That is why I find that the more interesting and accurate methodological writing on economics looks at the models and methods economists actually use, rather than relying on selected quotations…”

Should Be Aware of:

Continue reading “Things to Read on the Afternoon of May 10, 2014” →

Andrew Gelman: Troublesome Inheritance critique: Nicholas Wade’s Dated Assumptions About Race, Genes, and Culture: “The racism of the day seems reasonable and very possibly true…

…but the racism of the past always seems so ridiculous…. Wade… writes about the big differences in economic success between whites, blacks, Asians, and other groups and offers a sophisticated argument that racial differences arise from genetic differences that are amplified by culture…. Wade’s argument… racial groups have genetically evolved to differ in cognitive traits such as intelligence and creativity… “minor differences… invisible in an individual, have major consequences at the level of a society”… his views are uncomfortable truths that have been suppressed by a left-wing social-science establishment….

Continue reading “Afternoon Must-Read: Andrew Gelman: Troublesome Inheritance critique: Nicholas Wade’s Dated Assumptions About Race, Genes, and Culture” →

One of the most important things I learned in my first two months working in the Clinton administration back in 1993 was what we called the “Bob Rubin Question”: ending a meeting with: “OK. That’s what we are going to do now. But what else should we do? What if we are wrong in our understanding of the situation? What, two years from now, will we then wish we had done today when we look back and say ‘if only…’?”

Now I find that this is SCIENCE!!:

Oliver Burkeman: This column will change your life: hindsight–it’s not just for past events: “One obvious conclusion… and I’m not saying it’s wrong…

…is that people are idiots. But a more interesting one is that hindsight… doesn’t just make things look different; it makes them look so utterly different that it’s impossible, when taking a decision in the moment, even to begin to grasp how it’ll strike you later on…. [A] technique… invented by the psychologist Gary Klein, and which Daniel Kahneman, his Nobel-winning colleague, describes as his favourite method for making better decisions… the “premortem”…. Imagine yourself in the future, after the project you’re considering has ended in spectacular failure…. You’re screwed. Everything went as badly as you could have feared. Now: why? Asking the question this way, Klein explains, has an almost magical effect…. Another advocate of “prospective hindsight”… Karl Weick, argues that it works because of a cognitive quirk: we find it easier to imagine the detailed causes of a single outcome than causes of multiple outcomes…. ‘I mentioned it at Davos’, Kahneman said a while back, and ‘the chairman of a large corporation said it was worth coming to Davos for’…. Hindsight, we’re told, is a wonderful thing. But hindsight in advance is even better…

Roger Myerson: Rethinking the Principles of Bank Regulation: A Review of Admati and Hellwig’s “The Bankers’ New Clothes”: “Worthy of such global attention as Keynes’s General Theory received in 1936…

…[is] The Banker’ New Clothes: What’s Wrong with Banking and What to Do about It by Anat Admati and Martin Hellwig…. A book for the general public about fundamental problems of financial instability in our time… banks should be required to have much more equity…. In response to all their arguments against the increasingly complex provisions for minimizing banks’ capital requirements, Admati and Hellwig report (p. 182) that they have never received a coherent answer to the basic question of why banks should not have equity levels between 20 and 30 percent of their total assets…. This recommendation is simple, but it is based on their deep command of theory. The book is long… because it takes time to rebut all the bankers’ arguments…

Over at the WCEG: I still do not have a copy of Tim Geithner’s Stress Test. That means I cannot take on the task of explaining, justifying, and putting in context (1) Bernanke-Geithner Federal Reserve and then (2) Obama administration macroeconomic policies from 2007-2012. All I can do right now is lay out my own errors of judgment from 2007-2012.

As I look back, I see that my serious errors of judgment were only secondarily about the state of the economy. They were primarily and overwhelmingly about senior Bernanke-Geithner Federal Reserve and Obama-Geithner policymakers and (a) how they viewed the economy and (b) what policies they would pursue.

My errors were:

Continue reading “Tim Geithner Has Stressed Me Out: Saturday Focus: May 10, 2014” →