matthew yglesias

Voodoo Economics Behind Government Demand for Mortgage Write-Downs by Big Banks

by Hans Bader on June 14, 2011 · 3 comments

in Bailout Watch, Economy, Legal, Regulation, Stimulus to Nowhere

In 2010, Obama administration allies proposed a trillion-dollar bailout for those lucky mortgage borrowers whose loans were owned by the government-backed mortgage giants Fannie Mae and Freddie Mac — including wealthy borrowers who have no difficulty paying their mortgage — in order to increase their disposable income and temporarily pump up the economy through the next election. Now, Obama administration officials such as Associate Attorney General Tom Perrelli are trying to achieve the same goal on a much smaller scale in settlement talks with the nation’s four biggest banks. Perrelli is demanding that they reduce the mortgages of certain favored underwater borrowers (many of whom are underwater because they didn’t make a substantial downpayment, the way thrifty people do), using the banks’ unrelated foreclosure paperwork violations as a pretext (benefiting lucky borrowers who were never foreclosed upon, much less treated improperly in any way).

But as Mark Calabria notes, this demand makes no sense at all economically. Any mortgage write-off that increases the disposable income of borrowers will reduce the disposable income of investors whose mortgage-backed securities are worth less after mortgages are partly written off. The government’s demand reflects irrational, magical thinking, a kind of voodoo economics. This  proposed rip-off of investors would not create any wealth or income, but rather merely redistribute wealth and income from investors to borrowers (reducing the disposable income of the suddenly poorer investors), discouraging future investment.

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A Bizarre Defense of High-Speed Rail

by Marc Scribner on November 3, 2010

in Economy, Mobility, Stimulus to Nowhere

Perhaps “bizarre” is not the appropriate word, as Matthew Yglesias is employed by the Obama administration’s barely unofficial think tank/PR shop Center for American Progress, which supports wasteful spending on high-speed rail — surprise! — just like the Obama administration. “Nonsensical” is probably a better adjective. Anyway, government-subsidy shill Yglesias took issue with Cato’s Tad DeHaven’s Cato @ Liberty post on Robert Samuelson’s excellent debunking of high-speed rail, but couldn’t really refute any of it. Instead, he claims $1 trillion isn’t that big of a deal:

Currently, the government needs to pay 4.1% interest on a thirty year bond. And according to the handy dandy amortization-calc.com to amortize a 30 year loan of $1 trillion at an interest rate of 4.1% per year would cost $57.99 billion a year for thirty years. Note that’s in fixed, nominal terms, so while it’s a fair amount of money in the short term by the 2030s it’ll be a joke relative to our Nominal GDP. Contrast that to the $708 billion FY 2011 budget request the Obama administration submitted. It seems to me that an 8.1 percent reduction in defense expenditures in order to create a transformative nationwide new infrastructure program would be a no-brainer.

Yglesias doesn’t consider whether or not high-speed rail makes sense from a cost/benefit perspective. It doesn’t. Nor does he address the inconvenient truth that many of the so-called “high-speed” rail corridors aren’t high-speed by developed-world standards. In fact, he doesn’t even make a case for high-speed rail; rather, he compares subsidies for his preferred project to defense spending. And that’s about it.

Cato’s Randal O’Toole posted a thoughtful response here.  It continues to amaze me that progressives, supposed champions of more egalitarian outcomes through heroic central planning, would support a government program that would primarily benefit wealthy urban elites. But when you consider the fact that most of them, including Dalton-Harvard alum Matthew Yglesias, are wealthy urban elites, things begin to make a little more sense.

Administration Allies Float Trillion Dollar Bailout to Offset Rising Savings Rate

by Hans Bader on November 1, 2010

in Bailout Watch, Economy, Stimulus to Nowhere

Alarmed by the rising savings rate, which liberal Keynesian economic theory views as potentially bad in a weak economy, intellectuals with close ties to the Obama administration, such as Matthew Yglesias, and liberal commentators such as Noam Scheiber, are floating the idea of a trillion-dollar bailout at taxpayer expense, using government-controlled mortgage giants Fannie Mae and Freddie Mac. The bailout would involve Fannie and Freddie writing off part of the mortgage balances of many people who are perfectly capable of making their mortgage payments, not in order to prevent defaults, but just in order to increase borrowers’ purchasing power so that they can spend more money. (The bailout would not cover all Americans, only many of the loans held by Fannie and Freddie.)

The cost of this bailout — perhaps a trillion dollars — would be borne by taxpayers, since Fannie and Freddie are already insolvent, and are expected to need as much as $363 billion more in taxpayer bailouts, even if this massive bailout proposal is not adopted.  (Democrats in Congress blocked GOP proposals to reform Fannie and Freddie or wind them down in May.)

This entire proposal, like many of the administration’s stimulus proposals, is based on the faulty assumption that weak consumer demand is the primary reason for the slow recovery. In fact, personal consumption has resumed rising, while private investment has fallen and remains low. Private investment is way down compared to past recoveries, driven partly by lack of confidence in the administration (a well-deserved lack of confidence given the administration’s anti-business policies).  The savings rate has only increased slightly and remains lower in the U.S. than in most of the world.

Matt Yglesias of the Center for American Progress (CAP) is one of the people floating this proposal. CAP is widely credited with “shaping the agenda of the new Obama administration.”

Yglesias concedes that this proposal may not even be legal, and that “there are real doubts as to whether the Housing and Economic Recovery Act of 2008 actually authorizes this.”  But legalities are unlikely to stand in the way for this administration, which showed little reluctance to take actions in the past that were deemed illegal by many commentators, like the multi-billion dollar auto bailouts, which were criticized for flouting federal bankruptcy laws, the TARP statute, and the Constitution.

Behind such radical proposals are the false assumption that we are in a recession due to “a collapse” in private consumption.  But as Mark Calabria notes, “private personal consumption” is “actually up and higher than at any point during the boom, after reaching bottom in the Spring of 2009.”  Meanwhile, “unlike consumption, which has largely rebounded, investment today is about 20% below its peak.” It’s investment that needs to increase dramatically, not consumption.

There is no reason to think this proposal would help the economy even in the short run.  As Yglesias concedes, this proposal would not be costless even under liberal assumptions: “if the US government deliberately takes on a trillion dollars in additional debt, that may lead the interest rate the US government needs to pay on its debt to rise. Rising interest rates on treasuries will increase interest rates throughout the economy and hurt growth.””

Other bailout proposals have ended up harming rather than helping the economy.  A $75 billion Obama mortgage bailout program is actually harming the economy, the housing market, and the construction industry, economists and real estate experts say.  Many other Obama administration jobs programs have backfired, like a biofuels program that wiped out jobs, and a green-jobs program in the stimulus package that ended up funneling money mostly to foreign firms.  The stimulus package wiped out jobs in America’s export sector, and even the Congressional Budget Office, which claims it will help the economy in the short run, admits it will reduce the size of the economy in the long run.

There are additional problems with the trillion-dollar bailout proposal that its floaters don’t recognize.  The increased national debt it produces would lead to higher taxes and interest payments in the future — crowding out private investment in the future, and thus shrinking the economy in the long run.  And most of the bailout might be saved rather than spent by its recipients, preventing it from increasing consumption in the short run.

Building Height Restrictions: Where I Agree with Matthew Yglesias

by Marc Scribner on October 19, 2010

in Economy, Property Rights, Regulation

Matthew Yglesias of the Center for American Progress links to a Washington Post article that notes that office rents in downtown D.C. are now higher on average than office rents in Manhattan. He correctly points out that Washington, D.C.’s building height restrictions are largely responsible:

Normally what happens when you get high rents is that people respond with bigger buildings. Which is why Manhattan has such big office buildings. DC office buildings, by contrast, are quite short. So are developers working on responding to the high demand by building taller buildings? Of course not! Taller buildings are illegal in Washington DC.

Consequently, instead of building up real estate developers in the DC area build “out,” putting more and more jobs in the suburbs.

By no means am I anti-suburb. Nor do I believe that minimum parking requirements and “free parking” are the evils Yglesias and Donald Shoup claim they are (that said, just like maximum parking limits, these distortionary regulations should be eliminated). But I do not support arbitrary aesthetic justifications for limiting urban development, which unfairly make the suburbs more attractive  to developers. Density and land-use patterns should be natural byproducts of development, rather than planning goals. If property owners wish to meet demand for leased space by building taller buildings, so be it.

Last Bastion of Progressive Optimism

by Fred Smith on April 22, 2010

in Legal, Personal Liberty

Progressives once believed in bureaucracy.  A wise, enlightened civil service kept immune from the corrupting influence of politics would create Heaven on Earth.  That blind faith in government as a better means of advancing the public interest had many roots: a secular substitute for declining faith in traditional religion, a power grab by an expanding intellectual class, the innovations that (they thought) would ensure this result (the “independent agency,” supposed advances in the social “sciences,” and an impatience with the evolutionary gains made possible by the free market.  If spontaneous order could yield gains, think what a directed expert-led effort could achieve!

Reality has not been kind to the Progressives.  Their hope of a non-political politics rapidly went astray as their first model, the Interstate Commerce Commission, was first captured by the railroads and then by the shippers.  The ICC was soon a tool for suppressing competition, for rewarding special interest (the “regulatory capture” reality that the public choice school was to analyze much later).  Regulatory agencies faced a swiftly changing marketplace and found themselves time and time again out-maneuvered.  (It is, of course, always possible that somewhere in our society, there exists a handful of brilliant individuals who might be able to “regulate” a complex and changing marketplace, but it is highly unlikely that those individuals will be attracted to bureaucracy.)

As a result, Progressives have changed tactics.  They still favor elite control of America, but they no longer place their faith in agencies, in the “independence” of civil servants.  They have switched their allegiance to the Courts.  And, that change has meant that the courts have become much more politicized than even the most powerful Progressive institution, the Federal Reserve.  That point was alluded to in a recent Outlook piece in the Washington Post, “Picking a Justice, Ignoring the Fed” by Matthew Yglesias commenting on the massive attention given the retirement of Supreme Court justice, John Paul Stevens, compared to that given the retirement of several key Fed Reserve governors.  Yglesias notes this is somewhat surprising since in many ways the Fed has even more influence over our daily lives than does the Court.  No surprise really: the ideas of Keynes still dominate at the Fed so the Progressives are content.  The Court is narrowly divided with Progressive ideology on the defensive.  It remains narrowly a Progressive institution – they’ll fight to the death to keep it so.

Understanding the GSEs’ Role in the Mixed Economy

by Iain Murray on October 20, 2008 · 5 comments

in Bailout Watch, Economy

I’m not sure why Matthew Yglesias chose to adopt the unpleasant leftist tactic of beginning an argument with insult (“conservatives don’t know anything about anything”) in response to a recent Corner post of mine. Yglesias also engages in shifting the goalposts, because my “enthusiastic recommendation” of a Wall Street Journal leader column was not enthusiastic for the argument he chooses to highlight, but for its expose of the tactics Sen. Dodd and co are employing in the current debate.

Let’s leave all that irrelevance aside, however, and concentrate on Yglesias’ supposed killer point, which is his characterization of the “conservative position” on Fannie and Freddie:

[T]he implied government guarantee to Fannie and Freddie might cause them to take unduly large risks, and … the very scale of those risks would mean that in the event of a crash we actually would need to bail them out despite the lack of explicit guarantee. Thus, the idea of limiting the size of the Fannie/Freddie portfolios. The point was that if the Fannie/Freddie portfolios could be kept small, then perhaps the GSEs wouldn’t be “too big to fail” and we could afford to avoid bailing them out. And if we did wind up needing to bail them out, we wouldn’t be on the hook for such an enormous amount of money.

Yglesias concedes that this concern was valid, but further argues that: [click to continue…]