Topic: Finance, Banking & Monetary Policy

Bipartisan Baloney About Top 1 Percent Income Gains

In the State of the Union address on January 20, President Obama said, “those at the top have never done better… Inequality has deepened.”  The following day, Fox News anchor Brett Baier said, “According to the work of Emmanuel Saez, a professor at the University of California, Berkeley, during the post-recession years of 2009-2012, top earners snagged a greater share of total income growth than during the boom years of 2002-2007. In other words, income inequality has become more pronounced since the Bush administration, not less.” 

Senator Bernie Sanders agrees that “in recent years, over 99 percent of all new income generated in the economy has gone to the top 1 percent.”  And Senator Ted Cruz likewise confirmed that, “The top 1 percent under President Obama, the millionaires and billionaires that he constantly demagogued earned a higher share for our income than any year since 1928.” 

When any statistic is so politically useful and wildly popular among left-wing Democrats and right-wing Republicans you can be pretty sure it’s baloney.  Bipartisan baloney.

In November 2013, I wrote that, “Because reported capital gains and bonuses were…shifted forward from 2013 to 2012 [to avoid higher tax rates], we can expect a sizable drop in the top 1 percent’s reported income when the 2013 estimates come out a year from now. The befuddled media will doubtless figure out some way to depict that drop as an increase.” As predicted, the New York Times took one look at a 14.9% drop in top 1% incomes and concluded that “The Gains from the Recovery are Still Limited to the Top One Percent” That involved slicing the same old baloney very badly.

What Fed Officials Really Don’t Want You to Know (Hint: They Are Telling You)

Yesterday morning I had a query from someone asking me to share my thoughts about the Federal Reserve Transparency Act, better known as the bill to “Audit the Fed.” Having given him a brief answer, I thought I might say a little more here.

Although Rand Paul promises that his measure will shed much-needed light on the Fed’s undertakings (the Senate version of his measure was even called “The Federal Reserve Sunshine Act”), the truth is that it’s unlikely to reveal anything of importance beyond what existing Fed audits–including those provided by Title XI of the Dodd-Frank Act (which provides for a GAO audit of the Fed’s crisis-related emergency lending)–can themselves reveal.

True, unlike existing measures Paul’s bill would also let the GAO “audit” the Fed’s conduct of monetary policy, including its open-market operations and financial dealings with other central banks. But if “sunshine” is the first word that pops into your head when contemplating this possibility, you probably have had a little too much of it already. Certainly you have not read many GAO reports.

Don’t get me wrong: the GAO does its job well, and a report by it on the Fed’s conduct of monetary policy would probably be a much better read than most academic papers on the same topic. But if you’re looking forward to seeing the GAO give the FOMC a good thrashing, or to any other sort of scintillating reading, you’re barking up the wrong tree, because what you’re likely to be in for instead is a bunch of charts and tables, accompanied by a competent but very measured and detached review of the Fed’s activities, of the sort that might prove very handy, but that is hardly likely to be the least-bit earth-shattering.

How Not to Spin a Big Drop in Top 1% Incomes

Pre-1944 method of estimating top 1% shares

When Thomas Piketty and Emmanuel Saez release their annual estimates of top 1 percent incomes, you can count on The New York Times to put it in a front page headline with additional hype on the editorial page.  This time, however, the news was that the top 1 percent had suffered a 14.9 percent decline in real income in 2013 if capital gains are included, as they always had been until now.  

The New York Times heroic spin was “The Gains From the Economic Recovery Are Still Limited to the Top One Percent.”  The author, Justin Wolfers of the Peterson Institute wrote, “Emmanuel Saez … has just released preliminary estimates for 2013. The share of total income (excluding capital gains) going to the top 1 percent remains above one ­sixth, at 17.5 percent. By this measure, the concentration of income among the richest Americans remains at levels last seen nearly a century ago.”

I will have more to say about this in another blog post.  For now, I just want to call attention to the artistic way in which the subject was changed.  Since 2008, Saez has been comparing changes in top incomes (for which he has preliminary IRS data) to incomes of the bottom 90 percent (for which IRS data are singularly inappropriate).   He always included realized capital gains because that makes the top 1 percent share both larger and more cyclical.

If We Decide to Keep Fannie Mae Around…

I’ve repeatedly said since 2009 that the further in time we get from the crisis, the greater the probability that Fannie Mae and Freddie Mac would survive in some form.  Such looks like an ever-increasing likelihood.  I’m occasionally asked if there are any reforms that would make Fannie & Freddie acceptable.  I’m tempted to say “no.” 

In the spirit of lively debate, I submit the following changes to address most of the flaws in the government sponsored enterprise (GSE) model that would also allow the companies to survive in some form.  I do emphasize that this is not an argument for keeping the GSEs.  That’s a different question altogether.

1)   Open up the charters to competition.  If we learned anything from the rampant corruption that characterized early 1800s U.S. state banking, it is that legislators shouldn’t give out exclusive charters.  Accordingly, the government should delegate chartering authority to the regulator and allow anyone who can meet the requirements to get a charter.

2)   Increase Capital.  Fannie and Freddie were (and still are) massively leveraged.  Laurie Goodman suggests 4 to 5 percent would be a reasonable minimum capital.  I believe something closer to what insurance companies have–around 8 percent (real, not risk-weighted) would be appropriate.  While I’m not completely in the Admati camp on capital, I do agree with her general point that capital isn’t “dead” –it would be used for lending.  And since GSEs aren’t providing some form of payment medium like banks, I see little cost to requiring higher capital levels. So I’d say 8 percent, if not more.

3)   Ditch loan limits, go with income.  In order to make sure these entities actually serve middle-class America, rather than be a subsidy to the well-off, we should eliminate the loan limits and make mortgage eligibility based on income.  This is similar to the USDA’s Rural Housing Service loans.

4)   Break ‘em up.  This might be the most controversial, but simply allowing other institutions to enter the market is unlikely to guarantee sufficient competition.  We broke up Ma Bell.  Under any antitrust standard, Fannie and Freddie are a duopoly.  Unless we are repealing the Sherman Act, the two companies should be broken into at least 6 pieces each and barred from merging.  Existing shareholders would get shares in the off-spring companies.

5)   Require More Mortgage Insurance.  In order to protect the taxpayer, mortgage insurance companies should take the first 35 percent of loss, instead of the customary 20 percent.

6)   Improve Underwriting Standards.  End the housing goals and require minimum down payments of 5 percent and minimum FICO scores of 700.

7)   End all securities law exemptions.  Subject companies to 1933 & 1934 Act requirements. 

8)   End banking law preferences.  Banks aren’t allowed to hold corporate equity, except for that of GSEs.  We know how that turned out.  For the purposes of all banking regulation, especially capital and asset concentration limits, treat GSE securities as you would any other corporate security.

9)   Limit portfolios.  Allow portfolios to be used for an inventory function only. A minimum of 90 percent of debt issued should be required to be mortgage-backed securities (MBS).

These are just some initial thoughts.  Implementing all of these would go a long way towards bringing competition to our mortgage markets and protecting the taxpayer.  If some remain concerned that this lacks a “catastrophic” backstop, then we can allow the Federal Home Loan Banks to discount advances on the MBS issued by these new and improved GSEs.

Fact Checking the Fed on “Audit the Fed”

With the introduction of bills in both the House (H.R. 24) and Senate (S.264) allowing for a GAO audit of the Federal Reserve’s monetary policy, officials at both the Board and regional Fed banks have launched an attack on these efforts.  While we should all welcome this debate, it should be one based on facts.  Unfortunately some Fed officials have made a number of statements that could at best be called misleading. 

For instance Fed Governor Jerome Powell recently claimed “Audit the Fed also risks inserting the Congress directly into monetary policy decisionmaking”.  I’ve read and re-read every word of these bills and have yet to find such.  H.R. 24/S.264 provide for no role at all for Congress to insert itself into monetary policy, other than Congress’ existing powers.  I would urge Governor Powell to point us to which particular part of the bill he is referring to, as I cannot find it.

Dr. Krugman Meets Dr. Fox

Dr. Paul Krugman, the hyper-productive New York Times columnist and Nobel laureate, has produced a flood of fiscal factoids. He argues that the only way to put the major economies around the world back on track is to “stimulate” them via deficit-financed government spending.

Most recently, Dr. Krugman has weighed in repeatedly on Greece’s travails with his fiscalist snake oil. His column of January 26th, “Ending Greece’s Nightmare,” makes it clear that he thinks he can deliver an elixir.

Not so fast Doctor. A mountain of evidence shows that the elixir is a fiscal factoid. Never mind.

On Greece: Plus Ça Change, Plus C’est la Même Chose

People keep asking me what I think about Europe’s most recent crisis (read: Greece). Well, my sentiments are exactly the same as they were in April 2012, when my Globe Asia column was titled: “China and Greece – Here We Go Again.”

Here’s what I wrote on Greece: “And if you think the political chattering classes in the U.S. are dangerous, take a look at Europe, where the elites are fighting economic reality with all their might — a fight they will lose. Indeed, they have built an economic doomsday machine. And when it comes to Greece, don’t fool yourselves into believing that the recent huge debt restructuring exercise will allow Europe’s politicos to pull their chestnuts out of the fire. Greece’s annual broad money (M3) growth rate has been in negative territory for every month since February 2010, and it is currently contracting at a fantastic 17.5%. In the words of former President George W. Bush (not Yogi Berra): ‘This sucker is going down.’ You can forget all the calculations and soothing noises coming from Europe.”

Yes. Plus ça change, plus c’est la même chose.