Topic: International Economics and Development

Imaginary Squabbles Part 5: Comparing Krugman’s 2005 Housing Bubble Forecasts to Mine

New York Times columnist Paul Krugman has recycled another phony argument about something I wrote many years ago. 

He begins by citing Matt O’Brien who found that Fed governor Janet Yellen in October 2005 was predicting there would be no great impact on the economy “were the house-price bubble to deflate.” O’Brien concludes that, “Back in 2005, she didn’t appreciate how much shadow banks relied on AAA-rated mortgage-backed-securities (MBS) as collateral to fund their day-to-day operations—or how much even this supposedly high-quality collateral could go bust if housing did.” But that is “What Janet Yellen and Everyone Else Got Wrong,” as Krugman’s column is rightly titiled. Nobody in 2005 grasped what a precarious house-of-cards was being built, worldwide, on U.S. mortgage-backed securities. 

O’Brien found another quote suggesting Yellen did get it right by December 2007. Yet the recession had already started by then, and blogger Bill McBride and others were worrying that rising unemployment would cause mass foreclosures (not the other way around).

“We had a monstrous housing bubble,” writes Krugman, “and Janet Yellen recognized it in real time [December 2007]…. It’s important to notice that just being willing to see the obvious here puts Janet Yellen way ahead of a lot of people who still presume to give us advice on the economy.”   

He links to a 2008 list of 28 people who were supposedly way behind Yellen in “being willing to see” that house prices had fallen 21.6 percent by December 2007, even though nearly all of those 28 references were from 2003–2005. My name is at the top of that list, of course. But why am I on it while Krugman and Yellen are not?

The “Unofficial List of Pundits/Experts Who Were Wrong on the Housing Bubble,” was compiled by a finance lawyer who blogs as “Economics of Contempt.” He worked as a legislative aide to a House Democrat and dealt with derivatives at Lehman Brothers. The list of 28 could find no investment bankers who got it wrong, even at Lehman or Bear Stearns, but it did find a lot of conservatives and libertartians.   

Sovereign Currency Populism versus Dollarized Populism

Venezuela and Ecuador both have left-wing populist governments that have benefited tremendously from record high oil revenues. Both governments used those revenues to significantly increase public spending. However, there is a critical difference between these countries: while Venezuela has its own currency (the so called “strong Bolívar”), Ecuador adopted the U.S. dollar as its official currency in 2000. That means that, no matter how fiscally irresponsible the Ecuadorean government, it can’t print money to pay for its spending.

The result: Venezuela has the highest inflation rate in Latin America whereas Ecuador has one of the lowest rates in the region.

What Is Syria’s Iranian Credit Line Worth?

Last week, the press was filled with reportage about Tehran throwing a lifeline – actually a credit line of $3.6 billion  – to the Syrian regime.

The announcement of this Iranian lifeline should have changed the economic expectations of Syrians in the throes of what has morphed into a bloody civil war. Indeed, if it materializes, the $3.6 billion credit line should allow Damascus to conserve its dwindling supply of foreign exchange. This development should have thrown a positive expectation shock into the market for the Syrian pound.

So, did economic expectations receive a positive boost from the announcement of Tehran’s lifeline? Let’s go back to May 27th. That’s when the tentative credit line agreement was announced. A mini event study shows that the initial agreement had no material impact on expectations, as objectively measured by the Syrian pound/U.S. dollar black-market exchange rate. Indeed, the SYP/USD exchange rate was unmoved by the tentative agreement (see the accompanying table).

The next event in this credit line story occurred on July 30th, when it was announced that the May agreement had been finalized and signed on July 29th. Again, expectations and the SYP/USD exchange rate remained unmoved (see the accompanying table):

What, then, can we say about the Tehran-Damascus deal? Well, objective data – namely market prices – tell us that the widely-reported event had no material effect on Syrians’ economic expectations. Accordingly, the implied inflation rate for Syria remained unmoved. Using these objective black-market exchange-rate data, I estimate that Syria is currently experiencing an annual inflation rate of 190.7%.

In short, Syrians viewed the deal as irrelevant. They think that either Iranians won’t deliver on the promised credit line, or that if they do, it will not change the situation on the ground.

I often tell my students to be mindful of the late Prof. Armen Alchian’s “95% rule”: Ninety-five percent of what you read that passes for finance and economics is either wrong or irrelevant. For the time being, it appears that Syria’s Iranian credit line falls under the latter category.

I have established a page to track current black-market exchange-rate and implied inflation data for the Syrian pound, as well as for troubled currencies in Iran, Argentina, North Korea, and Venezuela. For more, see: The Troubled Currencies Project.

Violating the Law to Subsidize Egypt’s Coup: Bipartisan Foolishness in Washington

U.S. policy in Egypt is a disaster.  Washington long backed authoritarian rule.  Now military rule has supplanted short-lived democracy.  Washington should disengage and cut off all foreign “aid.”

Instead, the Obama administration has embraced putative dictatorship.  According to Secretary of State John Kerry, “the military did not take over to the best of our judgment so far.”

The administration could have acknowledged that Gen. Abdul-Fattah al-Sisi rules by force and then argued that the coup was justified.  But the case was weak.

President Mohamed Morsi misplayed his hand and the Muslim Brotherhood deserves suspicion.  But the first elected leader in Egypt’s 5000-year history was discrediting himself and political Islam.  Nor could he have become a dictator without the military’s support.

The administration refuses to call the coup a coup to avoid triggering the law which requires cutting off aid.  President Barack Obama’s policy towards Egypt is one of his greatest failures.

Washington backed the dictator Mubarak as Egyptians were rallying against him.  The administration then accepted President Morsi’s rise, unsuccessfully urging him to rule in an inclusive manner.  Several administration officials urged the Egyptian military not to stage a coup.  Subsequently Gen. Sisi ignored American advice not to persecute the Brotherhood.  Yet today virtually every Egyptian blames America. 

Still, leading Republicans have endorsed the Obama policy.  The Senate rejected an amendment from Sen. Rand Paul (R-KY) to cut off America’s $1.55 billion in annual foreign “aid.”

For instance, Florida’s Sen. Marco Rubio echoed the clueless Secretary Kerry, warning that if you cut off aid “you lose leverage.”  However, as I ask in my new article on American Spectator online:

Where, one wonders, is the evidence of this vaunted leverage—after nearly $75 billion in “assistance” over the years?  When Presidents Sadat and Mubarak jailed opponents, persecuted Coptic Christians, enriched supporters, and despoiled the economy?  When President Morsi claimed extraordinary power and refused to conciliate his opponents?  When Gen. Sisi staged the coup?  When the general ignored the administration’s advice to govern in an inclusive fashion?  When he embraced the corrupt and authoritarian Mubarak elite?  One unnamed official reluctantly admitted to the New York Times:  “what we say might not be part of their calculus.”

If the Obama administration is willing to torture language and ignore the law to keep shoveling money into Cairo, it is evident that nothing, except presumably war with Israel, would cause Washington to close the spigot.  Since Gen. Sisi and his fellow officers can count on America’s money—as well as a promised $12 billion from Saudi Arabia and other Persian Gulf states—they have no reason to pay the slightest attention to Secretary Kerry.

Sen. Lindsey Graham (R-SC) worried about the impact on Israel.  However, aid is not why Cairo has kept the peace with Israel for 40 years.  Syria has been at peace with Israel for the same period of time and received no money.  Both states know they would lose a war with Israel, which would be particularly bad news for Egypt’s generals. 

Unfortunately, the U.S. faces inevitable blowback.  Backing military rule risks generating the same sort of long-term harm that came from Washington’s support for the 1953 coup against Iran’s democratically elected prime minister, Mohammad Mossadegh. 

Washington should avoid being linked to the Brotherhood or the military.  Disengage and let Egyptians decide their own future. 

Americans Are Far More Compassionate than “Socially Conscious” Europeans

When I’m in Europe giving speeches and participating in conferences, it’s quite common that folks on the left will attempt to discredit my views by asserting that Americans are selfish and greedy.

Since I’m generally sympathetic to Ayn Rand’s writings, I don’t see anything wrong with people striving to make themselves better off. Moreover, Adam Smith noted back in 1776 that the desire to earn more money leads other people to make our lives better. One of his most famous observations is that, “It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest.”

But, for the sake of argument, let’s accept the premise of my statist friends in Europe and simply look at whether their assertion is correct. Are Americans more selfish and greedy that their counterparts across the ocean?

The most obvious way of testing this proposition is to compare rates and levels of voluntary charity. Selfish and greedy people presumably will cling to their money, while compassionate and socially conscious people will share their blessings with others.

So how does the United State compare to other nations? Well, I’m not a big fan of the Organization for Economic Cooperation and Development, but the bureaucrats in Paris are quite good at collecting statistics from member nations and producing apples-to-apples comparisons.

And if you look at rates of “voluntary private social expenditure” among nations, it turns out that Americans are easily the most generous people in the developed world.

Voluntary Social Expenditure in OECD Nations

Uruguay’s House of Deputies Votes to Legalize Marijuana

Uruguay’s House of Deputies voted today to allow the production, commercialization, and distribution of cannabis, taking the first step to becoming the first country in the world to fully legalize marijuana. Even though Uruguay never criminalized personal consumption, this vote, passed 50-46, is a much bolder move.

The bill is a more elaborate piece of legislation than the draft introduced to the Uruguayan congress a year ago, which had only one article giving the state the power to regulate the cannabis market. Initially, the government contemplated creating a state-owned monopoly in the production and sale of the drug. The bill approved today provides for a private but strictly regulated market for cannabis. Uruguayans will be able to grow their own pot (up to six plants) or they can join membership clubs which can also grow their own marijuana (up to 99 plants). All crops require prior government authorization.

Also, Uruguayans will be able to buy marijuana from authorized drug stores (up to 40 grams per month). In order to do so, they will have to join a National Registry of Users. Even though the bill stipulates that the registry will be private and the information there is considered “sensitive,” there are good reasons to believe that not many people will rush to a government agency to register as a marijuana user. People under 18 years of age won’t be able to legally access marijuana and all forms of advertisement of the drug are prohibited.

The bill is now headed to the Senate where it is expected to pass. Once it becomes the law of the land, Uruguay will become the world’s standard-bearer of drug policy reform. Even though the country is small and it’s not beset by the plight of drug-related violence seen in Mexico or Central America, Uruguay’s marijuana legalization constitutes a momentous step in the road to dismantling the international prohibitionist regime that has been in place since the 1960s. Marijuana legalization bills have already been introduced in the legislatures of countries such as Chile and Mexico. And let’s not forget that cannabis was legalized last November (via referendum) in Colorado and Washington State.

The Obama administration faces a choice: it may either obstruct the momentum toward reform, or it may engage Latin American countries in an open debate about how to end a failed policy that has cost the lives of hundreds of thousands of people in the region. That would be change we can believe in.

Zimbabwe Elections Underway as Mugabe Seeks to Remain in Power

Zimbabweans went to the polls today. Standing against each other in the contest for the presidency were, for the third time, President Robert Mugabe and Prime Minister Morgan Tsvangirai. Their respective political parties, the ZANU-PF and Movement for Democratic Change, battled for the control of the country’s Parliament.

None can be sure about the outcome, but smart money must be on the 89-year-old dictator, who seems determined to extend his 33-year hold on power. Mugabe has managed to hang on to the presidency in more difficult circumstances, murdering his way to electoral “victory” in the midst of hyperinflation and economic meltdown in 2008. He is likely to “win” again.

Those who are interested in the situation in Zimbabwe might like to read my take on the Zimbabwean economy in Foreign Policy and Washington Times. Also, Craig Richardson, associate professor of economics at Winston-Salem State University in North Carolina, has analyzed the country’s recent economic performance in a Cato Institute study titled “Zimbabwe: Why is One of the World’s Least-Free Economies Growing So Fast?” Last but not least, check out Cato’s Zimbabwe page that discusses, among other things, Zimbabwe’s experience with hyperinflation.