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throwing money at homeowners • regulating finance: newfangled schemes • the stimulus program: how much, who's getting it, is the debt a problem? • what comes after the Great Recession? • Iraq oil • Mishkin talks more nonsense

Federally subsidized dreaming

From its earliest days, this newsletter has complained obsessively about the absurd American obsession with homeownership. In the national mythology, ownership—the American Dream, as it’s called—is supposed to make us both better and richer people. To encourage it, the federal government has for decades extended a generous, subsidy-bearing hand to the whole enterprise. The message is reinforced by cultural validation that approaches the intensity and frequency of agitprop. (For more on all this, see the excellent new book, Our Lot, by Alyssa Katz.)

Our current economic crisis is traceable in no small part to that obsession. Having given up on public housing as an offense against neoliberal doctrine, the Clinton and Bush administrations both encouraged people of modest means to stretch hard to buy houses—which, as we now know all too well, they couldn’t really afford. When the bust came, it looked for a moment that we might engage in a national rethink of the ownership fetish and at least give renters an even break.

Alas, as with many things about this crisis, instead of striking out in new directions, the authorities have....

Regulating finance: coddle, jiggle, or stifle?

Everyone with a tolerably close relationship with reality agrees that our financial regulatory structure needs a serious overhaul. Over the summer, the Obama administration got the ball rolling with a set of proposals for a new regulatory architecture (a favored word of the pundits). Then as summer turned into fall, Congress took some time out from making a mess of health care and got into the act. While it’s all very much a work in progress, it’s worth contemplating what the issues are, and what direction the executive and legislative branches are likely to take.

What exists

One of the crazy things about the U.S. financial regulatory system, like just about everything else in this country, is its intense fragmentation. There are multiple federal agencies governing different sectors—securities markets are regulated by the Securities and Exchange Commission (SEC); commodity markets by the Commodity Futures Trading Commission (CFTC); commercial banks by the Federal Reserve, the FDIC, and the Comptroller of the Currency; savings and loans by the Office of Thrift Supervision—and that’s by no means a complete list. Oh, and some sectors aren’t regulated at all, like municipal bonds. And the insurance business is only regulated at the state level. States also regulate banks and securities trading.

No one has a formal responsibility for how it all fits together. Bucks are passed, turf is guarded. Regulators are organized around sectors, and focus mainly on individual institutions, even though links between institutions and sectors mean that trouble in one place can quickly metastasize to another. Who could have guessed, aside from the usual gang of worrywarts, that mortgage delinquencies could have led to AIG blowing up, which threatened the meltdown of the entire global financial system? The Fed has an informal supercop role, but it mostly slept complacently through the bubble, and hasn’t done much to stop a new one from forming (see p. 8).

What’s proposed

Measuring the StimPak

As the U.S. economy looks to be emerging from its near death experience of a year ago, how much can we credit the stimulus package for its…well, revival is too strong a word, so maybe life-like twitchiness?

GDP growth in the third quarter came in at 3.5% at an annual rate—decent, though unspectacular. But a large share of the growth in third quarter GDP is traceable to government policy. Cash-for-clunkers boosted vehicle sales and federal mortgage assistance (present in three-quarters of all new mortgage origination these days) boosted residential investment. Those sectors, plus direct federal purchases, together contributed 56% of the growth in the third quarter, more than three times their collective share of GDP. Without Washington’s help, growth would probably have been closer to 1–2%.

Beyond one quarter’s results, how big has the federal stimulus been exactly?...

Money

A lot, though not all, of Wall Street thinks the U.S. economy is already in a recovery that could surprise us with its vigor. While it’s near-certain that the Great Recession has ended, the official opinion of this page remains that the recovery will largely be in name only, with the job market the last to get the news.

Hiring strike

It also looks like the probability of finding a job is at an all-time low in 60 years of data. There are no timely stats on the fate of the unemployed, but the economist Robert Shimer has developed a statistical technique for estimating the monthly probability of the jobless finding fresh work, which he published in a 2005 paper. LBO is now keeping up-to-date estimates based on his technique.

Over the long term, the probability of someone unemployed in one month finding a job in the next, using Shimer’s technique, has been about 44%. Before 2008, it had never been below 28%. In earlier recessions, it’s averaged around 33%. Now it’s...

Miscellany

Some gusher. It was a little surprising, even for the presumably unshockable, to learn of diplomat Peter Galbraith’s nine-figure interest in Kurdish oil even as he was serving as an “unpaid” advisor to the Kurds and writing apparently high-minded op-eds insisting on their control of the oil in northern Iraq. Clearly the invasion that he enthusiastically promoted has worked out nicely for him. But has it been so profitable for other, less high-minded interests?

Over the years, there’s been a lot of talk about how the whole purpose of the U.S. invasion was to steal Iraq’s oil. Recall that back in the old days, Western oil companies used to own Middle Eastern crude. Most countries in the region nationalized their oil back in the 1970s; Iraq did in 1972–3. Many said that George Bush longed to reverse all that. Maybe that is what he had in mind, though we don’t know. But things haven’t quite worked out as hoped....

Mishkin redux. Back in issue 119, LBO made fun of Columbia finance professor and former Federal Reserve governor Frederic Mishkin for describing the financial system as “the brain of the economy…act[ing] as a coordinating mechanism that allocates capital…to its most productive uses.” A textbook sentiment, believed by all right-thinking sorts when Mishkin uttered these words in 2006, it sounds a little dated today.