The View from Right Field

Unlearning the Lessons of the Financial Crisis – One at a Time

In an interview with FT Weekend,¹ former Federal Reserve chairman Janet Yellen said that, even though work on the post-financial crisis regulatory framework is yet to be finished, Washington is already moving to ease “burdens” on financial firms.  Among the key concerns for Ms. Yellen is lending to indebted, less-creditworthy corporate borrowers, which she sees as a potential source of systemic risk.

In light of her comments, one wonders what she thinks of an article in The Wall Street Journal last week indicating that Fair Isaac Corp., the company that created the FICO credit rating score, is planning on revising the way the score is calculated.  In addition to measuring how people manage their credit, which is what they do now, Fair Isaac will look at how people manage their cash.  The idea, according to the article, is “to boost the number of approvals for credit cards, personal loans and other debt”.

Ten Years After the Big Bust

There actually are things going on other than the Great Brett Kavanaugh Nomination Spectacular.  For example, Donald Trump is playing Tariff-O-Rama with China, and yet the Dow Jones Industrials and the S&P 500 hit record highs on Thursday, and the Dow did it again on Friday.  And the yield on 10-year Treasuries is near a seven-year high.¹ 

Plus it’s the tenth anniversary of the big bust in 2008: the Lehman Brothers bankruptcy and the Great Recession that followed.²  Two of the big questions that have been discussed recently are: (i) did the government respond appropriately, in 2008-09, to what was happening then; and (ii) have we made sure that what happened then can’t happen again?

First, how was our response in 2008-09?  Without going into all of the detailed arguments that have been made, I would simply answer the question this way:  Could things have been done better?  Sure.  Could they have been handled worse?  Absolutely.  Which pretty much answers the question in my mind.  Because it seems fairly clear to me that the mistakes that were made were a lot fewer than the mistakes that could have been made but were not.

Uncertainty

I have talked before about how uncertainty can slow down the economy.  Businesses won’t invest if they are uncertain what the future holds.  During the Obama administration, uncertainty in regulatory matters, what the government was going to do, what new rules or costs the Administration might come up with, was a drag on the economy.  It seems like President Trump’s “trade wars” are probably a bit of the same today, and it could get worse.

But uncertainty is just as much of a problem, if not more, in foreign affairs.  Almost regardless of what your position is, it is better if other countries know what your position is and know that you will follow through on it than if they are uncertain.  Which brings me to Donald Trump.

What we have seen so far is President Trump saying, or tweeting, one thing and his administration saying something else.  President Trump denies (at least sometimes) that the Russians tried to interfere with the 2016 election.  People in his administration, such as Dan Coats, Director of National Intelligence, say the exact opposite.  President Trump rips on NATO.  Secretary of Defense James Mattis goes on trips trying to reassure our allies that our commitment is still strong.

What Can We Learn from the Financial Crisis – and Could It Have Been Handled Better?

As Harvard professor¹ Greg Mankiw says, the conventional wisdom is pretty clear on what caused the 2008 financial crisis:

“In the mid-2000s, the nation experienced a housing bubble.  A combination of stupidity, negligence and malfeasance led a bunch of Wall Street firms to make excessively risky bets that the bubble would go on forever. …

[W]hen the bubble burst, these new homeowners defaulted in record numbers, and the Wall Street firms headed toward insolvency. ...

Fortunately, policymakers came to the rescue.”

Inflation Finally Hits the Fed’s Target. Is This a Good Thing?

One assumes the Federal Reserve is happy that inflation is up.  After falling below the Fed’s 2% target for six years, the Commerce Department has reported the CPI for personal consumption items, excluding food and energy, was up 2% on a year-to-year basis in May.  And the index including food and energy was up 2.3%. 

As an aside, it is interesting that the Fed apparently likes to look at the former, because it is less volatile, when consumers focus on the latter because that is what they pay.  To the extent that expectations regarding inflation matter, and many economists believe they do, one would think the latter might be of more relevance.

A Cashless Society Plus China’s Social Credit System Equals …

­In May, FT Weekend had a long article on the increase in the number of payments being made electronically and asked, “Does cash have a future?” The subheadline read: “Electronic payment is quick, convenient, germ-free and can deter crime, from tax evasion to terrorism.  So why are we so reluctant to give up on coins and notes.”¹

The pluses of cash-free transactions are many.  For businesses, more cash-free transactions mean lower costs.  There are fewer break-ins by people looking for money.  Not having to handle cash is cheaper: you don’t have to count it; and you don’t have to physically take it to the bank.

Rebuilding In the Houston Flood Plain?

They are starting to rebuild in Houston after Hurricane Harvey, and there are disputes about how and where to rebuild.  Here are some excerpts from a recent Washington Post article:

“‘What are we going to do in these neighborhoods that people just don’t want to leave?’ said Stephen Costello, Houston’s chief resilience officer, whose task is to balance development and flood protection as the city recovers. …

The need to build even in flood-susceptible areas is the result of the region’s projected growth rate. …

An Idea for Less Stress About the News

Richard Thaler, winner of the 2017 Nobel Prize for Economics, was asked what somebody should do if they woke up, turned on the TV, and found that the stock market had fallen by three percent.  Dr. Thaler’s advice was simple: “Change channels.  Turn the show off.”¹

Dr. Thaler’s investment advice is pretty simple:

“Whenever anyone asks me for investment advice, I tell them to buy a diversified portfolio heavily tilted toward stocks, especially if they are young, and then scrupulously avoid reading anything in the newspaper aside from the sports section.”²

He said crossword puzzles are also okay, but you need to stay away from the financial section.

When Housing Is Expensive, the Solution Is to Make It More Expensive

With California already being one of the most expensive housing markets in the country, what is the only sensible thing to do?  Make housing more expensive, of course, which is what California is on course to do.  Last Wednesday, the California Energy Commission voted 5 to 0 to require all new residential buildings, up to three stories high, including single-family houses and condominiums, to have solar panel installations beginning in 2020.  The commission estimates this will add $9,500 to the cost of a single-family home.¹ 

Of course, with the median price of a house in California already being almost $565,000, $9.500 is not going to matter much to somebody buying an above-average price home.  Also, there are tax credits, etc., that can help cut the cost – for people who can already afford a house and probably don’t need a government subsidy anyway.

Questions for the Federal Reserve and the Importance of Humility

Alan Blinder, former vice chairman of the Federal Reserve and member of Jimmy Carter’s Council of Economic Advisers, listed three questions for the Federal Reserve in last Friday’s Wall Street Journal:

“First, given the current state of the economy, should monetary policy be stimulating the economy or restraining it?  Second, is current monetary policy stimulative or restraining?  Third, if the Fed alters its policy, what should it expect to happen to inflation and unemployment?”

Professor Blinder said that “[a] central bank that can’t answer basic questions like these is in deep water.”  A few comments: