December, 2008

The GSE Supply Curve for Nonprime Products Kept Shifting to the Right

by Lawrence H. White
The Conversation
December 18th, 2008

Brad DeLong rejects “the claim that the crash in the mortgage market was in some sense the fault of excessively risky lending by the GSEs Fannie Mae and Freddie Mac which pulled the private sector along behind them,” based on the observation that “Fannie Mae and Freddie Mac lost market share as all the loans [...]

Read: The GSE Supply Curve for Nonprime Products Kept Shifting to the Right

Thank God for Anonymous Readers!

by William K. Black
The Conversation
December 18th, 2008

I’m back from Utrecht and eager to rejoin the discussion, which has been aided greatly by the contributions of an anonymous reader who has obviously been in the tranches.  Let me first respond to the specific questions my colleagues have posed to me. 
Do I argue that agency problems in the private sector are both an important [...]

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Supply Curves Slope Up, Demand Curves Slope Down

by J. Bradford DeLong
The Conversation
December 18th, 2008

There is one huge argument against the claim that the crash in the mortgage market was in some sense the fault of excessively risky lending by the GSEs Fannie Mae and Freddie Mac which pulled the private sector along behind them: it is that Fannie Mae and Freddie Mac lost market share as all the [...]

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I Am Not Now, nor Have I Ever Been, a Monkey Psychologist

by Lawrence H. White
The Conversation
December 16th, 2008

In response to my observation that he had put little emphasis on the real estate and other malinvestments that kicked off our financial turmoil, Bradford DeLong writes:
That there are “malinvestments… wealth-squandering mistakes” … is simply not news.
I understand that Professor DeLong’s main interest lies elsewhere, in the question of what has made the global decline [...]

Read: I Am Not Now, nor Have I Ever Been, a Monkey Psychologist

Reader Contribution: A Worm’s-Eye View from Wall Street

A Cato Unbound reader who works on Wall Street (and has asked to remain anonymous) sent us this detailed essay offering a professional “worm’s-eye” perspective on the financial crisis. The essay add to this month’s issue by exploring some of the complex mechanisms behind the “acid decay of trust” the author contends caused Wall Street’s meltdown.

Read: Reader Contribution: A Worm’s-Eye View from Wall Street

Financial Accelerator vs. Monkey Psychology

by J. Bradford DeLong
The Conversation
December 16th, 2008

Lawrence White writes:
Professor DeLong says little to emphasize the cluster of malinvestments, the rafts of investment projects — particularly in real estate — that have turned out to be wealth-squandering mistakes, leading to the writing down of financial claims that funded them…
I protest.
White misses my point. We have, at most, $2T of losses in securities [...]

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Warped Perspective

by Casey B. Mulligan
The Conversation
December 16th, 2008

Professor Black claims that “Rome is burning,” which I take to mean that we are in the midst of an economic disaster, and claims that I ignore it because of a theoretical bias.
2008 has been a disaster for Wall Street.  A couple of years of steeply rising oil prices has been bad for the automobile [...]

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Does Moral Hazard from the Safety Net Help to Explain Deceptive Accounting?

by Lawrence H. White
The Conversation
December 15th, 2008

William K. Black’s interesting contributions to this symposium, and in particular his drawing parallels to the S&L fiasco of the 1980s, prompt me to wonder what role financial safety nets, like the deposit insurance that fostered the S&L fiasco, have played in fostering the current crisis.
Professor Black focuses on the growth of deceptive (or fraudulent) [...]

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How Do We Explain Housing-Boom Optimism?

by Lawrence H. White
The Conversation
December 12th, 2008

If I understand him rightly, I don’t much disagree with Professor Mulligan.  We agree that Federal Reserve policy acted to promote the housing price boom by lowering real interest rates.  The difficult question is:  what share of the boom can we attribute to monetary policy, and what share to other independent sources?  Applying Professor Mulligan’s [...]

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Interest Rates, or Optimism about Interest Rates?

by Casey B. Mulligan
The Conversation
December 11th, 2008

Professor White showed that one-year real interest rates were low during the housing boom.  That’s a good starting point because, if the Fed can affect anything real, it is the short-term interest rate.  Now let’s use that information to demonstrate that the impact on housing prices is minimal.
Since I will demonstrate that the housing-price impact [...]

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I Accept Larry White’s Correction…

by J. Bradford DeLong
The Conversation
December 11th, 2008

I accept Larry White’s correction with respect to the word “liquidity.” The conventional language — that we distinguish between situations in which organizations are illiquid and those in which organizations are insolvent — is, I think, confusing at some level. After all, if there is no doubt that some organization is solvent why should it [...]

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Low Real Interest Rates

by Lawrence H. White
The Conversation
December 10th, 2008

Casey Mulligan has asked for a time series for real interest rates so we can judge just how low they were.  Here’s the clearest and most up-to-date picture I could find, from Christopher J. Neely and David E. Rapach, “Real Interest Rate Persistence: Evidence and Implications,” St. Louis Federal Reserve Bank Review 90 (November-December 2008), [...]

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Data, Please

by Casey B. Mulligan
The Conversation
December 10th, 2008

The claim has been made that real interest rates were low during the housing boom.  Can someone who believes this claim show us a time series for such real interest rates, and calculate the number of basis points by which those rates were low during the boom?  Then we can consider more carefully how much [...]

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