Hackery Ombudsman: Paul Krugman

There are many different kinds of hacks.

But before we get into that - lets address my whereabouts recently. Some of you became a bit concerned with my absence, wondering where the column was, wondering what I was doing.

To all of that I say shhh shhh shhhh. Everythings ok. Lets see if you can guess what I was doing. Was TWO

A) Pausing before his next column, like a basketball player sinking a three pointer holding his arm aloft as he runs down court, simply to impress upon the readers how incredibly correct he was about Lebron and the Cavs

or

B) Lounging at his estate in Santorini (pictured above), sipping marula fruit cream liqueur and disburdening himself of musings on Bismark's Germany

Trick question. BOTH! Because TWO is both always right and has a Pan-European accent.

A brief moment on Lebron... in addition to the posturing and grimacing and limping around (which was on display almost constantly)... did you notice the Lebron-Headwhip? Here is a man who is 6-8, 275 pounds, who knocks people around like bowling pins when he flies through the lane. However, should he be caught in the face or upper chest with a flailing hand or an errant basketball, he whips his head backwards, rotates his arms in huge concentric circles and usually rolls around on the ground for a while. Did Shaquille O'Neal do this during the hack-a-shaq days where he was hacked acrossed the shoulders, face and arms 20 times a game? No.

Look, Lebron will be the best player in the NBA if he isn't already. He is young and has time to mature. In his defense, he has been told he is the greatest from the time he was 12 -- that sort of things leads to arrogance which may, in time, be tempered. TWO can admit that he would be just as bad if he had attained success at such a young age. As it is, I am older than Lebron and whenever my column has over 1000 hits in a day I spray champagne out of the window onto unsuspecting pedestrians below. They hate that. But thats how I celebrate. Anyway, I continue to find it disheartening that the basketball commentators are typically too hacky to call out Lebron on his antics.

Moving on to a different kind of hack, can we have a moment on Paul Krugman? Krugman might be the hackiest journalist to ever attain acclaim in American history. Krugman's most recent opus was this article, blaming Ronald Reagan (who is dead) for the 2008-2009 financial crisis. Am I oversimplifying? Is TWO using hyperbole? The title of the article is "Reagan Did It." Like its the last utterance of a victim at a murder scene.

How did Reagan commit this crime 5 years after his death? Well, with the passing of the Garn-St. Germain Depository Institutions Act of course! This bill, passed 26 years before the 2008-2009 financial crisis, deregulated the savings and loan industry. One of the consequences was that it allowed lenders to lend more freely to potential home purchasers. Krugman's thesis is that this Act was the main cause of our current economic downturn.

Before we just accept this argument and move on with our lives, TWO would like to examine facts. TWO loves facts. The Garn - St. Germain Act was a bi-partisan bill sponsored by Congressman Ferdinand St. Germain (D-RI) (who sounds like the sort of person who I would invite to my property in Santorini, but I digress) and Senator Jake Garn (R-Utah) (who sounds like the sort of person who would be re-caulking bathroom tiles at my property in Santorini, but I digress again). It passed the House and, with some amendments, the Senate overwhelmingly. Co-sponsors included current Democratic Senator Chuck Schumer and current Democratic Congressman Steny Hoyer. The Act allowed savings and loans to increase commercial lending to up to 10% of its assets, national banks to lend 15% of assets (up from 10%) and similar other slight increases. There's a savings and loan debacle a few years later, but essentially 10 years go by without any sort of substantial change in American home ownership and 25 years go by without any sort of housing related financial crisis.

Fast forward to 1993. Home ownership is at 63%. At the urging of the Clinton administration, bank regulators reform the Community Reinvestment Act requiring banks to show they were lending to a set number of lower-income buyers. By 2000, home ownership has suddenly jumped to 68%. Meanwhile, GSEs like Fannie Mae are being pressured to provide more and more mortgages to high-credit-risk purchasers. How outrageous were the rates? In 1997 Fannie Mae was offering 97% loan to value mortgages. The Bush administration was no better. Attempting to rebound from the dot com bubble, Alan Greenspan advocated refinancing and borrowing against speculative home values and Bush tirelessly pushed for more home ownership for more low-income buyers. By 2001, Fannie Mae was actually offering 100% loan to value mortgages -- in other words, allowing people to buy homes without putting any money down! As pressure mounted to lend, the number of dangerous loans increased. During a three year period between 2003-2006, sub-prime and Alt-A loans jumped from making up about 1/10 of all mortgages to making up nearly 1/3. By 2008, US consumers were spending almost $1.1 trillion more than they were earning in spendable income.* When the values of homes fell, homeowners who had refinanced often had almost no equity value in their homes and often just didn't pay. Others couldn't afford their mortgages after the downturn. Financial institutions, many of whom held massive amounts of mortgage-backed-securities (Bear Stearns collapsed under a 35:1 leverage ratio) found that the underlying assets were greatly, greatly overvalued and illiquid. All the while, government officials (the Fed, the Clinton and Bush administrations and members of Congress) were asleep at the wheel, as we've discussed before.

To summarize, although there has been a general trend towards open markets and free lending over the past 30 years, the events proximately causing this financial crisis undeniably took place throughout the past 10 to 15 years. No serious thinker would call President Reagan, of all people, "the prime villain" of this financial crisis.

And that is really the point. Paul Krugman is capable of being a serious thinker, but he chooses not to be. He instead chooses to be a hack. A economics professor, skilled writer and (somehow) Nobel Prize winner, he has relegated himself to the journalistic equivalent of a drunk heckler at a basketball game, yelling inflammatory things to anyone who will listen. As people tune him out or change seats, he has to yell louder and more obscenely to get noticed. By the end of his career Krugman will be writing articles like "George Bush - Sarah Palin Love Child Is Wolf Boy" for the National Enquirer.

Politically, there are two types of people: People who treat their political party like its their favorite college football team and people who just want the government to get things right. The former will trace back the roots of any problem to a misstep by their rival and make any argument, no matter how convoluted, to show that their "team" is blameless. The latter would prefer that elected officials who get things right be given proper credit, and those who get things wrong be held accountable, no matter the letter after their name.

In conclusion, don't be a hack.


*We don't really cite sources in any organized way here at TWO, but, for those interested, I relied heavily on financial figures from this article by Peter J. Wallison and this speech by Robert Rodriguez

Financial Crisis Ombudsman: Accountability

Don't look at me.

Today this video is all over the internets. Its a Harvard student asking Barney Frank, current House Representative from Massachusetts and former Harvard graduate and professor, what responsibility he feels for the current economic crisis. Frank essentially mocks the student, claims conservative conspiracy and then humbly concedes that he does, in fact, regret writing a bill to regulate hedge funds but then not trying hard enough to get it passed. This last statement, of course, is the equivalent of being on a job interview and saying that your biggest fault is working too hard and caring too much about the company.

Lets take a step back. The basic role of government, at its very core, is to provide services for the people that the people could not readily provide for themselves, either individually or with non-governmental civic organization. These sorts of essential government services tend to be areas that are crucial to all citizens but require massive amounts of money, organization and/or oversight that ordinary citizens or groups of citizens could not take on by themselves. Examples include security (intelligence gathering, training, organization of large-scale military operations) and infrastructure (interstate highways, ports, air safety, energy, water). Also clearly falling into this category of basic goverment functions is financial oversight. While nearly all 300 million Americans have been effected by the fall out from the financial crisis, ordinary citizens for the most part would have no way of understanding the factors leading up to the crisis, let alone be able to take steps to remedy the problems.

It is for this reason that Americans entrust power and money to elected officials. Barney Frank was paid $169,000 and his staff was paid a total of $1.2 million in 2008, figures that are on-par with the other 435 members of the house. The understanding between elected officials and the people that elect them and pay their salaries is that they will look out for the people's interests particularly in the areas mentioned above, that are important but beyond the control of the constituents. In that sense, all elected officials have dropped the ball when it comes to the financial crisis.

But Barney Frank, in particular, had a special position that makes his tenure as an elected official even more negligent and his failure to take any responsibility even more disgraceful. Since 2003 Barney Frank has been on the House Financial Services Committee, and since 2007 has been the chairman of that committee. In its own words, "[t]he Committee oversees all components of the nation's housing and financial services sectors, including banking, insurance, real estate, public and assisted housing, and securities." This could be shortened to "the Committee is in charge of making sure a financial meltdown doesn't happen."

And yet Frank feels no responsibility. Some selected highlights of Frank's performance:

- In this 2003 hearing, Barney Frank concludes that Fannie Mae and Freddie Mac are sufficiently regulated because Fannie Mae and Freddie Mac say they are. Clearly exhausted from that rigorous line of questioning, Frank concludes that there is no impending financial crisis. (see page 110).
Mr. FRANK. Let me ask Mr. Gould and Mr. Raines on behalf of Freddie Mac and Fannie Mae, do you feel that over the past years you have been substantially under-regulated?
Mr. Raines?
Mr. RAINES. No, sir.
Mr. FRANK. Mr. Gould?
Mr. GOULD. No, sir.
Mr. FRANK. And let me ask now the gentleman from the Federal Home Loan Bank, do you believe that the Federal Home Loan Bank System has been substantially under-regulated?
Mr. HEHMAN. No, sir.
Mr. FRANK. Mr. Schultz?
Mr. SCHULTZ. No, sir.
Mr. FRANK. Okay. Then I am not entirely sure why we are here, but we killed the afternoon anyway, so we might as well go forward.
I must say, I am inclined to agree with that. I don't see any financial crisis. You can always make things better, but I do think we should dispel the notion that we are here because there is something rotten that has gone on.

Incidentally, Franklin Raines was fired in 2004 for grossly overstating earnings and, along with two others, charged with 101 civil counts related to the manipulation in 2006.

- In this 2004 hearing on the safety of Fannie Mae and Freddie Mac, Frank insists that serious issues with their financial statements and internal controls don't effect their safety and soundness, since they won't go immediately insolvent. (see pages 108-110).

(edited)
Mr. FALCON. Just the very fact that we have serious doubts about the accuracy of the financial statements and their books and records, the very fact that we have identified very serious internal controls——
Mr. FRANK. Well, let me ask a question.....Does any accuracy threaten the safety and soundness? That is what bothers me. There is a quality and a quantity issue here.......To throw ''safety and soundness'' around in that thing I think really is, for a regulator, irresponsible.
Mr. FALCON. Well, I think internal controls are a very serious safety and soundness concern. A breakdown or a lack of internal controls——
Mr. FRANK. Do you think the safety and soundness is at risk right now?
Mr. FALCON. Are they at risk of becoming insolvent right now? No. We have an agreement with the board in place that will address these problems, provide an adequate capital cushion. We think we——
Mr. FRANK. That is the answer. The rest is just rhetoric.

Fannie Mae and Freddie Mac, after losing $14.9 billion and facing potential insolvency, were placed under government control in 2008.

- In 2005 and 2006, Frank sponsored 34 bills. Only 2 had anything to do with subjects related to the current financial crisis (H.R. 4291 and H.R. 5712) and neither became law. Frank did find time to pass House Resolution 86, a congratulations to the New England Patriots for winning the Super Bowl.

- In 2007 and 2008, while the economy fell apart and millions lost their jobs, Frank, now chairman of the Financial Services Committee, sponsored 70 bills, 6 having to do with relevant economic issues, (HR. 1257, HR 3526, HR3838, HR 1427, HR 7321 and HR 3915). None of the six became law, but 4 did at least pass the House. Meanwhile, his Financial Services Committee saw 521 bills and 109 were passed by the house. Of those 109, maybe 4 (HR 698, HR 890, HR 5140 and HR 6312) in addition to Frank's 4 (mentioned above) were on topics at all pertinent to the financial meltdown. Other than H.R. 5140 - the 2008 Economic Stimulus (not written by Frank or anyone in the Financial Services Committee), none became law.

While the Finacial Services Committee, under Frank's guidance, could not seem to pass anything that would have saved the people of this country from economic catastrophe, they were a tour de force when it came to minting coins. TWO would like to commend the House Financial Services Committee for being instrumental in minting coins to commemorate the centennial of Mothers Day, the contributions of Indian tribes, the 50th anniversary of NASA, the contributions of singer Eddie Money, the founding of the US Army in 1775, the bicentennial of the Star Spangled Banner, the semicentennial of the Civil Rights Act, the Boy Scouts and the legacy of the US Infantry. I made up the one about Eddie Money, but he probably deserves one too.

- And now its 2009. Barney Frank and other elected officials - Republican and Democrat - are trying to cover themselves. They are pointing fingers, talking about committees they're on, how they attended important hearings and sponsored important bills.

But nothing can undo the fact that an economic disaster occurred and all we got from the Financial Services Committee were commemorative coins. And its not an accident. Voting on commemorative coins is easy. It requires no difficult due diligence. It doesn't entail understanding complex concepts, upsetting powerful institutions or risking campaign funding. And, most importantly, if the people aren't calling for it, why risk getting involved in anything that could upset the chances of reelection?

And therein lies the disconnect. The people weren't calling for oversight on banks, credit derivatives, government sponsored entities etc from 2003 - 2007 because most of them didn't realize there was a problem. Most people are working 9-5, taking their kids to school, paying bills and living their lives. They don't have the time or the means to investigate, understand or have an impact on these issues. They pay their taxes with the understanding that elected officials and their staffs will be the ones spending time asking the serious questions, doing unglamorous and painstaking research and fighting to pass bills that matter.

This is not a partisan issue. Blame lies on the Bush Administration, the Fed (particularly Allen Greenspan) and members in both houses of Congress in addition to obvious culpability (at least for recklessness) on the part of many financial institutions.

But I find it particularly disheartening, and, indeed, insulting, when an elected official specifically charged with financial oversight not only does not do his job, but, upon challenge from a constituent, has the audacity to mock and deride the questioner while at the same time accepting no accountability for his failures - as if the financial crisis were some independent, unforeseeable act of God.

In conclusion, this is further evidence that we'd be better off governed "by the first 2000 names in the Boston telephone book than by the faculty at Harvard."