America Beset By Reaganism, W. Williams & B. Jones

When it comes to fiscal policy, bad ideas are dangerous, observed the great British economist John Maynard Keynes. "The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood," he wrote. "Indeed, the world is ruled by little else."

America is now beset by a bad idea called Reaganism, which holds that government is the problem and must be constrained if the powerful American economy is to flourish. Deep tax cuts for the rich and massive deregulation will do the trick.

Ronald Reagan was able to turn this philosophy into the nation's dominant economic concept. But in the hands of Reagan's disciple--George W. Bush--it has yielded devastating results.

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Reaganomics in Retreat, Donald Luskin

IT SEEMS THAT the world is beginning to come around to my point of view, that the credit crisis has been averted and the economy is not going to weaken enough to deserve to be called a "recession."

Several speeches this week by Federal Reserve officials have talked about the credit crisis very much in the past tense. The Fed finally came up with new liquidity facilities that were effective at easing the crisis — after nine months of flailing, doing everything wrong and nothing right. This after years of keeping interest rates too low, and triggering the cycle of speculation that led to the credit crisis in the first place. So now the Fed speechifiers can pontificate about the mistakes that bank lending officers and brokerage firm risk control experts made.

Even my longtime ideological nemesis Paul Krugman, the economist who writes a column for the New York Times in which, for years, he has forecasted every possible horrific outcome for the economy, admitted last week that "the worst of the financial crisis is over."

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Our Great Economic U-Turn, Thomas Frank

Twenty years ago, when I started out as a writer, the problems of mass prosperity were the ones that intrigued me most. America was then, as I thought it would always remain, the great middle-class nation. And in the permanent affluent society, questions of taste and waste and marketing and alienation were what really mattered, now and forever. When moved to consider workplace issues in those days, I instinctively placed them in the category of brutal-things-settled-long-ago: Without even thinking about it, I connected the word "labor" to the word "history."

It's not a mistake anyone can make any longer, whether they are pondering the voting patterns of working-class Hoosiers or the driest statistics in the record book. Median "nonelderly" household income, we find, fell consistently through the first half of this decade, despite the solid economic growth enjoyed by the country as a whole.

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The Dumbest WSJ Story Ever. Really, James Pethokoukis

What the heck is the matter with Thomas Frank? The new columnist at the Wall Street Journal—and author of the book What's the Matter With Kansas?—wrote a commentary earlier this week, "Our Great Economic U-Turn," that basically said the economic boom of the past quarter century was a "man-made catastrophe." (It's an opinion seemingly shared by Barack Obama if you listen to his speeches.) This chunk pretty well sums up Frank's thesis:

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Where, oh where, to begin? OK, a few quick observations:

1) It was the 1970s, a decade Frank praises because of its strong unions and low income inequality, that was the economic disaster. High inflation, high oil prices, high taxes, a terrible stock market and three (!) nasty recessions averaging 11 months apiece. Ugh. The 1973-75 downturn was the worst since the Great Depression. Even most liberal economists would say taxes were probably too high and regulation too heavy.

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Let's Not Write the Fed a Blank Check, Interfluidity

Last week, the Fed decided to ask Congress for the right to pay interest on bank reserves. (Hat tip Barry Ritholtz, see also William Polley, Mark Thoma, Brad DeLong) This is a very big deal.

Don't be misled into thinking that the Fed's proposal is just some arcane, technocratic change. The Federal Reserve is asking taxpayers for a big pile of signed, blank checks. That's far too much power to put in the hands of a quasipublic organization with little democratic accountability. This authority should not be granted without some strong strings attached.

First, some background. There is a trend among central banks to move from old-fashioned, fractional-reserve banking to a system whereby interest rates are managed via a "channel" or "corridor", and under which fixed reserve requirements might be dispensed with entirely. The basic idea is simple. The Fed currently manages interest rates indirectly, by manipulating the supply and demand for cash in the banking system. But the Fed could adopt a more direct approach. It could choose two interest rates, a "floor rate" at which the Fed would stand ready to borrow funds, and a "ceiling rate" at which the Fed would stand ready to lend...

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The Fed Already Has a Blank Check!, Economist's View

In the interest of continuing the conversation, I want to argue a contrary position and push back a bit on Steve Waldman's post about allowing the Fed to pay interest on reserves, and his worry that this change will allow the Fed to put excessive amounts of public money at risk:

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Some "off the cuff" thoughts:

1. Public money is always at risk when the Fed does open market operations. The amounts may not be as large, but the risk is always there. For example, suppose the Fed prints $100 and purchases a T-Bill for $100, and that while it is holding that T-Bill, the price falls to $75. The Fed has just taken a 25% loss - if it tries to sell the T-Bill back to the public, it will get less for it than it paid originally. The big difference is that with MBS and other risky securities there is default risk - the value could fall to zero - but this is about the magnitude of the loss, not the fact that the Fed is able to put taxpayer money at risk. In addition, every action the Fed takes can affect the public treasury. If monetary policy changes GDP, tax collections change and this affects the deficit. Similarly, when the Fed changes the interest rate, the amount of interest paid on the accumulated federal debt changes - and this can be quite a bit of money...

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The Housing Crisis Is Over, Moulle-Berteaux

The dire headlines coming fast and furious in the financial and popular press suggest that the housing crisis is intensifying. Yet it is very likely that April 2008 will mark the bottom of the U.S. housing market. Yes, the housing market is bottoming right now.

How can this be? For starters, a bottom does not mean that prices are about to return to the heady days of 2005. That probably won't happen for another 15 years. It just means that the trend is no longer getting worse, which is the critical factor.

Most people forget that the current housing bust is nearly three years old. Home sales peaked in July 2005. New home sales are down a staggering 63% from peak levels of 1.4 million. Housing starts have fallen more than 50% and, adjusted for population growth, are back to the trough levels of 1982.

Furthermore, residential construction is close to 15-year lows at 3.8% of GDP; by the fourth quarter of this year, it will probably hit the lowest level ever. So what's going to stop the housing decline? Very simply, the same thing that caused the bust: affordability.

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Is The Housing Crisis Over?, Calculated Risk

From an opinion piece in the WSJ this morning, hedge fund manager Cyril Moulle-Berteaux argues "that the housing crisis is over."

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Mr. Moulle-Berteaux appears to be arguing that new home sales have bottomed, not prices or new home construction. He ignores the existing home market (with the huge overhang of supply, especially distressed supply), and that leads Moulle-Berteaux to an inaccurate conclusion.

It is actually possible that new home sales may be nearing the bottom of this cycle, however that doesn't mean the "housing crisis is over" - far from it.

I'm not here to correct all the errors in this piece. As an example, Moulle-Berteaux writes "residential construction" when he means "residential investment" (RI) - there is a difference, since RI includes home improvement, broker's commissions and a some other components, while Moulle-Berteaux appears to be focusing on the new home market.

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