The Media's Top 10 Economic Myths of 2008 (No.8)

Network reporters should have been reading The Wall Street Journal, which had been sounding alarms about the corruption and financial danger of the lenders' practices for more than six years. The Journal has run at least 29 editorials or op-eds exposing the two businesses for political connections, preferential regulation, and Enron-like "cooking" of the books.

"The Washington political class has nurtured and subsidized these financial beasts for decades in return for their campaign cash and lobbying support," said one Journal editorial on July 12. That editorial also pointed out the lack of reporting on the issue saying, "Maybe the press corps will even start reporting how this vast confidence game could happen."

The Journal wasn't alone. The Washington Post said on July 14, "Though the implosion of investor confidence in Fannie Mae and Freddie Mac last week was sudden, the worries driving it have been the subject of countless warnings over many years."

That Post article explained that the two entities had too much debt and not enough capital, operating "with financial cushions that were too thin to support their far-reaching financial risks." This was something former Federal Reserve Chairman Alan Greenspan told lawmakers in 2004, according to the Post. Greenspan argued for "preventive action" "sooner rather than later."

After Fannie and Freddie failed some in the media blamed free markets, but both Investor's Business Daily and The Journal explained that it was socialism that created the problem: "We haven't suddenly become socialists. What taxpayers need to understand is that Fannie and Freddie already practice socialism, albeit of the dishonest kind. Their profit is privatized but their risk is socialized," said a July 12 Journal editorial.

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8. Fannie's failure

Media myth: When it came to the demise of Fannie Mae and Freddie Mac, the network news never saw the trouble coming.

Originally published by the Business & Media Institute

Print journalists had been warning of trouble at government-sponsored enterprises Fannie Mae and Freddie Mac since 2002. But in 2008 ABC, CBS and NBC were clueless when it came to the extreme risk the duo presented to taxpayers.

The NBC "Today" show hinted at problems with the two government-sponsored companies on July 14 when Andrea Mitchell reported Sen. John McCain's (R-Ariz.) reaction to a bailout:

"John McCain also says the survival of the mortgage giants is essential, despite some of their past practices," said Mitchell. Viewers were left to wonder what those "past practices" could have been. Here are a few hints: billions of dollars in accounting scandals, stock prices that have plummeted, connections to prominent politicians and a high-risk portfolio.

CNBC's Erin Burnett shed almost no light on the situation in a "Today" segment the same morning.

When co-host Matt Lauer asked, "How did they get themselves in this situation?" Burnett explained that Fannie and Freddie guarantee mortgages for other lenders so that if the loan goes unpaid, they take the loss instead of the original lender. But she neglected to mention the enterprises' government mandate to increase home ownership and the implied taxpayer guarantee that enabled the two public companies to dominate the market.

The media also underreported accounting scandals at Fannie Mae. In 2004, earnings restatements at Fannie Mae were $11 billion. That was 19 times bigger than Enron's, yet Enron is the scandal everyone remembers. [Click 'read more' to continue]

Film of the Year No. 7

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7. No Country for Old Men

This film from Joel and Ethan Coen, the brothers behind cult classics like Fargo and The Big Lebowski, is probably their best yet. Based on the book by Cormac McCarthy, No Country for Old Men is a modern-day western that's every bit as terse and dark as that genre's greatest hits, and yet still manages to exude the wit and humour that the Coens are famous for.

The story is a simple one. Llewellyn Moss is out hunting in the desert when he comes across a macabre scene: abandoned cars, dead bodies, and a briefcase full of money – the hallmarks of a drug deal gone horribly wrong. Taking the cash and going on the run, Moss is relentlessly pursued by a seemingly unstoppable assassin (Javier Bardem, in an Academy Award-winning role), with the county's laconic sheriff (Tommy Lee Jones) following a few steps further behind.

No Country for Old Men is a suspenseful and truly exhilarating film, let down only by a rather flat finale. While it may be true to the spirit of the source material, it doesn't really work on film. That's a shame: if No Country for Old Men had gone out with a bang rather than a whimper, it could have been my film of the year. That said, it still won Best Picture at the Oscars. Watch the trailer here.

Blog Review 818

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Just why housing benefit costs us all so much money. It's quite mindboggling how the government conspires to make its own procurement more expensive.

For those amused by Richard Murphy. It would appear that he's unaware of what an audit is for.

So what that they're spending more money on diagnosing dementia? It's still a social problem, not a medical one.

For those of you who saw the "how to be a lefty writer about Africa" article, here's the author explaining what it all means.

It would appear that at least part of the BBC could be described as the public relations arm of Greenpeace.

Bailing out the car companies. Would thing be different if, instead of each car manufacturing job supporting 5 others, it was actually 0.3 others?

And finally, there are two El Gordo's in Europe and only one of them is worthwhile at a 6% break even chance.

 

History's lessons

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The Telegraph announces that the Archbishop of Canterbury is claiming that we can all learn something from the Nazis.

The Archbishop of Canterbury warns today that Britain must learn the lessons of Nazi Germany in dealing with the effects of the recession.

The actual piece isn't quite that exciting: he's arguing that we should not adopt an economic policy without thinking of the morality of both the goals and the methods used to reach them. Quite right too. However, just for giggles, let's look at what the Nazis actually did do to reduce the effect of the Depression and to mop up that excess unemployment.

The previous literature has emphasized the Nazi policy of holding down real wages as a contribution to the rapid expansion of employment, the opposite of the perverse wageincreasing policies of Roosevelt’s NRA. Indeed, Barkai shows that the share of German wage income in national product declined from 64 to 59 percent between 1932 and 1936, while the increase in profits was “quite spectacular" (p. 196). Likewise, Abelshauser (p. 148) reports that the income share of the bottom half of the income distribution fell from 25 to 18 percent between 1928 and 1936.

They lowered real wages, cut labour's share of the economy and deliberately worked to increase corporate profits. Roosevelt, as is pointed out, tried the opposite track, boosting real wages. The end result was that German unemployment shrank quickly while in the US it was at 19% as late as 1938.

This shouldn't come as all that much of a surprise really. Things that are more expensive get used in smaller quantities than things which are cheap and this applies to labour just as much as it applies to anything else (no, no one at all is claiming that labour is a Giffen Good). If we try to raise the price of labour then we're going to reduce the amount of it which is used. If we lower said price then we'll increase the amount used.

Which is indeed a useful lesson for us to remember in current times. Raising the minimum wage just isn't going to help in reducing unemployment. Restricting working hours, imposing greater workers' rights, loading more regulation upon companies (all of which raise the cost of labour) similarly are not things we really want to be doing just now.

Swings, roundabouts, bailouts

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In the US, Congress has passed a $17.4 billion bail-out package to its auto industry. In the UK, there are calls that the government should do the same with Jaguar LandRover - even though the Indian holding company, Tata, says it's injecting 'tens of millions of pounds'. Meanwhile the Confederation of British Industry is demanding urgent government action to preserve 800,000 jobs in carmaking, and Toyota has just reported a huge loss. The trade union Unite says jobs are hanging by a thread, and wants the same.

Should governments support distresed carmakers? Probably not. It's tough to say because many people will indeed lose their jobs and thre will be knock on effects in other industries. But think about it. If the government is to support carmakers, where does the money come from? It can only come from higher taxes, higher borrowing, or by printing more of the stuff. If it comes from higher taxes, then as the tax burden takes up more of our earnings, everyone else will find it that much harder to make ends meet. Small businesses in particular will struggle, and lay off workers. You will still have unemployment, it will just be more diffused and will catch fewer headlines. But it will be real.

If the support for carmakers comes from borrowing, the same is true - it's just that the unemployment will be felt in a few years time, when the borrowing has to be paid off. And if the support comes from printing money, then money becomes less valuable, prices soar, and planning for the future becomes harder. That messes up investment, and eventually it costs jobs once again.

So the government cannot 'save' jobs. It just passes the unemployment on to others.

When you have a long boom, as we have had, people tend to splurge out on luxuries, like homes and cars. When that party ends and the headache sets in, they still buy the necessities but cut out the luxuries. So if you make cars, or sell houses, you know it's going to be a rough time. The sensible thing to do is to put cash aside when times are good so you can get through the downswing. If people enjoy good business in the boom but know that the government will bail you out in the recession, that's hardly a good way to run an economy - particularly when the cost falls on people who don't have the PR might of Unite or the CBI are the ones who get made redundant as a result.

Film of the Year No. 8

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8. There Will Be Blood

There Will Be Blood is probably the most acclaimed film of 2008, and it's not hard to see why. From a technical perspective, this is filmmaking at its very best. Everything from the cinematography to the soundtrack is absolutely top-notch, and Daniel Day-Lewis' Oscar-winning central performance is everything it's cracked up to be – intense, compelling and, occasionally terrifying.

Loosely based on the novel OIL! by Upton Sinclair, the story follows the rise of Daniel Plainview, a ruthless oil-prospector driven as much by his hatred for others as his seemingly boundless greed. The details of the plot are not so important as its themes: ultimately, There Will Be Blood is about the corruption of the human soul. From its stark opening to its extraordinary conclusion, this is a powerful piece of cinema.

Yet There Will Be Blood is a flawed masterpiece. For all its technical brilliance, the film too often feels artificial, even theatrical. Its characters are unreal, their motivations hard to fathom or accept. They are ciphers rather than people. That's why There Will Be Blood is merely a very good film, rather than a great one. See the trailer here.

Blog Review 817

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Netsmith has been known to predict that this will happen but even Netsmith didn't think it would come this quickly. A major newspaper could now dump it''sentire print operation and distribution and still remain profitable.

The madness of feeding a Pomeranian with a 25 lb turkey.

The banks raised money to cover their losses....so why are people surprised when a bank uses the money raised to cover the losses?

What a hedge fund manager really wanted to be is a cockroach.

Feminism is dead and it's all Maggie's fault.

If we ever get the information from this FOI request it'll be fascinating.

And finally, just small change.

Which fiscal policy?

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Allow me to start by selling the pass. OK, so we need to have some form of a fiscal boost. Government has got to spend more than it taxes and thus boost aggregate demand and fund the gap by borrowing. Leave aside whether this is true or not and concentrate instead on the next step. We can increase the deficit either by spending more and keeping taxes where they are or by keeping spending where it is and reducing taxes.

Varied Guardianistas and the like think we should increase spending, usually because they think that increased governmental spending is the cure for all ills. I would prefer the lower taxation route for I of course know that reduced taxation is indeed the cure for all evils. But within the bounds of the current debate, which of us is right depends upon the various multipliers. How much extra GDP do we get in the short term for extra spending against how much extra GDP do we get from a cut in taxation? The usual assumption is that the boost is greater from spending but this probably (OK,  it isn't) true. Firstly, government isn't very good at spending money quickly.

To make a long story short, you cannot juice up a government agency's budget by tens of billions (or in the case of the stimulus package, hundreds of billions) and expect them to be able to process the paperwork to contract it out, much less oversee the projects or even choose them with any kind of hope for success. It's like trying to feed a Pomeranian a 25 lb turkey. It's madness.

That pretty much rules out any infrastructure or other directed spending on projects. They just take too long to get going.

It also seems that the multiplier of spending is, umm, not very impressive. Like, umm, one and a bit. For each pound of spending we get a one pound rise in GDP.

Valerie Ramey has written a paper with the results of her recent work on the question and with a full bibliography of earlier work. Her answer is that consumption and other categories stay about the same when the government spends more. In other words, the increase in GDP is about equal to the increase in govenment spending (for technical reasons, a mulitplier of 1.4 or so-Tim).

However, the tax multiplier is much higher:

By contrast, recent research by Christina Romer and David Romer looks at tax changes and concludes that the tax multiplier is about three: A dollar of tax cuts raises GDP by about three dollars.

(Worth noting that Christina Romer is such an aggressive tax cutting right winger that she's just been made Obama's head of the Council of Economic Advisors.)

So we should be cutting taxes rather than increasing spending to provide that fiscal boost then. And this holds even more strongly for us in the UK.

Any large-scale fiscal policy impulse must therefore, to be effective quickly, work through transfers to the private sector, either via lower taxes or via higher transfer to households. The key problem here is that under the present circumstances of extreme uncertainty households might just save any increase in their disposable income. How likely is this to happen?  A key factor will be the financial position of households themselves.

Households that depend on credit to finance their consumption will be most affected by the credit crunch and are thus most likely to react to a tax cut by maintaining their consumption. For this type of household, a tax cut (or an increase in expenditure) will be an effective tool to prevent an even sharper drop in consumption.

However, for households that do not depend on credit, the situation is quite different. Households that are saving anyway will probably at present just increase their savings in response to an increase in their disposable income that they know to be temporary.

This implies that the effectiveness of fiscal policy will vary greatly across the EU. Table 1 shows that households are on average net borrowers in only two of the larger member countries – Spain and the UK, unsurprisingly. In these two countries (with the largest housing bubbles) fiscal policy should thus be effective.

OK, OK, I agree, tax cuts aren't really the cure for all evils, they won't eradicate herpes, Simon Cowell or improve the form of the England rugby team. But it does seem to be true that if we do indeed need a fiscal boost we would be best advised to provide such by cutting taxes upon households rather than allowing politicians to splurge our money, ineffectively, upon their pet projects.

The Media's Top 10 Economic Myths of 2008 (No.9)

In truth, the law of supply and demand mostly determines the price of a commodity like oil. The rapidly growing economies of China and India demanded ever-increasing amounts of oil, jacking up prices. When demand contracted because of the economic slowdown and high prices the bubble burst and prices collapsed.

But if the media must have villains, it could have looked to someone who actually does manipulate prices: OPEC. Western oil companies must rely on OPEC nations for much of their product. When OPEC meets and decides to curtail oil production, the price of oil to all those companies – and everyone else – goes up.

The Business & Media Institute found that the networks ran 14 times more stories about oil companies' profits than OPEC profits. Reporters also overlooked the anti-American hostility of some OPEC nations.

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9. Gas at $4-a-gallon, blame the oil companies.

Media myth: Oil companies and CEOs were a favorite media target in 2008, but the monopolistic oil cartel that does manipulate oil prices was rarely scrutinized.

Originally published by the Business & Media Institute

When gas hit 4 bucks a gallon, who got the blame? Not the oil cartels, that's for sure.

When oil prices climbed to more than $100 a barrel, journalists were looking for someone to blame for Americans' "pain at the pump." They called "Big Oil" companies "thieves" and accused them of reaping "excessive profits" driven by "greed." But the networks ignored one of the leading causes of high gas prices – the hostile leaders of the world oil cartel – the Organization of Petroleum Exporting Countries (OPEC).

On NBC's May 15 "Today," host Matt Lauer interviewed ExxonMobil CEO Rex Tillerson. Lauer quizzed Tillerson on oil companies' profit margins and higher gas prices, but Lauer didn't ask Tillerson about other factors that affect the price of gas, like the Lieberman-Warner climate-change bill.

"Most analysts say prices at the pump will get even worse during the summer driving season," Lauer said, "but the oil companies are posting huge profits." He noted that ExxonMobil, made a $10.9-billion profit in the first quarter of 2008, and asked Tillerson a question from "Today" viewer "Elaine in Pennsylvania":

"How can you justify the record profits you're making when people can't afford to put gas in their cars to go to work?"

In response, Tillerson pointed out that Exxon's profits are not large because of high profit margins, but because of high volume. "[W]hen you take our profit of $40 billion [in 2007], that's 10 cents on every dollar of revenue that we generate," he said. "That puts us about in the middle of most Fortune 500 companies, so we're not at the top in terms of profit per revenue; we're not at the bottom." [Click 'read more' to continue]

Film of the Year No. 9

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9. Priceless

Audrey Tautou (of Amelie fame) plays Irene, a beautiful young gold-digger in the South of France. One night – after her elderly boyfriend has fallen asleep – she mistakes the mild-mannered (and penniless) bartender in her hotel for a wealthy man. One thing leads to another, and a very glamorous farce ensues.

Priceless is a lightweight, charming comedy that aspires to be the French Breakfast at Tiffany's and comes pretty close. It won't win any awards, but it's stylish, funny and highly entertaining from start to finish. Sure to cheer you up even in the midst of a grim British winter.

Watch the trailer here