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Picking Apart Krugman's Ridiculous Housing Op-Ed

Anthony Randazzo
August 3, 2012, 4:49pm

Most of the time when I read Paul Krugman's op-eds I disagree with him. I shake my head in frustration that he is misleading tens of thousands of people. I wrestle with the question of why economists can look at the same data and come up with different results (psychology has the answers by the way). And then I go on with life because it is just not worth it to dwell.

Today's post "Debt, Depression, DeMarco" is so ridiculous that I can't just go on. So I'm going to break down all of the manipulations and inaccuracies point by point, for my own mental relief if anything else. I will include every line of his post so nothing is taken out of context. 

"There has been plenty to criticize about President Obama’s handling of the economy. Yet the overriding story of the past few years is not Mr. Obama’s mistakes but the scorched-earth opposition of Republicans, who have done everything they can to get in his way — and who now, having blocked the president’s policies, hope to win the White House by claiming that his policies have failed."

Not that I'm a big fan of the GOP, but that is what minority parties do. They get in the way of majority parties. It is up to the leading party to, well, lead. We'll move past the sob story about the GOP beating Obama at the political game though, because that is not the point here.

"And this week’s shocking refusal to implement debt relief by the acting director of the Federal Housing Finance Agency — a Bush-era holdover the president hasn’t been able to replace — illustrates perfectly what’s going on."

Nothing was shocking about this refusal. This is not the first time that FHFA has rejected the idea of universally writing down principal on mortgages backed by Fannie Mae and Freddie Mac. All acting-director of FHFA Ed DeMarco did was maintain the agency's position. To set this up as "shocking" is to prime the reader for assuming what follows is outside normality. It is playing on psychological impulses and misframing the argument.

"Some background: many economists believe that the overhang of excess household debt, a legacy of the bubble years, is the biggest factor holding back economic recovery."

True. Count me as one who also believes that household debt is one of the largest problems holding back recovery.

"Loosely speaking, excess debt has created a situation in which everyone is trying to spend less than their income. Since this is collectively impossible — my spending is your income, and your spending is my income — the result is a persistently depressed economy. How should policy respond? One answer is government spending to support the economy while the private sector repairs its balance sheets; now is not the time for austerity, and cuts in government purchases have been a major economic drag."

You do have to give it to Krugman for never failing to push his anti-austerity argument. A challenge with this argument is that I can push back by saying, the government has supported the economy by spending hundreds of billions (both through the stimulus and the bailout) and providing dirt cheap loans through the Fed, not to mention supporting housing prices and attempting to invest in green technology. That hasn't created a recovery. Krugman will respond that we didn't spend enough. But that is an easy come back if spending doesn't succeed at its goal.

"Another answer is aggressive monetary policy, which is why the Federal Reserve’s refusal to act in the face of high unemployment and below-target inflation is a scandal."

The Federal Reserve has been acting. Krugman makes it seem like the Fed has been just standing on the sidelines for the whole faux-recovery period. Most readers of his column will know that is not true. What Krugman really means to say is that the Federal Reserves refusal to do even more is a scandal. He'll get his wish in September I think, but there is so much debate about whether QE3 could be effective in any form that calling it a scandal is absolutely ridiculous. The Fed's holding steady on course is extreme as it is, going further necessitates a substantial debate. 

"But fiscal and monetary policy could, and should, be coupled with debt relief. Reducing the burden on Americans in financial trouble would mean more jobs and improved opportunities for everyone. Unfortunately, the administration’s initial debt relief efforts were ineffectual: Officials imposed so many restrictions to avoid giving relief to “undeserving” debtors that the program went nowhere."

How terrible of the government to try and protect taxpayer money by preventing fraud and attempting to limit moral hazard. More to the point though, it is far from a widespread view that debt relief is a "should" for government policy. A debt jubilee would probably have positive effects for households free of their financial burdens, but the gains are washed out by an equal net loss to the creditors that will no longer get back the money they owed. That is a policy debate very much up in the air, not a "should."

"More recently, however, the administration has gotten a lot more serious about the issue. And the obvious place to provide debt relief is on mortgages owned by Fannie Mae and Freddie Mac, the government-sponsored lenders that were effectively nationalized in the waning days of the George W. Bush administration."

Again, I respect the rhetorical flourish of Krugman painting the GOP as always the bad guys. I don't respect him for playing politics when he should be acting like more of an professional economist though. Krugman is right that the GOP are the bad guys who nationalized the GSEs. But I would have added to that sentence, "and have continued on in government conservatorship for more than three years under the Obama administration who has failed to make a concerted effort to deal with the defunct mortgage giants." Both sides share a lot of blame for being stuck in the political mud and not wanting to take on the very powerful American housing lobby.

"The idea of using Fannie and Freddie has bipartisan support. Indeed, Columbia’s Glenn Hubbard, a top Romney adviser, has called on Fannie and Freddie to let homeowners with little or no equity refinance their mortgages, which could sharply cut their interest payments and provide a major boost to the economy. The Obama administration supports this idea and has also proposed a special program of relief for deeply troubled borrowers. But Edward DeMarco, the acting director of the agency that oversees Fannie and Freddie, refuses to move on refinancing. And, this week, he rejected the administration’s relief plan."

This is the point in Krugman's op-ed that my ears started to bleed. Bipartisan support my ass! That is like calling the stimulus bipartisan because it got a few Republican votes in the Senate. There are a few center-right economists supporting widespread principal reduction. But most of the center right is opposed. That is just plain wrong and Krugman knows it. Again, it is priming the audience to see Ed DeMarco as the evil government technocrat out of touch with the mainstream. The ironic thing is that principal reductions are something that needs to be painted as "bi-partisan" at all. This is not a political issue. It is an accounting and financial analysis issue. Sometimes reducing a borrowers principal will yield a net positive return to the lender because the borrower won't go into complete default and foreclosure. Other times not. It is a case-by-case basis. Not a left-right political debate. 

"Who is Ed DeMarco? He’s a civil servant who became acting director of the housing finance agency after the Bush-appointed director resigned in 2009. He is still there, in the fourth year of the Obama administration, because Senate Republicans have blocked attempts to install a permanent director."

At this point my eyes started to bleed with frustrated fury. It is when elements of truth are twisted to create a false reality that we should really question the legitimacy of public commenters. I am certain that I have made this error in the past and would honestly own up to it if pointed out. But Krugman could at least make an honest attempt to tell the story right here. Yes, DeMarco became acting-director after James Lockhart quit. But Obama didn't try to appoint a permanent director until November of 2010. There were legitimate concerns about whether Joseph Smith should step into the FHFA top post, and the out going GOP asked those questions. The lame duck congress in the fall of 2010 was not able to push through Smith's nomination, and it was left up to the next Congress, incoming for January 2011. But Obama decided to not renominate Smith for the 112th Congress to take a vote on one way or the other. And since then the Obama administration has not tried to reappoint anyone to the post. Krugman makes it seem that the White House has been trying hard to create replace DeMarco, but largely they've been afraid of the politics of having to honestly vet a candidate that would take the role of GSE conservator seriously vs. just being a technocratic tool of the administration. VERY different story than Krugman paints.

"And he evidently just hates the idea of providing debt relief."

Patently false. Ad hominem attack. DeMarco is on the record as saying principal reduction has the capacity to save taxpayers money. But he has argued the risks would be too high for the taxpayers. He has even written about debt forbearance a good option. He does not "evidently" hate debt relief. Either a research failure for Krugman or a misleading sentence that he should apologize for.

"Mr. DeMarco’s letter rejecting the relief plan made remarkably weak arguments. He claimed that the plan, while improving his agency’s financial position thanks to subsidies from the Treasury Department, would be a net loss to taxpayers — a conclusion not supported by his own staff’s analysis, which showed a net gain."

What DeMarco's letter actually said was that under his estimated scenario (and he is the acting-director that has been doing this for more than three years now), taxpayers might only get a savings of $500 million under a best case scenario. More optimistic estimates have suggested closer to $1.8 billion in savings to the taxpayer. DeMarco's argument was that the $500 million estimate was such a narrow margin for the calculations being discussed that it was not worth the risk. Krugman paints DeMarco as a single rouge operator in his organization. Not true at all.

"And it’s worth pointing out that many private lenders have offered the very kinds of principal reductions Mr. DeMarco rejects — even though these lenders, unlike the government, have no incentive to take into account the way debt relief would strengthen the economy."

Yes, that is worth pointing out. But it is also worth pointing out that the Red Sox have been slowly gaining ground on the Yankees in the AL East race, but will still wind up breaking my heart with failure down the stretch. Banks doing individual principal reductions on a case-by-case basis is VERY different from the GSEs just writing down principal in bulk on mortgages in a large program. The banks are not doing "the very kind" of reductions being discussed here.

"The main point, however, is that Mr. DeMarco seems to misunderstand his job. He’s supposed to run his agency and secure its finances — not make national economic policy."

No, Mr. Krugman misunderstands Mr. DeMarco's job. It is explicit in the conservatorship agreement that FHFA manage the GSEs to reduce losses to the taxpayers. If DeMarco were to bend to the push for principal reductions despite his best estimate that taxpayers might lose on the deal, then he would be setting national economic policy. There are plenty of arguments against principal reduction from a moral hazard perspective, from a rule of law perspective, from a data perspective (at least half of HAMP's modifications have re-defaulted the last I looked). But DeMarco is taking his job very seriously and considering not the housing market, but just taxpayer well-being from GSE specific losses.

"If the Treasury secretary, acting for the president, seeks to subsidize debt relief in a way that actually strengthens the finance agency, the agency’s chief has no business blocking that policy. Doing so should be a firing offense."

Again, wrong. That might be how some would like to view the FHFA director post. But that is not what the law says. If taxpayers really would be better off from a program like this, and it could be designed to avoid moral hazard and there was no violation of contracts, then I'd say go for it. Until that is the case, though, DeMarco should stand firm... and that is not a fireable offense.

"Can Mr. DeMarco be fired right away? I’ve been seeing conflicting analyses on that point, although one thing is clear: President Obama, if re-elected, can, and should, replace him through a recess appointment. In fact, he should have done that years ago. As I said, Mr. Obama has made plenty of mistakes. But the DeMarco affair nonetheless demonstrates, once again, the extent to which U.S. economic policy has been crippled by unyielding, irresponsible political opposition. If our economy is still deeply depressed, much — and I would say most — of the blame rests not with Mr. Obama but with the very people seeking to use that depressed economy for political advantage."

Nothing more need be said. A very frustrating article to read indeed. Send complaints to anthony.randazzo@reason.org

Update: An earlier version of this post mistakenly cited Obamacare as receiving a few GOP votes in the Senate, it was the American Recovery and Reinvestment Act that received three Republican votes (one of which was Arlen Specter who later switched to the Democrat party) and was therefore claimed to be "bipartisan." 


Anthony Randazzo is Director of Economic Research


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