"We expect to evaluate and to be evaluated rigorously to ensure that Washington is held accountable for how tax dollars are spent. "

Lawrence Summers in the Washington Post:

"By Lawrence Summers

Sunday, December 28, 2008; B07

When President-elect Barack Obama takes office, he will face what may well( COULD BE ) be the bleakest economic outlook since World War II. Economic forecasts have been revised significantly downward over the past several months; today, many experts believe that unemployment could reach 10 percent by the end of next year and our economy could fall $1 trillion short of its full capacity -- which translates into more than $12,000 in lost income for a family of four.( I DON'T AGREE )

As difficult as these conditions are, however, the Obama administration also inherits an economy with great potential for the medium and long terms. Investments in an array of areas -- including energy, education, infrastructure and health care -- offer the potential of extraordinarily high social returns while allowing our country to address some long-standing national challenges and put our economy on a solid footing for years to come( HOW SO ? ).

In this crisis( JUST THIS ONE ), doing too little poses a greater threat than doing too much( I AGREE ). Any sound economic strategy in the current context must be directed at both creating the jobs that Americans need and doing the work that our economy requires. Any plan geared toward only one of these objectives would be dangerously deficient. Failure to create enough jobs in the short term would put the prospect of recovery at risk. Failure to start undertaking necessary long-term investments would endanger the foundation of our recovery and, ultimately, our children's prosperity( GO ON ).

Our president-elect understands both the peril and the promise of the situation and the importance of responding to changing conditions. That is why his economic team is crafting a broad proposal, the American Recovery and Reinvestment Plan, to support the jobs and incomes essential for recovery while also making a down payment on our nation's long-term financial health( HERE WE GO ).

A key pillar of the Obama plan is job creation. In the face of deteriorating economic forecasts, Obama has revised his goal upward, to 3 million. For one thing, significantly fewer positions would be created in the absence of any recovery plan. Second, more than 80 percent of these 3 million jobs will be in the private sector, including emerging sectors such as environmental technology( I LIKE THE GOAL, BUT...). This is a bold goal. But economists across the political spectrum recognize that it is far less risky to stand firmly against the forces propelling our economy downward than to be timid in the face of a mounting crisis.

The Obama plan represents not new public works but, rather, investments( ESSENTIAL ) that will work for the American public. Investments to build the classrooms, laboratories and libraries our children need to meet 21st-century educational challenges( THIS WORRIES ME ). Investments to help reduce U.S. dependence on foreign oil by spurring renewable energy initiatives (many of which are on hold because of the credit crunch)( I LIKE THESE ). Investments to put millions of Americans back to work rebuilding our roads, bridges and public transit systems( FOCUS ON THE LAST ONE ). Investments to modernize our health-care system, which is necessary to improve care in the short term and key to driving down costs across the board( GOOD LUCK ).

Laying the groundwork for recovery and future prosperity will require shedding Washington habits. We must measure progress not by the agendas of interest groups( GOOD LUCK ) but by whether the American people experience results( I AGREE ). We must focus not on ideology but on drawing the best ideas from all quarters( I AGREE ). That is why, for example, in key sectors such as energy, Obama is pushing for both public investments and the removal of barriers to private investment( GOOD ). It is also why his plan relies on both government spending and tax cuts to raise incomes and promote recovery( I AGREE. WE NEED BOTH. ).

The president-elect has insisted that investments proposed in the recovery plan meet standards much higher than has been traditional. There will be no earmarks( GOOD LUCK ). Investments will be chosen strategically based on what yields the highest rate of return for the economy and monitored closely( ESSENTIAL ) not just by officials but also by the public as government becomes more transparent. We expect to evaluate and to be evaluated rigorously to ensure that Washington is held accountable for how tax dollars are spent( ESSENTIAL ).

Some argue that instead of attempting to both create jobs and invest in our long-run growth, we should focus exclusively on short-term policies that generate consumer spending. But that approach led to some of the challenges we face today -- and it is that approach that we must reject if we are going to strengthen our middle class( ESSENTIAL FOR SOCIAL HARMONY ) and our economy over the long run. Far from being an excuse for inaction or delay, the magnitude of the work ahead is all the more reason to begin that work."

It sounds good. But...

Taxpayers would no longer be on the line for subsidizing home loans.

The Washington Post on Fannie/Freddie:

"By Zachary A. Goldfarb

Washington Post Staff Writer
Monday, December 22, 2008; D01

Policymakers are looking to revamp the nation's home loan system next year after the collapse of U.S. housing and mortgage markets spurred the current economic crisis.

Under one possible approach, Fannie Mae and Freddie Mac, the federally run companies that control half of the nation's $11 trillion mortgage market, would disappear, leaving lending primarily to private banks( YES ). Taxpayers would no longer be on the line for subsidizing home loans( GOOD ). But analysts say it could become much harder to get a mortgage -- at least one with a relatively low interest rate and a 30-year term( AND ? ).

Under another approach, Fannie and Freddie would remain. They could continue as private companies, trying to strike the difficult balance between the demands of profit-seeking shareholders and those of policy-oriented lawmakers. They could also be turned into government agencies. In either of these cases, taxpayers would remain potentially exposed to trillions of dollars in losses( PLEASE NO ).

The debate comes after the nation endured a bruising effort to promote homeownership in the past decade. Fannie and Freddie provided hundreds of billions of dollars in loans to people with blemished credit records or other financial limitations, which led to huge losses and the government seizing the firms in September as the financial crisis escalated. The government agreed to cover as much as $200 billion in losses( TOO MUCH ).

Now policymakers are looking at ways to prevent a relapse while maintaining Fannie and Freddie's charge of supplying consistent funding for mortgages. Fannie, Freddie and government agencies are funding nearly all of the nation's home loans; private lenders have all but disappeared( CROWDING OUT ).

"If we want to divorce the federal government from the risks of the housing system, you would privatize it," said Howard Glaser, a housing consultant who has worked for Fannie and Freddie. "The cost of that is you never know if you'll have mortgage finance available. Case in point: today( NOT SURE OF THAT )."

Fannie and Freddie were chartered by Congress 40 years ago as private companies with a government mandate to buy mortgages from lenders, package them, guarantee them against default and sell them to investors around the world. As a result, borrowers in big cities or small towns could go to big banks or small thrifts and get a 30-year, fixed-rate loan at an affordable rate.

But risks always loomed. Investors assumed that the government backed Fannie and Freddie, even if they did not have such support officially( IMPLICIT GUARANTEE PROVED CORRECT ). As a result, the companies could borrow cheaply and grow big -- with as much outstanding debt as the U.S. government. But the housing crisis crippled the companies, prompting the Bush administration to take them over out of concern they'd severely damage the world financial system.

Some longtime supporters of Fannie and Freddie say they must change, but still see a need for the government to play a role. "The Fannie and Freddie model has to be approached and the private-public entanglement, I think, will be undone," Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, said in a recent interview. Frank said the reform of Fannie and Freddie is likely to include "some subsidy( THIS IS BETTER ) for enhanced affordability and increasing the flow of mortgages."

But there is little agreement about precisely how to restructure them. While Frank no longer thinks the hybrid model( THANKFULLY ) is viable, another influential lawmaker does. "The hybrid is the best( FOOLISH. ZERO LEARNING CURVE )," said Sen. Charles E. Schumer (D-N.Y.), who leads the Joint Economic Committee. "The hybrid nature should remain."

President-elect Barack Obama has said little on the topic. Obama's chief economic adviser, former Treasury secretary Lawrence Summers, has long been a critic of the risks posed by Fannie and Freddie. In a Washington Post opinion piece this past summer, Summers wrote that the government should use Fannie and Freddie to support the housing market during the crisis and that the government should then "divide their functions into government and private components, the latter of which would be sold off in multiple pieces( NO HYBRID HE SAID )."

One model gaining attention among some top policymakers would incorporate public and private elements, dividing Fannie and Freddie into separate components. One part of Fannie and Freddie's business involves buying mortgage bonds and other assets, holding them in a portfolio and trading them -- much like any other investment fund. This component would be privatized, with no government backing( FINE ).

A much bigger part involves the guarantee business, where Fannie and Freddie pool mortgages and guarantee timely payment of principal and interest. This area would receive explicit government backing( IF SO, IT SHOULD BE EXPLICIT ), possibly from the Treasury if it agrees to insure mortgages( CDSs ) in exchange for a fee.

Other options under discussion include turning the companies into public utilities, which would keep them highly regulated( THEY WOULD HAVE TO BE ), or cooperatives of large banks or of the Federal Home Loans Banks( FINE, IF PRIVATE ).

Some advocates of reducing or eliminating the government's role in the mortgage market argue that policymakers have erred in providing so much support to keeping mortgage rates low over the years -- not just through Fannie and Freddie but with tax breaks and accounting rules that made it easier for banks to own mortgage securities. Low interest rates, they argue, have artificially inflated housing prices and led too many people to buy homes with loans they cannot afford( I DON'T LIKE THE SUBSIDIES, BUT INDIVIDUAL HUMAN ACTIONS ARE RESPONSIBLE FOR BAD LOANS ).

"The problem with subsidizing mortgages is you're subsidizing people getting into debt. You're putting people into houses with no equity( THIS YOU SHOULDN'T DO )," said Arnold Kling, a former economist at both the Federal Reserve and Freddie Mac. "The goal should be getting people to own homes on a sound basis( TRUE )."

Kling would prefer that the government subsidize a down payment on a home, either through a tax-free savings account or another mechanism( I AGREE ).

Lawrence White, a professor of economics at New York University, argues that all the measures focused on the mortgage market have diverted capital from other important parts of the economy( TO SOME EXTENT THAT IS TRUE, BUT THAT'S UP TO INDIVIDUALS ).

"We invest more in residential structures and related things and less in factories and less in human capital," he said. "There are trade-offs. Investors have their choice between investing in a General Motors bond and a mortgage bond( TRUE )."

There are a number of risks associated with the private model. Anthony Sanders, a professor of finance at Arizona State University, argues that there's no guarantee that the private markets would do an adequate job of keeping the system functioning well. "Let's be honest: The commercial banks did not do a very good job since 2003" when they rushed into subprime loans, he said( BUT THEY ASSUMED IMPLICIT GOVERNMENT GUARANTEES ).

But Sanders also rejects the idea that Fannie and Freddie should be turned into a government agency, like the Federal Housing Administration. "If we load everything on the books of the federal government and there's no incentive to perform," he said, "we will see a lack of monitoring, we'll see underperformance( OK )."

In the past, the companies' powerful corps of lobbyists( YES ) could counter efforts to change the way they do business. Their lobbying activities stopped when the government took them over in September. Still, the companies themselves may weigh in.

Top executives at Fannie Mae and Freddie Mac have been assigned to study what the companies and mortgage market would look like if Fannie and Freddie were not what they are today, but they won't be making recommendations.

"I don't have a fixed view on this right now," said Fannie Mae chief executive Herbert M. Allison Jr., whom the government selected to lead the company. "I believe that the approach should be less about Fannie and Freddie and more about how to best meet the needs of the American public and promote responsible homeownership ( GOOD IDEA )."

Staff writer Lori Montgomery contributed to this report."

This report surprised me, given the supposed centrality of the Mayer/Hubbard plan in recent discussions, which would seem to necessitate a government role in the program.

"In order for these mortgages to rejuvenate the housing market, they have to be available to everyone. "

Here's a plan I have to consider, although I earlier thought that it would not go anywhere because of the possible price tag. I am going to wait and say more about it when it is actually proposed. From the Economist's View:

"Effective Nationalization of the Mortgage Finance Sector"

James Kwak says it's likely that the new administration will get behind the Hubbard and Mayer plan to have Fannie and Freddie buy mortgages and refinance them at 4.5%:

We Have a Winner?, by James Kwak: After seeing dozens of mortgage proposals emerge over the past several months, there are news stories that Larry Summers and the Obama economic team are converging on an unlikely candidate: the proposal by Glenn Hubbard and Christopher Mayer... Hubbard and Mayer published a summary of the plan in the WSJ last week; a longer version of the op-ed is available from their web site; and you can also download the full paper, with all the models.

I say “unlikely” not only because Hubbard was the chairman of President Bush’s Council of Economic Advisors, but because it doesn’t look like a Democratic plan; then again, it doesn’t look much like a Republican plan, either. ... Before getting to the policy specifics, though, I want to outline two of the premises...

First, Hubbard and Mayer, like many others, have the goal of preventing an overcorrection on the downside (housing prices falling further than where they need to go to be reasonable). But unlike many others, they have calculated where prices need to go( THIS BOTHERS ME ), and one of their central arguments is that we are already there, and therefore housing prices should be propped up right now( THIS MIGHT TRUE, BUT IT'S HARD TO TELL ). This was surprising to me, since I am familiar with Case-Shiller charts like this one from Calculated Risk..., which seem to show prices still more than 50% above their 2000 levels (nominal prices, but in a low inflation environment). ...( THESE CHARTS ARE OF LIMITED USE. BUT THEY ARE USEFUL, AND, SO, YES, I'M NOT SURE WHY THEY'RE SO SURE )

Second, Hubbard and Mayer argue that housing prices are mainly a function of real mortgage rates. While they acknowledge that other factors took over at the peak of the boom, their model shows that most housing price appreciation through 2005 was due to fundamentals, primarily low mortgage rates( OK ). ... Right now, they argue, mortgage rates are historically high relative to Treasury bond yields, and those high mortgage rates are pushing housing prices below their long-term levels. (Mortgage rates are only historically high because Treasury yields are world-historically low, but we’ll come back to that.)( I AGREE )

Given those premises, the policy proposal is simple: force mortgage rates down to 4.5% (by reducing the cost of Fannie/Freddie debt relative to Treasuries), thereby propping up housing prices at a level that Hubbard and Mayer think is sustainable. ...( YIKES )

Now here’s the surprising part. In order for these mortgages to rejuvenate the housing market, they have to be available to everyone. This isn’t a program for reducing mortgage foreclosures; this is a program for boosting housing sales and refinancings across the board. ...( YIKES )

The goals of the program are to stop the slide in housing prices, stimulate the economy by unfreezing home sales and through the wealth effect of increased housing prices, and stabilize the value of mortgage-backed securities, thereby aiding the financial sector. ... ( WE SEE THAT )

One question is whether the loans will be sustainable. ... Fannie and Freddie could face the problem of getting stuck with riskier mortgages while the private sector keeps the better ones( MAYBE ). But in any case there are signs that some version of this plan will be brought to the floor.

Brad DeLong:

Glenn Hubbard and Charlie Mayer call for the effective nationalization of the mortgage finance sector. ... All in all, I approve of the plan: having Fannie and Freddie buy up mortgages at market prices and refinance them at 4.5% could do a lot of good for the country and make a fortune for the government.( I'M A BIG FAN OF DeLONG, BUT THIS REMINDS ME OF WHAT WILLIAM GROSS SAID ABOUT THE ORIGINAL PLAN FOR TARP. NAMELY, BUYING TOXIC ASSETS, FINANCING THEM CHEAPLY, AND THEN SELLING THEM FOR A LARGE PROFIT DOWN THE LINE. I SEE THAT IT COULD WORK, BUT IT STILL SEEMS RISKY )

I am, however, gobsmacked to see Glenn Hubbard proposing it."

"providing just about everybody with access to a 30-year fixed-rate mortgage with a 4.5 percent interest rate."

I wonder if this is a trial balloon. Kevin Hassett on Bloomberg:

"Dec. 15 (Bloomberg) -- Pollster Frank Luntz asked a large audience at a conference in Washington last week to raise their hands if they had received a government bailout. While they chuckled and rested their hands on their laps, Luntz made an important observation. Bailout money is snowing down in an unprecedented blizzard, and if the moves fail to stimulate the economy, there will be a lot of angry voters."

This is a very serious concern. The bailout cannot be limited to the Financial Sector for this reason.

"Perhaps the same realization moved President-elect Barack Obama’s economic advisers to begin considering a bailout for the masses.

If Luntz asks the same question a few months from now, everyone may well lift their hand.

Bloomberg News last week reported that the chairman- designate of the National Economic Council, Lawrence Summers, had been conferring with conservative icon and Columbia Business School Dean Glenn Hubbard about a housing plan Hubbard designed with Columbia colleague Christopher Mayer. Obama’s economic advisers appear to have embraced the proposal, which is already “on a fast track at the Treasury,” according to the story.

The Hubbard-Mayer plan calls for the government to revive the moribund housing market by providing just about everybody with access to a 30-year fixed-rate mortgage with a 4.5 percent interest rate. That’s almost a full percentage point lower than the average national rate of 5.47 percent currently.

Buyers could borrow as much as 95 percent of the value of the home they purchase. The plan might extend to those with existing mortgages, allowing them to refinance and get the same terms. When either type of deal is complete, the lender will place the loan with Fannie Mae or Freddie Mac."

I'm finding this hard to believe.

"Splitting the Loss

Anyone refinancing with positive equity in their home would be relatively easy to accommodate. For those with negative equity -- meaning the dollar amount of their mortgage exceeds the value of their house -- Hubbard and Mayer recommend that homeowners and lenders split the loss evenly and start over with a clean mortgage reset to reflect the property’s current market value.

With some forecasts for fourth-quarter gross domestic product growth inching toward negative 8 percent at an annualized rate, drastic policy measures are becoming increasingly palatable.

This mortgage plan is radical, and might just be powerful enough to help turn this troubled economy around.

The bottom line: if you have a mortgage, this plan would put extra money in your pocket.

Imagine, for example, that you have a $500,000 mortgage with a 30-year fixed-rate loan carrying an interest rate of 6.1 percent, the average rate for a fixed 30-year mortgage issued this year. Lowering the interest rate to 4.5 percent would reduce monthly payments by about $500 monthly. Someone with a mortgage of $150,000 would save about $150 a month."

It's so radical that it's hardly believable.

"Better Than Rebates

These monthly payments changes are different from tax rebates because they would last for many years. For that reason, consumers would be fairly likely to increase their spending. After all, if your monthly housing expenses just dropped by $400, then adding a new car payment of $300 a month might seem a lot less frightening, even in these difficult times.

These subsidized mortgages should increase the number of home buyers and help push property values back up. There are a lot of problems in the economy, but they all began in the housing sector and it seems likely that staunching the bleeding there is a prerequisite for achieving financial stability."

It's not clear how far we have to go on this housing correction.

"Make no mistake, this remedy will be costly.

$3 Trillion

Last week’s report suggests that the Obama team may be wary of allowing everyone access to this plan, since it costs so much -- $3 trillion by one recent estimate. One constraint being discussed is to disallow refinancing, limiting the program to home buyers.

The restriction will be impossible to impose, however. All that you would need to do to qualify for the 4.5 percent rate would be to find a “bailout buddy” and agree to purchase each others’ homes with the new low-rate loan. You could then either swap the homes back, or agree to rent the homes to each other for the same fee.

Also, the program will have the largest possible effect on home prices, a key target of the policy, only if borrowers expect it to last a long time. After all, if the person you sell your house to in the future has to borrow at a high interest rate to finance the purchase, then he will offer a lower price. That realization should affect the price you are willing to pay today."

That was Dean Baker's problem with the 4.5 % Target Plan.

"Thus, the cost will be steep for two reasons. It will be tough to limit the new mortgage to home buyers, and the program will have to be sustained for a long time.

In the past, steep costs would have killed such a bill. But in today’s environment, it has almost become a political necessity to give voters their bailout too.

Ladies and gentlemen, grab your bailout buddy, help is on the way."

Is this real?

"a clear policy implication — namely, that financial market reform should be pressed quickly, that it shouldn’t wait until the crisis is resolved."

Paul Krugman has a post today in the NY Times:

"One answer to these questions is that nobody likes a party pooper. While the housing bubble was still inflating, lenders were making lots of money issuing mortgages to anyone who walked in the door; investment banks were making even more money repackaging those mortgages into shiny new securities; and money managers who booked big paper profits by buying those securities with borrowed funds looked like geniuses, and were paid accordingly. Who wanted to hear from dismal economists warning that the whole thing was, in effect, a giant Ponzi scheme?"

I don't see it as a Ponzi Scheme. One could read my thought experiment about looking into some of the more risky and complex inverstments as early as 2005, and being able to conclude that they were simply too risky. A number of things could have been done to keep this crisis from occurring or being this bad, whereas a Ponzi Scheme has Fraud built right into it. But I agree with the basic point, that it's hard to intentionally slow the economy down when so many people are still making money in it. It's one reason that I think it unlikely that the Fed, on its own, using a blunt instrument like raising interest rates across the board, will find it easy to raise rates to slow the economy down. Nevertheless, I believe that middle of the party is the part of the party where real diligence needs to be taken. In other words, focus on emerging problems in the economy when things start really going well, especially for a long period of time. Although it's hard to do, it's necessary.

"There’s also another reason the economic policy establishment failed to see the current crisis coming. The crises of the 1990s and the early years of this decade should have been seen as dire omens, as intimations of still worse troubles to come. But everyone was too busy celebrating our success in getting through those crises to notice.

Consider, in particular, what happened after the crisis of 1997-98. This crisis showed that the modern financial system, with its deregulated markets, highly leveraged players and global capital flows, was becoming dangerously fragile. But when the crisis abated, the order of the day was triumphalism, not soul-searching.

Time magazine famously named Mr. Greenspan, Robert Rubin and Lawrence Summers “The Committee to Save the World” — the “Three Marketeers” who “prevented a global meltdown.” In effect, everyone declared a victory party over our pullback from the brink, while forgetting to ask how we got so close to the brink in the first place.

In fact, both the crisis of 1997-98 and the bursting of the dot-com bubble probably had the perverse effect of making both investors and public officials more, not less, complacent. Because neither crisis quite lived up to our worst fears, because neither brought about another Great Depression, investors came to believe that Mr. Greenspan had the magical power to solve all problems — and so, one suspects, did Mr. Greenspan himself, who opposed all proposals for prudential regulation of the financial system."

There is some truth in this, but it misunderstands the nature of the triumphalism. The system worked because of government and Fed actions that were taken during these years. This led to a complacency in the nature and strength of the implicit and explicit government guarantess of intervention in a financial crisis. It was less relief at our wisdom, than a realization of the nature and depth of government backing of our financial system. The downside of excessive risk was thereby consigned to government accounts and salvation, a view that has proven remarkably prescient.

"And because we’re all so worried about the current crisis, it’s hard to focus on the longer-term issues — on reining in our out-of-control financial system, so as to prevent or at least limit the next crisis. Yet the experience of the last decade suggests that we should be worrying about financial reform, above all regulating the “shadow banking system” at the heart of the current mess, sooner rather than later.

For once the economy is on the road to recovery, the wheeler-dealers will be making easy money again — and will lobby hard against anyone who tries to limit their bottom lines. Moreover, the success of recovery efforts will come to seem preordained, even though it wasn’t, and the urgency of action will be lost.

So here’s my plea: even though the incoming administration’s agenda is already very full, it should not put off financial reform. The time to start preventing the next crisis is now. "

I disagree here as well. The real fear is that we will regulate excessively in the midst of this crisis, focusing in on the problems of this last crisis, and not putting into place a system that focuses less on actual regulation than recognition of the problems in our finacial system, some of which won't need more than supervision, while some might need regulatory oversight.

And to reiterate, just like value investing, we should be especially vigilent and fearful when things are going well, not after they've turned bad. I know it's going to be hard, but it's simply the patience, vision, and wisdom, of the value investor, a strategy that human beings have been able to execute.

"Explaining how you lost money on your safe investments isn’t fun."

Brad Setser about the flight from risk:

"Central bank reserve growth has unquestionably slowed. Indeed, global reserve growth in October was almost certainly negative. But the Fed’s custodial holdings are still rising. That could imply that central banks are moving out of euros and into dollars, reinforcing the dollar’s rise. More likely though it is evidence that central banks are moving out of money market funds and other dollar assets with a bit of credit risk. No central bank wants to be in the same position as the China Investment Corporation. Explaining how you lost money on your safe investments isn’t fun.

The general flight out of risk by central banks is one reason why the Treasury’s bailout of the Agencies has failed to halt the central bank run on Agencies. The flight out of Agencies — and flight into Treasuries — over the past two months has been stunning. Last week continued the trend: central banks added close to $20b to their Treasury portfolio at the New York Fed while cutting their Agency holdings by $7 billion. That helps support the Treasury market amid all the new supply, but hasn’t done wonders for the Agency market."

How can change the avoidance of risk? When will things change?

"Former (and perhaps future) Treasury Secretary Summers has argued that “You can usually date the end of the crisis to the first moment when a public official makes a forecast that proves too pessimistic.” I don’t think we are there yet. The IMF’s latest forecast still strikes me as rather optimistic. I increasingly suspect that one indicator that the financial crisis has truly turned a corner will come when the Fed’s balance sheet starts to shrink …"

You might try changing your view on risk. Viewing risk as more likely when things are good, and taking chances when things are bad.

How Many Times Do I Have To Say Blinder?

I make one last push for Blinder via the NY Times:

"Democrats close to the Obama team told The New York Times that they believed the likeliest choices for Treasury secretary would be Lawrence H. Summers, who held the post in the Clinton administration, and Timothy F. Geithner, president of the Federal Reserve Bank of New York.

The Wall Street Journal added former Federal Reserve Chairman Paul Volcker and Robert Rubin, another former Clinton Treasury secretary and director and senior counselor of Citigroup to the list.

In addition to Mr. Geithner, Mr. Summers and Mr. Volcker, Reuters said that the short list for Treasury includes former Clinton administration adviser Laura Tyson."

Here's my comment:

I’ve suggested Alan Blinder. I’m getting a little tired of being ignored. A word to the wise for the Obama administration: you’re going to need my support , so don’t disappoint me.

— Posted by Don the libertarian Democrat

"Democrats will be too tempted to revive the hybrid model because it provides funds for key policy goals."

I'm growing fonder of Lawrence Summers. I liked his stimulus proposals, and on Fannie and Freddie he talks sense, as well as about implicit government guarantees and hybrid government creations:

"President-elect Barack Obama has said little about his plans for Fannie Mae and Freddie Mac, but a top adviser and contender to Treasury Secretary already has a plan to break up the companies.

Summers

Lawrence Summers, Treasury Secretary at the end of the Clinton administration, believes the firms should be divided into their “government” and “private” functions after the financial crisis subsides. The private-sector components should then be sold off in many pieces, with the proceeds used to fund government affordable housing programs.

“With this approach, the government would be in a position to support the housing market in the years ahead without encouraging dubious financial practices or denying financial reality, as is the case today,” Summers argued in in July.

He laid out his vision in twin editorials in the The Financial Times and The Washington Post that were striking for their prescience about the firms’ fate. If market confidence in the companies does not improve, he said the government should throw them into receivership and run them as public corporations “for several years.” Just weeks later, the firms were seized jointly by Treasury and their regulator."

Here's my comment:

“In a 2007 Financial Times editorial, Summers counted himself as “among the many with serious doubts about the wisdom” of the firms’ implicit government guarantees.”

His understanding that these implicit government guarantees are a major problem recommends him to me.

“Summers believes the firms’ public-private business model should be scrapped. “These fuzzy line arrangements…have shown themselves to be deeply suspect,” he told the House Budget Committee days after the companies’ seizure. “I think we’ll have to move beyond that. We need to move beyond the ‘heads I win, tails the public loses’ model in which we’ve operated.”

Absolutely. These hybrid arrangements are trouble. Scrap them.

Comment by Don the libertarian Democrat - November 6, 2008 at 10:12 pm

"Fifty-nine percent of voters call themselves “fiscally conservative and socially liberal"

David Boaz is one of my favorite people, as is Greg Mankiw. He also says some interesting things:

"Lots of independents — as well as voters who identify with one of the major parties — hold broadly libertarian, or “fiscally conservative and socially liberal,” views. A lot of those voters moved from voting Republican to voting Democratic between 2000 and 2006, and it looks like they did so again this year."

So why is being a libertarian Democrat so strange a concept?

"If Obama governs as a centrist, he may make it very difficult for the Republicans to recover. But a candidate in either party who presented himself as a product of the social freedom of the Sixties and the economic freedom of the Eighties would be tapping into a market that both parties have yet to nail down.'

I suppose that I believe that this is where President Obama will be going, as well as the Democratic Party.

Here's an important difference between David and Greg and myself:

I don't feel that Paul Krugman, Robert Kuttner, Robert Reich, Lawrence Summers, Alan Blinder, are wildly different than me on economics. I believe that, even in cases that they disagree with me, they would listen to me, and understand my points. That's enough to be in a party that on all other issues, I generally agree with, and am often more "leftist", in some cases, than the average Democrat.

There's a realignment going on, and I think that more people with libertarian leanings will be joining me, without ever knowing about me, of course.

My Team Wants A Stimulus Package

Ezra Klein says the following:

"It's cruel irony that turmoil caused by elites gaming the financial markets has managed to rip attention from the struggles of the broader economy."

Actually, a number of people have commented on the need for a stimulus package for the economy:

Lawrence Summers:

"Indeed, in the current circumstances the case for fiscal stimulus -- policy actions that increase short-term deficits -- is stronger than ever before in my professional lifetime. Unemployment is almost certain to increase -- probably to the highest levels in a generation. Monetary policy has little scope to stimulate the economy given how low interest rates already are and the problems in the financial system. Global experience with economic downturns caused by financial distress suggests that while they are of uncertain depth, they are almost always of long duration.

The economic point here can be made straightforwardly: The more people who are unemployed, the more desirable it is that government takes steps to put them back to work by investing in infrastructure or energy or simply by providing tax cuts that allow families to avoid cutting back on their spending."

Robert Reich:

"Wall Street and its creditors are not at the core of the American economy. Main Street and consumers are at the core. So even if the bailout bill keeps Wall Street going and prevents the sort of massive defaults that would freeze global credit markets, it does virtually nothing to help the vast majority of American consumers who are already at the end of their ropes -- who right now need extended unemployment insurance, affordable health coverage, and assistance in meeting their mortgage payments and fuel bills. And as long as Americans remain at the end of their ropes, the American economy will continue to decline.

So the real choice isn't between a lousy bailout bill or economic Armageddon. It's between taking prompt action to help average Americans or watching the nation fall into a deeper and deeper recession. Wall Street will be bailed out. The bigger question is whether Congress and the next administration do what's needed to rescue the rest of America, and the overall economy."

Paul Krugman:

"We also desperately need an economic stimulus plan to push back against the slump in spending and employment. And this time it had better be a serious plan that doesn’t rely on the magic of tax cuts, but instead spends money where it’s needed. (Aid to cash-strapped state and local governments, which are slashing spending at precisely the worst moment, is also a priority.) Yet it’s hard to imagine the Bush administration, in its final months, overseeing the creation of a new Works Progress Administration."

Robert Kuttner:

"Third, with the real economy now suffering real damage, the Wall Street rescue should be linked to a big stimulus package to pump money into the rest of the economy -- infrastructure spending, help to state and local governments, and extended unemployment benefits."

Sen. Obama:

"As soon as we pass this rescue plan, we need to move with the same sense of urgency to rescue families on Main Street who are struggling to pay their bills and keep their jobs. I’ve said it before and I’ll say it again: we need to pass an economic stimulus plan that will help folks cope with rising food and gas prices, save one million jobs by rebuilding our schools and roads, and help states and cities avoid budget cuts and tax increases. A plan that would extend expiring unemployment benefits for those Americans who’ve lost their jobs and cannot find new ones."

Sen. Obama also said the following:

"We cannot mortgage our children’s future on a mountain of debt. It’s time to put an end to the run-away spending and the record deficits – it’s not how you would run your family budget, and it must not be how Washington handles your tax dollars. It’s time to return to the fiscal responsibility and pay as you go budgeting that we had in the 1990s. Many in Congress have been fighting for these commonsense principles, and I will be a President who supports them and makes sure they succeed. That’s why I’m not going to stand here and simply tell you what I’m going to spend – I’m going to start by telling you how we’re going to save when I am President.

I will go through the entire federal budget, page by page, line by line, and eliminate the programs that don’t work and aren’t needed. We should start by ending a war in Iraq that is costing us $10 billion a month while the Iraqi government sits on a $79 billion surplus. We should stop sending $15 billion a year in overpayments to insurance companies for Medicare, and go after tens of billions of dollars in Medicare and Medicaid fraud. We need to stop sending three billion a year to banks that provide student loans the government could provide for less. And we can end the hundreds of millions a year in subsidies to agribusiness that can survive just fine without your tax dollars, and use some of the money to help struggling family farmers. That’s what I’ll do as President.

And we can’t stop there. We lose $100 billion every year because corporations set up mailboxes offshore so they can avoid paying a dime of taxes in America. In the Senate, I worked across the aisle to crack down on these schemes. And as President, I will shut down those offshore tax havens and all those corporate loopholes once and for all. You shouldn’t have to pay higher taxes because some big corporation cut corners to avoid paying theirs. All of us have a responsibility to pay our fair share. That’s accountability. And that’s what we’ll have when I’m President.

As for the programs we do need, I will make them work better and cost less. I will create a High-Performance Team of experts that evaluates every agency and every office based on how well they’re serving the American taxpayer. I will save billions of dollars by cutting private contractors and improving management and oversight of the hundreds of billions of dollars our government spends on contracts. And I will finally end the abuse of no-bid contracts once and for all – the days of sweetheart deals for Halliburton will be over when I’m in the White House."

So, it's pretty clear that my team wants a stimulus package. From a libertarian Democrat point of view, we want to examine the effectiveness of the stimulus, and the budget ramifications of the stimulus.

Finally, I believe that one reason a stimulus package is not receiving much coverage right now is because it will have to wait for the next administration.