James Hamilton Defends Ben Bernanke

James Hamilton of Econbrowser ably and appropriately defends Federal Reserve Chairman Ben Bernanke who was browbeaten by members of the House Committee on Oversight and Government Reform ("On grilling the Fed Chair," June 27, 2009). Hamilton writes,

It is one thing to have different views from those of the Fed Chair on particular decisions that have been made-- I certainly have plenty of areas of disagreement of my own. But it is another matter to question Bernanke's intellect or personal integrity. As someone who's known him for 25 years, I would place him above 99.9% of those recently in power in Washington on the integrity dimension, not to mention IQ. His actions over the past two years have been guided by one and only one motive, that being to minimize the harm caused to ordinary people by the financial turmoil. Whether you agree or disagree with all the steps he's taken, let's start with an understanding that that's been his overriding goal.

These interrogations reveal more about those doing the grilling than they reveal about Bernanke. I see this as pure political theater, and I don't like it.

If Congress wants to explore more usefully the wisdom and motives behind some of the decisions that have been made, it might want to investigate why some legislators are now pushing for Fannie and Freddie to guarantee a riskier category of mortgage condo loans.

Occasionally a bit technical for readers with limited background in economics, Econbrowser is one of the best blogs on economics. James Hamilton and Menzie Chinn are excellent economists and writers.

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Mixed News on the Economy

Bob Willis and Shobhana Chandra write in "U.S. Economy: Jobless Claims Fall, Housing Stabilizes (Update2)," for Bloomberg on April 16, 2009 report that initial claims for unemployment fell.

Initial jobless claims decreased by 53,000 to 610,000 in the week ended April 11, the fewest since January, the Labor Department said today in Washington...

Initial claims were projected to rise to 660,000, according to the median forecast of 37 economists in a Bloomberg News survey. Estimates ranged from 635,000 to 700,000.

(HT to James Hamilton of Econbrowser post, "Initial unemployment claims and the end of recessions").  In a March 28, 2009 Wall Street Journal article titled "Economy Raises Tentative Hopes a Trough Is Finally in Sight," the authors report on research by Robert J. Gordon.  The Journal writes that,

"There's growing evidence supporting the optimists' view, and I am surprised at that," said Robert J. Gordon, an economist at Northwestern University and a member of the National Bureau of Economic Research committee that is the official arbiter of when recessions begin and end. "I was sort of in the pessimists' camp until I started looking at things."

He points to one indicator in particular with a remarkable track record: the number of Americans filing new claims for unemployment benefits. In past recessions, it has hit its peak about four weeks before the economy hit a trough and began to grow again. As of right now, the four-week average of new claims hit its peak of 650,000 in the week ended March 14. Based on the model, "if there's no further rise, we're looking at a trough coming in April or May," he said, which is far earlier than most forecasts currently anticipate.

Noting the fall in initial jobless claims in a post titled, "Update on the latest economic indicators," Hamilton writes,

...new claims for unemployment compensation were reported today to have fallen by 53,000 in the week ending April 11, bringing the 4-week average down by 8,500 from what the revised numbers show to have been the recent peak the week before. If April 4 ultimately proves to be the peak for the entire year, and if this recession behaves like each of the previous 6 recessions, we could expect the NBER eventually to declare that the economic recovery began within 6 weeks of today.

The unemployment rate tends to be a lagging indicator of economic recovery.  Even though initial jobless claims fell, the current level of 610,000 is still high, suggesting that the unemployment rate will not improve in 2009. 

Willis and Chandra also report that the housing market may be bottoming out.

Total housing starts fell 11 percent to a 510,000 annual rate, lower than economists surveyed projected. The drop was led by a 29 percent plunge in work on multifamily homes, such as townhouses and apartment buildings, which fell to an annual rate of 152,000 after surging 62 percent in February.

Construction of single-family homes, the biggest part of the market, has been little changed since January...

In another sign the housing slump may be nearing a bottom, the National Association of Home Builders/Wells Fargo’s confidence index rose this month to the highest level since October, the group said yesterday. Record-low mortgage rates and falling prices started to stir demand.

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James Hamilton On Improving Bailouts

James Hamilton of Econbrowser writes "Bailouts should be no fun." The trust of his argument is that bankruptcy proceedings are slow, freezing assets and lowering economic activity, exerting substantial spillovers or externalities on otherwise health pockets of the economy. A representative of taxpayers' could speed negotiations and lower externality costs by demanding concessions from owners, creditors, management, and workers in return for bailout funds. Taxpayers would benefit if the bailout funds were less than the avoided externality costs. Hamilton concludes,

If properly implemented, the taxpayers should leave the negotiating table pleased with the deal they achieved, and everybody else should leave battered, comforted only by the knowledge that, had they not made those concessions, things would have been even worse.

On the other hand, if everybody and their grandmother is lining up for a bailout, and pulling political strings...to make sure they get it, I read that as prima facie evidence that the taxpayers' interests are not being properly represented.

It appears that everybody and their grandmother is lining up. In a previous post, I named three banks, automotive firms, and a couple of pornographers. Cities, states, insurance companies, credit card companies and others can be added to the list. Hamilton's proposal might be a good way to shorten the line.

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