Crime & Federalism

If you read the Mercatus Center website, you'll be greeted with an interesting claim: "For over 25 years, the Mercatus Center at George Mason University has been the world’s premier university source for market-oriented ideas—bridging the gap between academic ideas and real world problems." The Mercatus Center has even formed a Financial Markets Working Group. "The Financial Markets Working Group is a collection of seventeen university-based scholars with expertise across a wide range of economic issues relevant to the recent economic crisis."

Oh really? Here are what three leading Mercatus Center "scholars" wrote about subprime lending:

There has been much criticism lately about so-called 'exotic mortgages' that are creating a 'housing bubble'.... Although often lumped together, the two are distinct. And I'm not sure I see what the problem is here. I want to focus on the supposed harm of exotic mortgages, especially interest-only mortgages (which are said to create the housing bubble by allowing people to borrow "too much" and forcing up home prices).

The subprime mortgage market is relatively new, and some lenders and borrowers misjudged the risk of loans and originated overly-risky loans-but most borrowers are now better off because of their subprime loans

[T]he growth in subprime lending is not creating overwhelming debt burdens for low-income households.  -- Todd Zywicki, Mercatus Center "scholar," and George Mason University economist. 

More from another "scholar""

 "[S]ubprime mortgage lending is a natural and positive outgrowth of financial innovation. Although some problems have occured they are being self-corrected and do not threaten the financial system." -- Alex Tabarrok (approvingly quoting Ben Bernanke's 2007 comments), George Mason University economist, and Mercatus Center "scholar."

Alex Tabarrok had much more to say about subprime lending. In a long rant against "credit snobs" - those of us who thought loaning money to people who couldn't afford to repay their loans - Tabarrok writes:

The fact that there are defaults is partly a learning process in response to financial innovation, and thus evolution, but also partly a simple matter of risk. Defaults are to be expected. I see no reason to expect contagion. All lending statistics must now be marked to the global financial market which means that diversification is now more extensive than ever before and thus net risk is lower. 

Mercatus Center CEO and George Mason University economist, Tyler Cowen, also had much to say about subprime lending.  I have collected his commentary here.  Among other "facts" about subprime lending, he presented this gemstone: 

Even with about a tenth of all subprime mortgages now in foreclosure, only a small share of all American families -- about 0.3 percent -- own a home in foreclosure...Here is the link, from Mark Thoma. This is one big reason why I'm not yet convinced by the economic pessimists. The article also notes how many estimates of the S&L crisis of the 1980s were exaggerated, and suggests the same tendency may be happening today.

How can the same economists who claimed that subprime lending was great for poor people, and no threat to the broader economy, claim to have expertise about the financial crisis? These are the guys who enabled the economic crisis!

The Mercatus Center has no credibility. They do, however, produce great work - if you're a bank or large corporation looking for a "research paper." In our next post about Mercatus, we'll see what Mercatus' tax records reveal. Who is funding their "research"? And what - or, rather, whom - is Mercatus spending a substantial amount of money on?

The biggest problem with expert accountability is that there isn't any. People turn on their televisions, or read their newspapers and blogs, to hear what is being said today. Yet how can one determine if what's being said today is true? The best way is to look at yesterday.

Marginal Revolution is a popular weblog that has turned George Mason economists professor (and Mercatus Center CEO) Tyler Cowen into a minor celebrity.  People turn to him for his expertise.  Indeed, the Mercatus Center calls him an expert.

Should Cowen be considered an economics expert?  If so, why?

Go to his blog, and run a search for "subprime." There are several gems, beginning with his co-blogger's introduction to the Cowen view on subprime lending.  You'll find several entries entitled "Subprime fact of the day."  In these entries, Cowen explained to the unwashed masses why their fears of subprime lending were hysterical.

In one post entitled "Subprime fact of the day," Cowen writes:

Even with about a tenth of all subprime mortgages now in foreclosure, only a small share of all American families -- about 0.3 percent -- own a home in foreclosure... 

Here is the link, from Mark Thoma.  This is one big reason why I'm not yet convinced by the economic pessimists.  The article also notes how many estimates of the S&L crisis of the 1980s were exaggerated, and suggests the same tendency may be happening today.

Here is another "Subprime fact of the day"

The entire market in subprime debt is just 1.4% of the size of global equity markets. Or, to put it another way, a 1.4% downward fluctuation in stocks erases the same amount of value as if all subprime-backed bonds were collectively marked to $0.

Here is the link.

There is another "Subprime fact of the day":

..the problems in the subprime mortgage market are relatively small.  Currently, losses are estimated to be at most $35 billion – equivalent to a stock market decline of about 0.2%.  (Last week the value of stocks traded in US markets were down a not terribly unusual 1.5%, or 7 times the total expected decline in the value of these mortgages).

That is from an excellent short essay by Stephen Cecchetti.

The implication of those "fact" posts was clear: Subprime lending wasn't that big of a deal.  Obviously Cowen didn't understand mortgage-backed securities.  He had no idea what a collateralized debt obligation was. After all, Cowen had never worked on Wall Street.  

One of Cowen's commenters tried educating him:

The subprime thing IS big because it's the canary for the HUGE raft of Collateralized debt obligations (CDOs) that are a web of unknowns (and unknowables). A lot of hedge funds are going to see their "equity" evaporate when CDOs are marked-to-market. (They are avoiding liquidation now to keep their fantasy prices intact.)

This may be a good post to save when you need humility in the future :)

Yet after displaying a profound ignorance of the issues that lead to the greatest economic collapse since the Great Depression, Cowen has shown no humility.  Instead, he has been defending Ben Bernanke's decision to print money - euphemistically called "quantitative easing." Cowen, who could not have been more wrong about subprime lending, is defending Bernake - who, also, could not have been more wrong about subprime lending.

Let's assume that Tyler Cowen is giving his opinions in good faith. If he is arguing in good faith, he clearly has no understanding about how Wall Street actually operates. He doesn't understand modern financial products and macroeconomics.

Why should anyone, then, listen to his opinions today?

And this post is about much more than Tyler Cowen. Unlike Cowen, Ben Bernanke is in charge of the entire United States economy. Here is what, in 2007 before the collapse of Lehman Brothers, Bernanke said about subprime lending:

All that said, given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.

This is the same Bernanke who insists that we trust him while he prints $600 billion. It is enough to give a grown adult indigestion.