Another Conservative Economist Goes Rogue

August 5th, 2011 at 3:45 pm David Frum | 57 Comments |

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Carmen Reinhart is the co-author with Kenneth Rogoff of the immensely important history of financial crises, This Time It’s Different. (Read it!) She’s married to AEI Senior Fellow Vince Reinhart, the former senior Fed official cited in this space yesterday.

If the words “free-market economist” describe anybody, they describe Carmen Reinhart.

OK, so here’s what she had to say to Bloomberg News today:

A restructuring of U.S. household debt, including debt forgiveness for low-income Americans, would be most effective in speeding economic growth, said Carmen Reinhart, a senior fellow at the Peterson Institute for International Economics in Washington.

“Until we deal head-on with the fact that some of those debts are not ever going to be repaid, we will continue to have this shadow” over growth, Reinhart said today in an interview on Bloomberg Television’s “Political Capital with Al Hunt,” airing this weekend.

Conservative economic commentators often respond to this kind  of thinking with name-calling: “Obama-bot”; “socialist.” I’ve received my share. But let me put this challenge back to the epithet-hurling conservative commentators: If your nostrums can no longer command the support of economists as smart as Carmen Reinhart, Vince Reinhart, John Makin, Bruce Bartlett, etc. – doesn’t that suggest that the problem is less with the smart economists and much more with the nostrums?

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57 Comments so far ↓

  • jjack

    What do economists know? Most of them aren’t very smart. Donald Trump said so.

  • Saladdin

    Aaaah David, nice try… the lone voice among a storm of insanity. Even if a new William F. Buckley came around today, would the current GOP listen to him?

  • D Furlano

    These two are the epitome of the book by John Kenneth Galbraith “The Economics of Innocent Fraud”.

    “…The purpose of this extended essay is to illuminate examples of “innocent fraud” or the gulf between perception and reality in the modern American economic system…”

  • WTBoy

    The only criticism of Ms. Reinhart’s analysis is its lack of boldness. A review of the local newspaper reveals that the forces that cause our woes are not confined to our country. Greece, Spain, Ireland, Canada, and most recently Italy, are suffering similar woes.

    If one concludes that conditions common to all of these countries are responsible for the problems, then the obvious culprit is globalism. Only by addressing the root cause, do we improve chances of success. If we delay by another decade the acknowledgment of the problem, the remedy will only become more elusive.

    • sweatyb

      “If one concludes that conditions common to all of these countries are responsible for the problems, then the obvious culprit is globalism.”

      That’s a pretty big supposition. There’s something else common between these countries. White people! All the countries you mention have a white-majority population. Only by addressing the root cause, do we improve chances of success. If we delay by another decade the acknowledgment of the problem, the remedy will only become more elusive.

      Or, here’s another theory, the cause of our problems is that the private banking industry recklessly leveraged everything they could using other people’s money to make more money without adding anything productive to the global economy. And once investors started to look critically at the assets they were offering (i.e. when the housing prices showed signs of stagnation) their collateral wasn’t sufficient. The collapse vaporized tens of trillions of dollars, shook the foundations of our capitalist economy, and caused a global downturn.

      Not that anyone’s bothered to address that issue either.

    • JohnMcC

      Dear, dear Mr Boy, does it not seem that there is a linking element to all those nations you list that does not exist for the U.S.? To people who have eyes to see it is plain that those economies DO NOT HAVE THEIR OWN CURRENCY. Except Canada, where economic performance is good enough to embarrass all us ‘Murkins.

      I have noted the effect of this little fact at least once on this Forum and will not bore myself and regular readers explaining to a very simple person what this means. Suffice it to say, you have revealed amazing ignorance of something you pretend to be able to lecture us about.

      • valkayec

        May I mention how glad I am to have you as an addition to the commentary on this forum as you look at things from a pragmatic, intellectual viewpoint rather than a partisan view.

    • ram6968

      it’s really something how pundits fail to appreciate that those mortgage backed securities and derivatives went to financial institutions in other countries….WE caused THEIR problems

  • Emma

    One definition of nostrum: “Any scheme asserted to solve a problem, but with no objective basis for belief in its effectiveness; esp., in politics, a scheme or proposal likely to prove popular with voters.”

    This definition comes closest to Frum’s meaning, but doesn’t actually get to the issue. The popularity of deficit reduction as a remedy for our economic woes is mostly confined to Republicans who have been indoctrinated into this view by its incessant repetition by Fox, Limbaugh, and the extreme-right commentariat. Which is to say, Republicans are not pandering to their voters with a nostrum, they are inculcating them with partisan and ideological dogma.

    Nostrum implies an audience with preferences. Indoctrination suggests an audience whose preferences are easily shaped. The former suggests manipulation, the latter suggests mind control. I come to this conclusion from talking with my ultra-conservative friends and acquaintances who are quick to repeat the talking points but very slow to engage independently. “Do you know of any instances where deficit reduction brought us out of a depression or deep recession?”

    • dennis

      Emma: “I come to this conclusion from talking with my ultra-conservative friends and acquaintances who are quick to repeat the talking points but very slow to engage independently. ”

      Indeed, Emma, that has been the crux of it for quite a while. As soon as you begin to draw them away from the talking points and one-liner philosophies, they have, literally, nothing to argue with. Which is more frustrating than their ignorant utterances.

    • PeedNUrGenePool

      Hypocrisy is difficult to justify.

  • Graychin

    Too many “conservatives” live in their bubble of epistemic cloture to pay any attention to kid shouting that the emperor has no clothes.

    Even if the “kid” is a respected “conservative” economist.

  • Oldskool

    A restructuring of U.S. household debt, including debt forgiveness for low-income Americans, would be most effective in speeding economic growth

    Cue that guy ranting on the stock market floor who started the whole teabagger nonsense. He was on Morning Joe today or yesterday sounding as crazy as ever.

    • valkayec

      Something I remember back when the crisis began: mortgage backed securities and everything else was rated on mark to market value. After the crisis hit, banks and investment firms lobbied Congress and regulatory agencies to change mark to market to what they considered fair value, meaning what they bought the securities for. In other words, the banks had no idea of the true value of their securities and they certainly did not want to mark down the value of them to what the market currently valued them at, maybe 50 cents or less on the dollar, so they got everyone to agree to a change in valuations by changing mark to market to what they called fair value. As a result, banks (a very loose euphemism) no longer had to write down the value of their security holdings which effectively prolonged the day of reckoning. I suspect we’re dealing with the result of that valuation change.

      The CNBC reporter you mentioned is very libertarian in his views…and over the top on a daily basis. But his rant on giving underwater homeowners a break, considering the real devaluation of their homes in order to save the banks from mark to market valuations, probably failed to serve the nation. I’m only speculating here, but if banks had been forced to write down their securities according to mark to market, the mortgage problem might have already been resolved even though several TBTF banks would probably have been bankrupt.

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  • jamielove

    Related to this issue of household debt is the decision to eliminate interest subsidies for graduate students. What will be the longer term cost of this “saving”?

    • PeedNUrGenePool

      By reducing the number of highly educated, more Republicans will be created.

  • Chris Balsz

    We have debt forgiveness in the form of Chapter 7 bankruptcy. If she means forgiving secured loans and letting the debtor retain the security, I think that’d be a confiscation of property. Though after Kelo, maybe the Court would uphold it.

    • thescarletpimpernel

      Strategic default is the number one driver in the housing market at the moment. Default effects all property owners. Bankrupcy requires the liquidation of assets to pay creditors further adding to the decline in housing values and further restricting growth. Some debt forgivness is called for and a prudent measure in my opinion.

      • Arms Merchant

        Yes, and the incentives for strategic default are absolutely crazy. Federal regulations now are perverse. Borrowers who would be considered good credit risks previously are prevented from refinancing because they lack enough equity.

        Refinancing to lower mortgage payments would free up more of homeowner’s cash for general demand. But the Central Control Commissars in D.C. can’t resist dictating their edicts.

        • valkayec

          Eh, it not the “Central Control Commissars in D.C.” so much as the lobbying of Banks to prevent mark to market valuations. Banks know that if they mark down mortgage values to true values their balance sheets would be under water. So they lobbied to change mark to market to fair value in which they could claim the value. As a result, banks didn’t have to write down valuations. They were saved from near bankruptcy just with that one move.

        • Arms Merchant

          Yes, but this is not solving the problem. As people move to downsize and cut living expenses, or take jobs (if they’re lucky) in other cities, they can’t rent out the house to cover their mortgage and have no choice but to short-sell or default. Overly restrictive lending regulation (closing the barn door after the horse has bolted, so to speak) does nothing to stop the downward spiral in home values.

    • JohnMcC

      Here in Florida one can declare bankruptcy and keep one’s home. It’s why we have so many illustrious residents. O.J. Hulk Hogan.

  • JimBob

    Never heard of her

  • sinz54

    Frum: “Conservative economic commentators often respond to this kind of thinking with name-calling”

    How many times have I suggested on this forum, that what would fix this economy most is debt relief to deal with this gigantic debt overhang? At least three or four.

    And unlike you, I am not a born-again moderate. I’m a conservative who wants to see Obama and his liberal pals out of power come 2013.

    I recognize that this calamity wasn’t the fault of the average homeowner. Most homeowners did NOT take subprime mortgages with 5% down. But housing prices fell so much (down over 30% in Nevada) that even homeowners who had built some equity lost it and ended up underwater anyway.

    But under the doctrine of “too big to fail,” Washington chose to aid some of the exact same banks and Wall Street firms who helped precipitate this economic slump. I guess it was necessary. But so is cleaning out septic tanks. Don’t expect me to like doing either one.

    • Holmes

      “I’m a conservative who wants to see Obama and his liberal pals out of power come 2013.”

      You are so right! Mitt will fix the economy in no time flat. With his toothy grin, dyed hair, really deep-deep convictions, huge experience solving problems just like the ones we’re facing now, and Bachmann or Perry to back him up, he can’t miss. It’s good to be a Republican. Never a reason for doubt or even for thought.

      • PeedNUrGenePool

        So what DOES happen if the Republican strategy to destroy Obama succeeds, and they get back into power?

        If their objective to decimate Government, cut all spending, taxes, and regulation is implemented, what would the Country become?

        I keep envisioning a totally polluted, police state, filled with lots of poor people.

    • valkayec

      Hey, I’m not thrilled with many of Obama’s fiscal policies, particularly those advocated by Geithner, but who amongst the GOP candidates would be better? I don’t see anyone that I’d trust to care about me and my kids and grandkids more than Wall St or the Fortune 1000 or Forbes list of multi-millionaires.

  • lnexus01


    Now, I’m looking forward to seeing Carmen Reinhart on every talk show and opinion-making outlet. (Not being stupid, however, I’m not holding my breath.)

    As I write this, the news breaks that S&P has downgraded the debt of the US to AA+. Lovely. Amazingly, I also hear Ezra Klein express his belief that this WILL convince Republicans of their error. Also stunning!

  • Frumplestiltskin

    Because of previous Republican reforms, bankruptcy to discharge credit card debt is a helluva lot harder to do. While I admire her intentions simplifying bankruptcy for the poor won’t solve the real problem, which is stagnant wages for all but the rich, who have received the lions share of productivity gains within the last 30 years, yes, a lucky few are benefitting off the hard work of the many although Republicans will never admit it, Rick Waggoner made hundreds of millions running GM into the ground, I could have done that for a fraction of the amount, meanwhile GM laborers productivity has steadily increased but they have only been asked to sacrifice.

    As to what to do about stagnating wages, how about returning to the tax rates of the Clinton era, the last time middle class workers have seen incomes increase. Would that America could return to the values of the Eisenhower era where obscene salaries were considered in bad taste and where workers were not considered burdens but assets. Yes, I know, shocking thoughts to the Randian ignoramuses running the party now.

    • drdredel

      especially ironic as the vast majority of them are the very same unskilled ignoramuses that they seem to care least about. Why does it keep falling on us (the educated, relatively well-to-do) to worry about them and keep dragging them along?

  • violet

    I think the TARP funds should have been channeled through mortgage owners first on the way to the banks. If I have a mortgage with Wells Fargo why not pay off my (and everyone else’s) mortgage balance first with bank bailout funds? This way Wall Street still gets bailed out, banks aren’t overloaded with houses in foreclosure, and the people on Main Street reduce their debt load so they can actually be the good consumers our economy depends on. Is this fair to everyone? No. Were the bank bailouts fair? NO!!!

    • drdredel

      that reminds me of a Steven Wright joke in which he had borrowed a thousand bucks from his friend and then when it came time to repay, he didn’t… he just carried the money around in his wallet until one day when the two of them were walking down the street they were approached by a mugger who demanded their money at gun point. At this time Steven says to the mugger “hold on a second” then he turns to his friend and repays him the thousand dollars.
      (the thief, in stark disbelief, then goes on to force him to borrow 2,000 before taking it all… but that’s not relevant to this analogy).

    • PeedNUrGenePool

      The flaw in your strategy is that it would encourage more mortgage holders to default, if they then qualified for a free payoff.

      A better strategy would have been to use the TARP money to buy down their interest rate (or teaser rate). When the teaser rate period expired, the homeowner couldn’t make the increased payment. By using TARP to keep the payment from going up, default (and the incentive TO default) could have been avoided.

      Of course, then the banks wouldn’t have received the TARP money as a direct payment….which, I’m sure they much preferred.

  • valkayec

    I’ve not read the Rogoff & Reinhart book, but the reviews I have read cause me to think they are really onto something. For all the Congressional infighting about taxes, most of their theories, especially about low taxes, prove historically that the current antipathy to higher tax rates to be wrong.

    Is there a way to make their book required reading by every member of Congress?

    • Demosthenes

      This is Raskolnik under a new sig. I read the book a few months ago, on the recommendation of many people, and was not disappointed. Yes, it should absolutely be required reading for any Congressman or -woman who wants to participate in the discussion about the debt/deficit. Given your background, valkayec, I get the sense that you would find it particularly rewarding.

      Taxes are a small part of their thesis. They do debunk the lower-taxes-always-lead-to-higher-GDP myth, but no one who knows anything ever took that myth seriously anyway. Much more interesting and lengthy is their analysis of how sovereign external debt default leads to prolonged difficulty borrowing at reasonable rates, creating a negative feedback loop where high interest rates make it more difficult to grow the economy which makes it more difficult to pay back the debt, making it more difficult to borrow money (and so on). The best part is they give you all the data, so those so inclined can crunch the numbers with their own parameters to see what turns up. Their approach is no-nonsense, non-partisan, really very refreshing. Highly recommended.

      • Bagok

        Nice nickname Demo. I kind of hate to admit this but my first thought was Wiggens, not Athens. I need to read more classics :p

      • Redrabbit

        They do debunk the lower-taxes-always-lead-to-higher-GDP myth, but no one who knows anything ever took that myth seriously anyway.

        Unfortunately there are many people who do not know anything, and the equally know-nothing voters keep electing them to office because they promise that lower taxes will make middle class Americans in to millionaires.

  • the buckaroo

    …nice to see that David & a few economist from the conservative brotherhood are spitters & not swallowers…of the kool-aid, that is.

    Now if we could only get them to inhale.

  • paul_gs

    “Obama-bot”, I hadn’t heard that one before. I’ll be sure to start working it into my conversations. :P

  • rockstar

    I love Silvio Berlusconi

  • New Orleans

    What is meant by “restructuring of U.S. household debt, including debt forgiveness for low-income Americans”? I like the sound of it, but I’ve no real idea what it means, whether Reinhart expects the creditors to do this on their own or under government inspiration. Perhaps the government would somehow subsidize the creditors, or merely require compliance of TARP recipients? I can imagine many more questions, but the reporting by Bloomberg News and David Frum doesn’t offer much on which to begin forming an opinion.

    • zephae

      ” I can imagine many more questions, but the reporting by Bloomberg News and David Frum doesn’t offer much on which to begin forming an opinion.”

      Well, see there used to be a column of news stories on the front page that was really useful in starting along that path, but then David and Noah came by and told us all we were wrong and foolish for ever having liked what many posters saw as a very valuable feature on the site, just as they were foolish to like formatting buttons instead of having to memorize the html tags (or are they back now? This website appears differently on my phone from my PC). Instead, the elightened path leads us to an inane and irritating twitter feed which is somehow superior to editorial discretion and a google search bar in the top right corner of my browser.

  • Matt X

    Do people seriously still think Obama knows what he is doing? Bush got blasted by liberals when the economy was doing fine back in 2007 and unemployment was 5-6%…it’s pushing 10% now and yet they still want people to buy this fantasy that Obama is some genius that can’t be replaced?

    • ExConSean

      “the economy was doing fine back in 2007″

      …on the strength of fake money and utterly unregulated financial instruments that weren’t even understood by the people who conceived of them.

      It was a “bubble,” smart guy. Bubbles are bad. They are based on over-confidence, not rational analysis of the market. That’s why they “burst.”

      Citing the 2007 economy as a DEFENSE of Bush-era policies is fantastically stupid. If 2007 was so good, why did 2008 happen?

  • Matt X

    I have heard of most economists that are considered conservative.

    I have never heard of this wench. She’s just a prop to be used by the left.

    • Xunzi Washington

      Are you an economist, Matt? If not, I’m curious why you not knowing who she is should matter to anyone.

    • ottovbvs

      “I have never heard of this wench.”

      Not exactly surprising based on the acuity of your comments. You are apparently unaware that the housing bubble started imploding in Q3 of 2006, and the Great Recession officially commenced in December 2007.

      • Redrabbit

        The ignorance of what has actually happened with our economy is truly staggering at times. Not only did things begin to go south in 2006, the job market in particular had been bad for years prior to that. Unemployment was low, but wages were stagnant and many jobs were low paying service jobs with little security.

        For a while, we were at near full employment, but that didn’t mean a lot of people had trouble making ends meet.

    • Redrabbit

      I have heard of most economists that are considered conservative.

      Beck, Limbaugh, Palin, Bachmann, and Erickson are not economists. You may not be aware of that, but I’m sure you will learn it in time. After all, you managed to learn how to read, despite your obvious limitations, so I suppose anything is possible.

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