Miranomics
The CEA Chairman has some odd ideas
Stephen Miran, President Trump’s Chairman of the Council of Economic Advisers, says,
in the years running up to the 2008 crash, China along with many foreign financial institutions, increased their holdings of US mortgage debt, which helped fuel the housing bubble, forcing hundreds of billions of dollars of credit into the housing sector without regard as to whether the investments made any sense. China played a meaningful role creating the global financial crisis.
The American left liked to blame mortgage defaults on “predatory lending.”1 Miran is accusing China of that evil. It is a ridiculous charge.
It is true that the rest of the world has poured savings into the United States, and that this raises the value of the dollar, contributing to our trade deficit. But the fault lies with the borrower.
It is not because of China that the United States is a huge borrower in world markets. And it is absolutely not because of China that the United States channeled the world’s savings into a housing bubble.
That we are a huge borrower is on us. The deficits that our Federal government runs have to be funded somehow. If foreigners were not willing to lend, then we would have to use domestic capital. Our interest rates would be higher and businesses would have to cut back on investment.
As I wrote a few days ago, I think that our economy would be better off with much less government spending. A big cut in U.S. government spending probably would do a great deal to reduce our trade deficit by reducing our borrowing from abroad.
Nobody in China told us that we had to use their money to inflate a housing bubble. That foreign lending is channeled into unproductive uses, like wasteful government spending and pumping up house prices here, is very much on us. We could have used foreign lending to build more factories and fund more innovation.
The fault lies with the Basel capital standards, especially as modified in the United States with the “recourse rule” of 2001. These regulations induced banks to hold “safe” mortgage securities rather than make “risky” corporate loans. The bank capital requirements for the former were less than 1/4 those of the latter. Of course, the relative safety of mortgage securities was only in the eye of the regulatory beholder. In 2008, this illusion was shattered.
In my view, all of financial regulation, including monetary policy, amounts to government allocation of credit to its preferred uses. Primarily this is its own spending, but it also includes home mortgages. Absent these biases, more of the world’s saving, including our own, would go toward business investment, which would expand our manufacturing capacity among other things.
Miranomics says that the United States is doing the world a favor by running trade deficits, and this has to stop. To me, and I daresay to most other economists, this is a misleading characterization of global finance. The problem is not predatory lending from the rest of the world. The problem is irresponsible borrowing and misuse of credit by the United States.
The claim was that the intention of lenders all along was to foreclose. But lenders lost money on the foreclosures. Tyler Cowen, noting that borrowers bought homes with little or no money down, said that it was more accurate to describe this as “predatory borrowing.”
A few days ago I mentioned the risk that comes from regulatory regimes that encourage (or require) all institutions to manage risks in the same way. You mention the Basel II standards that funneled US assets into home mortgages. I think the same standards caused even worse behavior among European banks - Basel II standards defined sovereign debt from Euro zone countries as risk-free, so banks were relieved of responsibility for any sort of due diligence in lending to such countries. The Greeks did things that would be considered fraud if committed by individuals, but the banks (and through them, European governments) encouraged the fraud.
I don't go in for bogus demonization of either the "predatory lending" or Chinese varieties and view these characterization of frankly quite impressive and smart Chinese behaviors as mostly cynical propaganda for consumption by domestic audiences (politically) and courts (legally) because the judges will allow the exercise of exceptional authorities, but only when the claimed excuses are made both consistently and in the most brazenly and aggressively exaggerated manner possible (see, e.g., Racial Preference Regimes, any one of the two dozen always-annually-renewed - and literally Orwellian - "permanent emergencies".)
Weaning the US economy off of reliance on perpetually huge trade deficits and fiscal deficits and reconstituting completely atrophied domestic production capabilities in the face of crippling regulatory burdens is like the set "Shock Therapy" recommendations to quickly liberalize recently-communist states and move so far in the direction of "mixed economy" capitalism that, while painful, it would prevent the socialist backsliding that was thought to be a Latin-American style political certainty for any more gradual transition to market economies. Both the methods chosen and the apologia trying to rationalize them are quite rightfully ridiculed and lamented. But the outcome is the right one to pursue, and, let's face it, no one has proposed any more likely way to get to that destination.
It's sad that the patient was allowed to get to this decrepit point and the intervention didn't happen earlier when things could have been done better and for better stated reasons. But here we are, and there we need to go, and apparently we're going to have to rely on Gollum to lead us through the dumb-and-dishonest marshes to get there.