In a blogpost taking stock of the IMF conference on lessons from the crisis, the Nobel laureate distills the lessons learned.

He makes the following observations:

• Not only are financial recessions deeper and slower in recovery than in normal recessions. They also have slower recovery the greater is the credit to GDP ratio.
• ... a measure of credit based on loans outstanding, even including the role of the shadow banks, yields a conservative measure of our benchmark for where we should now be.
• We should have led the public to understand that we should measure success not by the level of the current unemployment rate, but by a benchmark that takes into account the financial vulnerability that had been set in the previous boom. We economists have not done a good job of explaining that our macro-stability policies have been effective.
• [The bailout expenditures] will probably be positive, and run to a few billion dollars. But they did literally stop a financial meltdown which was in progress.
• In sum, we economists did very badly in predicting the crisis. But the economic policies post-crisis have been close to what a good sensible economist-doctor would have ordered.

There is much more to the post, and it should be read in its entirety.

I think bullet point 3 merits additional stress. The magnitude of the calamity that unfolded in 2007 and 2008, and the difficulty in re-establishing growth, should have been placed in the context. In my view, that context includes the decade long (at least) buildup of distortions in the economy, from deregulation, non-regulation, and out-of-control fiscal policy. The challenge of educating the public remains, as attested to by the all too common refrain by some "that the recovery should have been stronger", even while demanding austerity.

The Heritage Foundation's Salim Furth writes:

If interest rates are responsive to news, most macroeconomic models agree that government “stimulus” spending crowds out private investment. In usual times, with responsive interest rates, New Keynesian models[4] typically have a strong role for monetary (Fed) policy but little or no role for fiscal policy (stimulus spending or tax rebates). In Neoclassical[5] as well as New Keynesian models, government stimulus spending diminishes private activity—especially investment—as private borrowers are crowded out of the market by government borrowing. In contrast, New Keynesian models suggest that when the interest rates relevant for investing are constrained by the zero lower bound, the crowding-out mechanism stops functioning and fiscal policy can be expansionary.

...

...in 2009, Christina Romer and Jared Bernstein published the economic bases of the Obama Administration’s $800 billion stimulus plan.[8] The cornerstones of their estimates were the multipliers reported on page 12, in a table entitled “Output effects of a permanent stimulus of 1% of GDP.”[9] These estimates came from forcing their models to constrain all interest rates at the zero lower bound regardless of the performance of the economy.[10] ...

I find this description odd, as the multipliers used are an average of the Fed's FRB/US and a private macroeconometric model (my guess is Macroeconomic Advisers, a standard in EOP and Treasury, at least back in my day). This description of FRB/US makes clear that even if the Fed funds rate was kept at zero, the long term rate would not necessarily be zero; in other words, there's a term premium, so a pure EHTS is not imposed. (And if Macro Advisers is the private model, then the same applies -- see here).

In any case, what did nominal rates actually do? I plot a slightly longer sample than Furth does (starting in 1967 rather than 1990), highlighting exactly how extraordinarily low long rates are.

Figure 1: Nominal constant maturity yields on 10 year Treasurys (red), and on 5 year Treasury's (blue). Source: St. Louis Fed FRED.

Furth cites a Swanson and Williams paper that indicates a responsiveness of long term rates to announcements through 2011, as proof that there is no liquidity trap. Hence, in this interpretation, the American Recovery and Reinvestment Act (ARRA) might have crowded out investment.

In order to evaluate crowding out, one needs to examine the correlation of the stimulus package with real interest rates. This is shown in Figure 2.

Figure 2: American Recovery and Reinvestment Act (ARRA) outlays and tax cuts as share of GDP (blue, left scale), and 10 year constant maturity TIPS, % (red, right scale), and expected inflation adjusted 10 year constant maturity Treasurys, % (green, right scale). NBER defined recession dates shaded gray. Source: CEA, BEA, NBER, St. Louis Fed FRED, and Survey of Professional Forecasters.

A big upward shift in real rates is not apparent to me. It is true that real rates might have been even lower had there been no stimulus package. Whether that would have spurred significantly more investment is an interesting question.

The interesting thing is that according to the Swanson and Williams paper Furth cites, we are now in a liquidity trap-like situation. Now is exactly the time to undertake expansionary - not contractionary -- fiscal policy. At the very least, one would not want to cut government spending without cause. Interestingly, this implication Dr. Furth fails to note.

Mortgage buyer and insurer Fannie Mae was in the news again this week.

First, let me review a little of the history of how we got here. Fannie Mae (otherwise known as the Federal National Mortgage Association) was created by an act of the United States Congress in 1938 as a government-sponsored enterprise (GSE) intended to purchase loans that had been guaranteed directly by the U.S. government through the FHA. Subsequently Fannie got into the business of buying loans that were not guaranteed by FHA, as well as issuing its own guarantees on bundles of other loans that it put together and resold to private investors. In 1970, Congress chartered the Federal Home Loan Mortgage Corporation (Freddie Mac) to do the same thing and act as a competitor to Fannie. But in 2008 with mortgage loans going bad, Fannie and Freddie did not have adequate capital to fulfill their guarantees, and the federal government took both Fannie and Freddie into conservatorship, where they remain today.

Now this week Bloomberg reported

Fannie Mae (FNMA), the mortgage-financier seized by U.S. regulators in 2008, will pay the Treasury Department $59.4 billion after reporting a record quarterly profit driven by rising home prices and declining delinquencies....

After its latest payment, Fannie Mae will have sent the Treasury a total of $95 billion, compared with the $117.1 billion of capital infusions that the company has received. Freddie Mac, which yesterday reported a $4.6 billion profit, will have paid $36 billion, after drawing $72 billion of aid, and Chief Executive Officer Don Layton said it may release $30.1 billion of tax-credit writedowns as soon as next quarter.

The coming large payments from the companies will probably help delay the amount of time the U.S. government has until running out of room under its debt ceiling to sometime in October, the Bipartisan Policy Center said today in a posting on its website.

But if you study Fannie Mae's 10Q report, you'll find that most of the 2013:Q1 reported profit came from Fannie's decision to recredit itself with $50.6 B in deferred-tax assets. The company's theory prior to 2008 was that, with all its previous losses, it wouldn't have to pay much future taxes as a result of carrying those losses forward. Fannie had been counting the taxes it wouldn't have to pay in the future as one of its main net assets in 2008. When Fannie was taken into conservatorship in 2008, there was a decision that maybe the enterprise would never go back to being a "private" company that owed any taxes, so those deferred-tax assets were written off as a big loss. Now the enterprise is putting them back on the books, as a result of which it claimed a huge after-tax profit for 2013:Q1. So Fannie plans to pay the U.S. Treasury (the GSE's current owner) a big dividend.

It's pretty amusing to see how this is getting covered by some of the press. For example, CNN's headline was Fannie Mae, Freddie Mac to help cut deficit:

U.S. taxpayers will soon reap a nearly $67 billion benefit from the recovering housing market, which will help to shrink deficits and delay the need to raise the country's debt ceiling.

To translate, you don't need to worry so much about the outstanding government debt because maybe some day Fannie is going to be a private company again that won't have to pay taxes for quite a while. Because the taxes that Fannie isn't going to pay in the future count as an asset to its current owner (the U.S. government), we can now declare ourselves to be better off financially than we were a week ago.

But I have another question about the rest of that $59 B in income earned by Fannie. The U.S. government is currently the residual claimant who receives the income from the fees that Fannie is collecting for guaranteeing mortgage-backed securities. So who is the residual guarantor of those securities?

Mortgage debt held by government-sponsored enterprises or in agency- or GSE-backed mortgage pools, 1952:Q1 - 2012:Q3. Top panel: in billions of dollars. Middle panel: as a percent of GDP. Bottom panel: as a percent of all mortgages. Data source: Flow of Funds, Federal Reserve Board, Table L217.