Letters to The Economist

Part of a course last semester involved finding something objectionable in the latest issues of The Economist magazine and writing a rebuttal.  Here’s what I came up with:

Tight Response

 You claim the Federal Reserve and other central banks, used expansionary policy to prevent a shock from becoming a depression in 2008 (“The low-rate world”, September 24th).  In fact, initial Fed response ranged from neutral to contractionary.

It is true that the Fed engaged in large bailout loans to financial institutions in 2008.  But this expansion was sterilized by selling off its short term Treasuries.  When it had nearly run out of Treasuries and its balance sheet began to expand, it ushered in its interest on reserves program to discourage banks from lending the newly created money.  Neither of these policies can be described as expansionary.

Moreover, as some economists have argued, the FOMC signaled that it would engage in a passive tightening when it abstained from lowering its federal funds rate target in the second half of 2008.  The market received the message – loud and clear – and the economy dipped further thereafter.

Before looking to the future, it is important to understand the past.  Monetary policy did not mitigate the Great Recession.  It exaggerated the downturn.

Supply Side

You suggest the “global saving glut” of the early 2000’s turned investors to mortgage-backed securities, thereby enabling the Great Recession (“Passing the buck”, October 29).  By focusing on the demand side of the market in this period, you downplay important policies that expanded the supply.

In response to the dot-com bubble, the Federal Reserve lowered its target rate from 6.5% in late 2000 to 1.75% in late 2001, and then left the rate at 1% from 2003-2004.  Government pressure to increase home ownership among minorities and low-income consumers increased subprime loans and pushed mortgage rates down more generally.  As a result, refinance loans increased from approximately 2.5 million in 2000 to over 15 million in 2003.  The national median home price was about 2.9 times the median household income; by 2004 the ratio rose to 4.0 times.  Household debt as a percentage of annual disposable income rose from about 90% in 2000 to about 120% in 2004.  This debt was securitized and the mortgage backed securities market grew substantially.

It is true that global demand prompted mortgages to be securitized in ever more sophisticated ways.  But easy credit policies fueled a boom in the mortgage market, making mortgage backed securities unstable.

Chinese Dominance

You claim that commercial self-interest due to falling costs of clean energy will curb demand for oil and coal (“The Burning Question”, November 26).  But, by focusing on clean energy initiatives, you downplay the effects of large scale macroeconomic occurrences in general and the slowdown in China’s growth in particular.

According to the International Energy Agency, China is the world’s largest energy consumer.  Coal accounts for about 75% of total commercial energy consumption, with oil accounting for another 21%.  From 1989 until 2016, China experienced an average GDP growth rate of 9.8%.  But growth has been  a measly 6.7% (for Chinese standards) for the past year, with limited expectations of an increase.  Likewise, Chinese industrial output has slowed to 6% over the past 10 years, roughly half of the average growth for the post 1989 period.  Overall GDP stagnation and a shift to a stronger services economy has resulted in a slowdown in oil and coal demand.

It is certainly true that a surge in clean energies has been displacing coal and oil.  But China’s declining growth rate has played a greater role in slowing the demand for non-renewable energies.

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