And the reason the CPI is losing credibility is that, as economist John Williams tirelessly points out, it’s a bogus index. The way inflation is calculated by the Bureau of Labor Statistics has been “improved” 24 times since 1978. If the old methods were still used, the CPI would actually be 10 percent. Yes, folks, double-digit inflation is back. Pretty soon you’ll be able to figure out the real inflation rate just by moving the decimal point in the core CPI one place to the right.
As Krugman points out, MIT’s Billion Price Project shows prices have increased roughly 4 percent in the last three and a half years, essentially the same as what the Bureau of Labor Statistics reports. And that’s not 4 percent a year, that’s 4 percent total.
No. If the “old methods” were still being used, CPI inflation would not be 10%/year. God alone knows where Niall Ferguson got this. God alone knows why he believes it.
— The Financial Times’s Shahien Nasiripour has some good analysis on how an alliance between the New York attorney general and the inspector general of Fannie and Freddie could result in criminal prosecutions:
Documents and depositions taken by the FHFA Office of Inspector-General as part of its investigation into mortgage and securities fraud perpetrated against Fannie and Freddie - and by extension US taxpayers - can be shared with the New York attorney-general, and vice versa. Such information sharing could be used to build government-led lawsuits aimed at large banks for defrauding Fannie and Freddie or institutional investors.
The partnership is bolstered by Mr Schneiderman’s ability to use the Martin Act, a 1921 state law that allows him to bring misdemeanour and felony criminal charges against alleged wrongdoers doing business in New York. The prosecutor can operate across state lines, essentially acting on behalf of investors across the US.
If I were going to try to generalise this a bit, I’d suggest that a theory of deep downturns needs to have two key ingredients. First, it needs a theory of big demand shocks. And second, it needs a theory of bungled policy responses.
A good and reliable candidate for the former might be a major episode of financialisation in the economy that coincides with a surge in capital flows. If there is then a sudden change or reversal in the pattern of capital flows, as often occurs, the financialisation of the economy amplifies the impact and a big demand shock is the result. I wouldn’t begin to suggest this is the only thing that ever generates big shocks. It is perhaps the most common and significant of the possible suspects, however.
A big shock will not, on its own generate a deep downturn, especially one of a sustained nature. To do that it needs an accomplice: bungled policy. Governments can and do get many things wrong in the wake of economic shocks, but few mistakes are powerful enough to reliably generate depressions. Monetary policy mistakes can.
Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at email@example.com. Follow him on Twitter at @ryanchittum. Tags: Brad DeLong, Financial Times, Niall Ferguson, Paul Krugman, The Economist