Which publication has an article about how economist Joseph Stiglitz was wrong about Fannie Mae?
How could three prominent economists have been so dumb-foundingly wrong about the systemic risk of Fannie Mae and Freddie Mac? Today’s Wall Street Journal discusses a 2002 paper declaring that “on the basis of historical experience, the risk to the government from a potential default on GSE debt is effectively zero.” It’s authors were Jonathan Orzag, Peter Orszag and Joseph Stiglitz, who had won the Nobel prize in economics the year before. We’ve embedded it below so you can read the whole thing. As the WSJ edit page explains: The Stiglitz-Orszag paper’s method was to put the companies through “millions of potential future scenarios,” and then to judge the likelihood of default. The assumptions in the test were said to be “severe.” Even so, the probability of a default was found to be “so small that it is difficult to detect.” Some $111 billion in taxpayer-funded bailouts later, with perhaps hundreds of billions to go, the risks have been detected. They noted the government officials h
The paper concludes that the probability of default by the GSEs is extremely small. Given this, the expected monetary costs of exposure to GSE insolvency are relatively small — even given very large levels of outstanding GSE debt and even assuming that the government would bear the cost of all GSE debt in the case of insolvency. For example, if the probability of the stress test conditions occurring is less than one in 500,000, and if the GSEs hold sufficient capital to withstand the stress test, the implication is that the expected cost to the government of providing an explicit government guarantee on $1 trillion in GSE debt is less than $2 million. To be sure, it is difficult to analyze extremely low-probability events, such as the one embodied in the stress test. Even if the analysis is off by an order of magnitude, however, the expected cost to the government is still very modest. In his recent Podcast interview with Russ Roberts, Charles Calomiris reveals something interesting t
How could three prominent economists have been so dumb-foundingly wrong about the systemic risk of Fannie Mae and Freddie Mac? Today’s Wall Street Journal discusses a 2002 paper declaring that “on the basis of historical experience, the risk to the government from a potential default on GSE debt is effectively zero.” It’s authors were Jonathan Orzag, Peter Orszag and Joseph Stiglitz, who had won the Nobel prize in economics the year before. We’ve embedded it below so you can read the whole thing. Sources: http://www.businessinsider.
