Krugman jumps the shart

[CARLHAYDEN]

Here’s part of what Paul Krugman had to say on Sunday's "Fareed Zakaria GPS,"

“If we discovered that, you know, space aliens were planning to attack and we needed a massive buildup to counter the space alien threat and really inflation and budget deficits took secondary place to that, this slump would be over in 18 months.”

Read more: http://newsbusters.org/blogs/noel-sheppard/2011/08/14/paul-krugman-calls-space-aliens-attack-earth-requiring-massive-defens#ixzz1V7XBz7Ch

[bullmoose88]

I usually waddle after sharting...jumping is a bad idea.

[Politico]

He is off his rocker.

[bgwah]

I'm sure it gets frustrating when the obvious solution to the recession is ignored by everyone.

[Politico]

I'm sure it gets frustrating when the obvious solution to the recession is ignored by everyone.

The obvious solution being to prepare for an imaginary alien invasion, right?

I kid. So you really think the obvious solution is just more spending? How did that work out for Japan over the past twenty years?

More spending will just decrease confidence further as economic agents in the private sector tally up in their head how much more they will need to spend in taxes in the future to pay for all of the spending today. People did not do that in the 1930s/1940s, but they are certainly doing so today. The game has changed and Krugman is a smart man who should be realizing this by now.

[All Along The Watchtower]

I'm sure it gets frustrating when the obvious solution to the recession is ignored by everyone.

The obvious solution being to prepare for an imaginary alien invasion, right?

I kid. So you really think the obvious solution is just more spending? How did that work out for Japan over the past twenty years?

More spending will just decrease confidence further as economic agents in the private sector tally up in their head how much more they will need to spend in taxes in the future to pay for all of the spending today. People did not do that in the 1930s/1940s, but they are certainly doing so today. The game has changed and Krugman is a smart man who should be realizing this by now.

The "obvious solution" would be the mass destruction of surplus capital like in WW2. But...that was a world war. Kind of hard to mobilize the economy like that, unless there really WAS an alien invasion coming.

[Beet]

Krugman, is of course correct. The basic insight here is not so much that more spending would stimulate the economy, but rather that, on war footing, the political will would exist to organize human relations in such a way that what we wanted to get done got done. All modern economics can be traced back to the study of famines. It was discovered that famines exist not so much because of the lack of food, but because the political system failed to deliver food where it was needed.

Similarly, the problem today is not so much the lack of stuff or the ability to make stuff, (although that is becoming more and more of a problem as well, due to the rise of the third world) but the organization of what we have in a way such that people are working, being productive and able to enjoy the fruits of our economy. What we think of as scarcity is actually an invention of human institutions: money, debt, property, being the basis of it all. It is not that Jack and Jill cannot live in their house because the house is uninhabitable, it is because they owe a debt that they cannot pay, and so the bank will foreclose, and the house will become uninhabitable because no one else has the money to pay. Hence, Jack and Jill can live in a run-down apartment while the big, luxurious house sits empty. It is not that Bob the construction worker cannot build luxurious houses or that he does not want to, it is that there is no credit available for companies to hire him, and so on. So the problem is not the scarcity of houses, nor land, nor labor, nor technology. All of those exist in great abundance. The problem is human institutions. Under war footing, all human institutions are more clearly seen as what they are: fallible, and changeable by humans themselves.

[Politico]

Boiled down to the core, money is a tool to facilitate efficient trade among economic agents (money has other functions, of course, but let's just stick to the medium of exchange for now). The ONLY alternative is the barter system, which is grossly inefficient due to the requirement of double coincidence of wants (e.g., the musician who performs in a bar for food/drink. That same musician is not going to be able to pay his landlord for rent unless the landlord is also willing to accept "payment" for rent from the musician by playing music for him. See what kind of problems this would lead to? How it is impossible for a modern economy to run in this fashion? Or that even if money was abolished and the barter system was the law of the land, market forces would inevitably cause some item to emerge as the medium of exchange?)

With these two facts in mind, coupled with the fact you are an intelligent person, I have to ask: Do you now realize money itself is not a problem?

[Beet]

No one is saying we should do away with money, only that it is an example of a human institution that could be done away with if it were no longer useful. Your post is a great example of how it still is useful. But in the event of a massive overcontraction or oversupply of the money supply, individual currencies can and have been replaced with scrip, barter, or other currencies.

[Politico]

No one is saying we should do away with money, only that it is an example of a human institution that could be done away with if it were no longer useful. Your post is a great example of how it still is useful. But in the event of a massive overcontraction or oversupply of the money supply, individual currencies can and have been replaced with scrip, barter, or other currencies.

Absolutely. Hyperinflation completely distorts the two functions of prices, causing enormous inefficiencies, so it is no wonder that many people replace money with something else during bouts of hyperinflation (e.g., USD being used during hyperinflation in Zimbabwe).

So getting back to your original post now that we agree money itself is not a problem, let alone one of the problems: It seems to me you are trying to suggest that the problem of scarcity does not exist. Or, at the very least, scarcity is a concept that simply masquerades the fallibility of human institutions. Can you elaborate further?

I actually need to leave, but I will respond to your response when I get a chance...

[Beet]

Oh, I thought I was clear in my original post.

It's not that scarcity doesn't exist, it's that modern recession and depressions don't have much to do with it, because they always involve production at sub-maximal levels. Output is what falls, not productive capacity. So ultimately, we are in a recession because we choose to be in one.

[Politico]

From my vantage point, we are in an especially deep recession right now for a number of reasons but the top reason would have to be unnecessary government intervention in the economy. Policies should have never been put in place under Clinton, and continued under Bush, which promoted loose subprime lending. It is irrational for a bank to lend hundreds of thousands of dollars to somebody who could not possibly pay back their loan, especially if there is no down payment on the mortgage. We did not see this for much of American history until the 1990s when a push was created for high levels of sub-prime lending, which enabled exactly this kind of madness to take hold across much of the country. Couple that with the revolution in securitization, effectively creating an environment where those doing the lending did not have to take on the risk of the loan and everybody involved correctly bet that the government would "bail" most everybody out if things went especially sour, and it should not be a surprise that the housing bubble happened.

I think the best precautionary measure that can be done at this stage is installing stricter lending requirements nationwide with required down-payments of 5% being the absolute minimum for any mortgage (Both borrowers and lenders need to take on responsibility for mortgages, and such a down-payment requirement ensures this). That will pretty much ensure a housing bubble does not happen again. The government should not be involved in trying to push loans for people who cannot afford them. It does NOBODY a favor, and can cause a lot of distortions in the market.

With regards to the recovery, the best that can be done is to allow housing prices to clear (should be the top priority, although there are other things that also must be done). The banks and government have stopped house prices from reaching their low by holding back on the supply of houses to put on the market (A lot of foreclosures are being intentionally held back to attempt to keep the supply of houses for sale artificially low, which implies an artificially high price overall). It should not be a surprise that in such an environment most people are unwilling to buy a house. I mean, who wants to take out a mortgage on a house only to see their house depreciate in value thereafter? The market needs to clear, and then other things can be done to pave the road to recovery.

[Beet]

So your solution to what you say is a problem of government intervention is... more government intervention through a governmentally mandated minimum down payment?

Having housing prices depress even further is not a solution because it would make those Americans who already have a mortgage, which is most middle class families, further underwater, reducing their wealth and propensity to spend. This would cause further contraction in the economy, further job loss, and would not support the housing market. The housing market is not weak due to prices. Prices have come down in some places 80% are sales are still lower than they were in 2006. The reason is because of the lack of available jobs and wage growth. Ask any housing expert and they will tell you the reason for weak housing sales is poor job growth and poor household formation (related).

As for the economic crisis it was caused by too much faith in free markets. Subprime lending was mainly done by the private sector, not governmentally mandated. The vast majority of subprime lending was not related to any government push. The vast majority of it happened in the 2000s, not in the 1990s. In the 1990s the housing market was strong and stable with very low default rates. The problematic loans you see today were originated in 2004, 2005, 2006, and 2007, with the worst year being 2006. The worst years coincided with a surge in private sector lending pushing out Fannie Mae and Freddie Mac.

[Joe Republic]

I usually waddle after sharting...jumping is a bad idea.

The 'k' and 't' keys aren't even that close to each other.

Keep up the good work as always, CARLFAILDEN.

[Politico]

So your solution to what you say is a problem of government intervention is... more government intervention through a governmentally mandated minimum down payment?

In all honesty, I would propose dismantling Fannie and Freddie and ending sub-prime lending once and for all (ultimately, that market was created artificially by those two entities). If this were done, I suspect there would be no need for a mandated minimum down-payment (Indeed, the housing market would operate much like it used to and like it does in Canada, for example, where down-payments are a must in most every case. In the process, some poor people will not be able to afford to buy a house, but guess what: sub-prime lending does not allow them to be able to afford to buy a house either!). Unfortunately, this is probably not politically feasible. By being pragmatic, I support a mandated minimum down-payment on mortgage loans. It is possible to envision such an achievement in this political environment.

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Here is the thing: House prices are just going to keep going down, down, down until the market clears. All we are doing by artificially keeping the supply high is dragging out how long it takes to reach the inevitable end (Do you think all of these foreclosed homes they are holding back on are just going to magically disappear?). I think it would have been preferable to just let the market clear two years ago, so confidence would be restored by now at least and buyers would be confident to get back into the market. The market is NOT going to recover until prices hit their real low (i.e., until the market clears). Only then will all potential buyers be willing to take out mortgages once again, and so forth.

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No, it is weak because most people do not want to take out a mortgage only to see their house continue to depreciate in value. Once the market clears, we will have hit the bottom with regards to prices. Prices will start to rise as more and more buyers enter the market, including buyers from abroad who have significant USD holdings. We are just prolonging the process of getting to that point, and doing a lot of harm along the way (e.g., confidence is diminishing in other markets, fear is dominating every aspect of the economy so most firms are not hiring, etc.)

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Again, once the housing market clears, confidence will be restored. People will start buying houses again, and this restored confidence in the housing market will help restore confidence in every other realm of the economy. Hiring will increase shortly thereafter, especially if the deficit is brought down over time (the deficit is another reason most firms are not hiring: there is a lot of uncertainty as to what future taxation rates will be to help eliminate the deficit, so firms do not want to hire until there is more certainty in public finance...but this is a subject for another thread).

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Fannie and Freddie are not private institutions, nor have they ever been (they are government-sponsored enterprises). Go read up on the Community Reinvestment Act, most notably the legislative changes approved by the Clinton Administration which were continued under the Bush Administration. Then come back and tell me if you still feel this way.

[Politico]

I had to do a lot of edits, so hopefully you have not yet responded.

[Beet]

So your solution to what you say is a problem of government intervention is... more government intervention through a governmentally mandated minimum down payment?

In all honesty, I would propose dismantling Fannie and Freddie and ending sub-prime lending once and for all (ultimately, that market was created artificially by those two entities). If this were done, I suspect there would be no need for a mandated minimum down-payment (Indeed, the housing market would operate much like it used to and like it does in Canada, for example, where down-payments are a must in most every case. In the process, some poor people will not be able to afford to buy a house, but guess what: sub-prime lending does not allow them to be able to afford to buy a house either!). Unfortunately, this is probably not politically feasible. By being pragmatic, I support a mandated minimum down-payment on mortgage loans. It is possible to envision such an achievement in this political environment.

Subprime lending ended in 2007. Since subprime lending occurred in the private sector, it evaporated as soon as the private sector could not longer support it. Since 2008, there has not been subprime lending or housing securitization in the United States to any significant degree.

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Here is the thing: House prices are just going to keep going down, down, down until the market clears. All we are doing by artificially keeping the supply high is dragging out how long it takes to reach the inevitable end (Do you think all of these foreclosed homes they are holding back on are just going to magically disappear?). I think it would have been preferable to just let the market clear two years ago, so confidence would be restored by now at least and buyers would be confident to get back into the market. The market is NOT going to recover until prices hit their real low (i.e., until the market clears). Only then will all potential buyers be willing to take out mortgages once again, and so forth.[/quote]

The lower prices go, the more households go underwater. The more households go underwater, the more of them default on their loans and stop spending. The more that happens, the more the banks are weakened further. The more that happens, the weaker the economy goes, the less job creation there is, the less household formation, and the less demand for housing. In that situation, no one would be able to take out a mortgage without government support because the mortgage market simply wouldn't exist. Housing prices would become artificially depressed because the economy would be in a depression, with unemployment at upwards of 20%. The market may "clear" but only in the ashes of the economy and the broken dreams of hundreds of millions of people.

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No, it is weak because most people do not want to take out a mortgage only to see their house continue to depreciate in value. Once the market clears, we will have hit the bottom with regards to prices. Prices will start to rise as more and more buyers enter the market, including buyers from abroad who have significant USD holdings. We are just prolonging the process of getting to that point, and doing a lot of harm along the way (e.g., confidence is diminishing in other markets, fear is dominating every aspect of the economy so most firms are not hiring, etc.)[/quote]

Kicking the legs out of the housing market so it 'clears' would result in the cycle I described above-- a downward cycle into depression. It would in no way cause prices to start to rise or for more buyers to enter the market. Everything you describe -- confidence, hiring, fear -- would be far worse under the immediate liquidation of the market you propose. Not only that but it would wipe out trillions of dollars from American households' balance sheets.

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Again, once the housing market clears, confidence will be restored. People will start buying houses again, and this restored confidence in the housing market will help restore confidence in every other realm of the economy. Hiring will increase shortly thereafter, especially if the deficit is brought down over time (the deficit is another reason most firms are not hiring: there is a lot of uncertainty as to what future taxation rates will be to help eliminate the deficit, so firms do not want to hire until there is more certainty in public finance...but this is a subject for another thread).
[/quote]

Again, any attempt at immediate clearing of the housing market by price suppression would throw the economy into a deep depression and wipe out the net worth of American households. It would not restore confidence, it would devastate every other realm of the economy, and we would go back to losing half a million jobs a month-- at best. The deficit would skyrocket because of collapsing tax revenues and even with austerity measures, the US would likely be repeatedly downgraded. Basically an utter nightmare of every level imaginable.

One further thing, the problems in the US economy of overdebtedness are not only related to the housing market. Over-indebtedness infested every sector of the economy in the 2000's, from credit cards to student loans to car loans to pensions and everything in between. Everything was securitized. The problem was over-financialization, and blindness to the risks of over-financialization due to a misguided faith that the free market was operating and could never set a wrong or irrational price for anything. Even if the housing market were magically fixed overnight, the US economy's deep structural problems would not be fixed until we see a reduced level of debt, a reduced trade deficit and increased invention, innovation and investment here at home.

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Fannie and Freddie are not private institutions, nor have they ever been (they are government-sponsored enterprises). Go read up on the Community Reinvestment Act, most notably the legislative changes approved by the Clinton Administration which were continued under the Bush Administration. Then come back and tell me if you still feel this way.
[/quote]

Fannie and Freddie were not the originators of subprime. Companies like Countrywide and New Century and Golden State financial and arms of the major banks dominated subprime. Fannie and Freddie actually had strong lending standards in the early 2000s and much lower default rates, however after 2004 they caved into pressure for "market share". And yes, these companies were private institutions beholden to shareholders whose leadership was under pressure to increase short term profits. It was corporate welfare. As for the Communication Reinvestment Act, CRA was instituted in 1995, a full decade before the most problematic loans started to appear. Only a tiny proportion of subprime loans were under CRA.

The fundamental problem was irrational faith in a housing boom undergirded by blindness to the extent that the market could produce irrational prices, and over-confidence in models created by banks. The government has been supporting the housing market since 1935 and there was never a crisis until over-financialization and Wall Street tried to get involved.

[Beet]

The Bank of International Settlements concludes,

"Contrary to some media commentary, there is no evidence that the Community Reinvestment Act was
responsible for encouraging the subprime lending boom and subsequent housing bust. This Act only applies to
depositories, and did not cover most of the important subprime lenders. Depositories showed a lesser tendency
to write subprime loans than lenders not subject to the Act (Yellen 2008)."

http://www.bis.org/publ/work259.pdf?noframes=1

Sheila Bair, the Republican chairwoman of the FDIC, said:

"Only about one-in-four higher-priced first mortgage loans were made by CRA-covered banks during the hey-day years of subprime mortgage lending (2004-2006). The rest were made by private independent mortgage companies and large bank affiliates not covered by CRA rules.

You've heard the line of attack: The government told banks they had to make loans to people who were bad credit risks, and who could not afford to repay, just to prove that they were making loans to low- and moderate-income people.

Let me ask you: where in the CRA does it say: make loans to people who can't afford to repay? No-where! And the fact is, the lending practices that are causing problems today were driven by a desire for market share and revenue growth ... pure and simple."

http://www.fdic.gov/news/news/speeches/archives/2008/chairman/spdec1708.html

The idea that the CRA or Fannie or Freddie were responsible for the bust is absurd on face. Because Commercial real estate also had a bust, and commercial real estate had nothing to do with any of those! Further, Ireland, Australia, Canada, Spain, the UK, all experienced unprecedented housing bubbles (some of which are not fully deflated even now) at the same time. Are you going to say these are somehow unrelated? Absurd.

The basic problem was a worldwide explosion of financial "innovation", aided by globalization of capital, excessive lending and debt, too little regulation, and too much confidence in market prices for assets such as housing. We've seen it again and again and again from Japan to Southeast Asia to the US and Europe. Now we're seeing it in China, Israel, even Iraq-- all over the place.

[Politico]

Well, we are done this exchange if you insist on being partisan instead of objective, and really believe:

A) The American economy is completely screwed and the Great Depression II is underway when the housing market finally clears (Once again, do you really think all of these foreclosed homes the banks are keeping off the market are just going to magically disappear? And do you think buyers do not know what banks are trying to do? It is not a matter of IF the housing market clears, but WHEN it clears, and the actions of the banks/government over the past three years has caused a prolonging of the inevitable. It has probably done more harm than good in the process. I suspect a short, sharp, shock three years ago would have been preferable to this madness, and the road to recovery would truly be underway by now)

B) That banks would have been giving out loans to people who could not possibly pay them back if not for government penalties for NOT giving out such loans (under the auspices of preventing so-called mortgage discrimination, which is nonsense. Banks are not going to discriminate based up on racial characteristics if a loan makes economic sense. They do not care what one looks like. They only care about getting paid their principal and interest, so of course they are not going to make loans to people who cannot pay them back unless some entity is throwing penalties at them for behaving like this. Furthermore, I would have to ask exactly how anybody is benefiting when banks are forced to give loans to people who could not possibly pay back the loan. That hurts everybody involved, and is supremely absurd yet still defended under the banner of "fairness." WHY?). Throw in agencies that assure government "bail outs" if things get a bit hairy in the CDO/MBS markets, and no wonder we have rampant moral hazard...

[Politico]

The basic problem was a worldwide explosion of financial "innovation", aided by globalization of capital, excessive lending and debt, too little regulation, and too much confidence in market prices for assets such as housing. We've seen it again and again and again from Japan to Southeast Asia to the US and Europe. Now we're seeing it in China, Israel, even Iraq-- all over the place.

What all of these nations have in common is agencies that assure government "bail outs" if things get a bit hairy in domestic CDO/MBS markets. That is the one common denominator, and it is no wonder we have rampant moral hazard in these locations.

Securitization and deregulation itself is not the problem. The problem is when you have government entities that tell private firms they are not at risk no matter how risky they behave. If politics stayed out of business and business stayed out of politics, we would not have this problem!

By the way, commercial real estate in the US did not take nearly as much of a hit as the housing market (And it obviously followed the start of the recession, as one would expect commercial real estate to do). You can post all of the links you want, but common sense will eventually lead you to the conclusion why banks were making lots of loans to people who could not possibly pay them back.

[Beet]

Well, we are done this exchange if you insist on being partisan instead of objective, and really believe:

A) The American economy is completely screwed and the Great Depression II is underway when the housing market finally clears (Once again, do you really think all of these foreclosed homes the banks are keeping off the market are just going to magically disappear? And do you think buyers do not know what banks are trying to do? It is not a matter of IF the housing market clears, but WHEN it clears, and the actions of the banks/government over the past three years is just a prolonging of the inevitable. It has probably done more harm than good in the process. I suspect a short, sharp, shock three years ago would have been preferable to this madness)

No, I believe that if you tried to immediately clear the market by kicking out government supports, the economy would go into Great Depression II. This is common sense, not partisanship. I guarantee if you ask 99% of experts in the housing market they will agree with me. Without government supports there would be no mortgage lending in the US, period. Housing sales would immediately collapse by more than half from their currently depressed level, making it even harder for the market to clear.

Basically, I do not think you could even achieve your stated goal of having the market clear immediately by kicking out government supports and liquidating prices, because buying would collapse faster than you could cut prices, and banks would continue to keep REO off the market . Consumer confidence would collapse further, and the banking system would go bust again.

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Are you seriously arguing that the banks never do anything wrong and are completely innocent here? Did you even read a word I wrote? Have you been in a complete coma in the past 10 years? To be completely honest, your complete lunacy and stupidity bother me far more than the content of your opinions. You really seem like you've been brainwashed by some external source. You seem deeply misinformed.

[Beet]

The basic problem was a worldwide explosion of financial "innovation", aided by globalization of capital, excessive lending and debt, too little regulation, and too much confidence in market prices for assets such as housing. We've seen it again and again and again from Japan to Southeast Asia to the US and Europe. Now we're seeing it in China, Israel, even Iraq-- all over the place.

What all of these nations have in common is agencies that assure government "bail outs" if things get a bit hairy in domestic CDO/MBS markets. That is the one common denominator, and it is no wonder we have rampant moral hazard in these locations.

Securitization and deregulation itself is not the problem. The problem is when you have government entities that tell private firms they are not at risk no matter how risky they behave. If politics stayed out of business and business stayed out of politics, we would not have this problem!

By the way, commercial real estate in the US did not take nearly as much of a hit as the housing market (And it obviously followed the start of the recession, as one would expect commercial real estate to do). You can post all of the links you want, but common sense will eventually lead you to the conclusion why banks were making lots of loans to people who could not possibly pay them back.

Your common sense is complete lunacy. The history of banks making bad loans goes all the way back to the Tulip bubble of the 17th century. Banks are human, humans make mistakes, hence banks make mistakes. That's particularly when they are greedy.

You first said it was CRA and Fannie and Freddie, now you're changing your tune to moral hazard. Moral hazard is a problem, but the government has been involved in the housing market in many countries for many decades, however it was not until the last decade that a huge problem occurred in many countries at once. It was also the decade of the most excessive capitalism and unregulated markets. It's not hard to add two and two together.

Anyway, why did the Soviet Union never have a housing bubble and loan defaults? By your logic, since the Soviet Union owned all the housing, the ultimate government intervention, they ought to have had the biggest bubble. And I am not defending the Soviet Union, only illustrating how insane your logic is.

[Politico]

Well, we are done this exchange if you insist on being partisan instead of objective, and really believe:

A) The American economy is completely screwed and the Great Depression II is underway when the housing market finally clears (Once again, do you really think all of these foreclosed homes the banks are keeping off the market are just going to magically disappear? And do you think buyers do not know what banks are trying to do? It is not a matter of IF the housing market clears, but WHEN it clears, and the actions of the banks/government over the past three years is just a prolonging of the inevitable. It has probably done more harm than good in the process. I suspect a short, sharp, shock three years ago would have been preferable to this madness)

No, I believe that if you tried to immediately clear the market by kicking out government supports, the economy would go into Great Depression II. This is common sense, not partisanship. I guarantee if you ask 99% of experts in the housing market they will agree with me. Without government supports there would be no mortgage lending in the US, period. Housing sales would immediately collapse by more than half from their currently depressed level, making it even harder for the market to clear.

This is just not going to happen if the Fed simply ensures that the money supply does not contract. Put all of the foreclosed houses on the market right away, and let the market clear. I guarantee people will start buying houses again now that the price has hit the absolute low. There are so many dollars floating out there, especially abroad. People are just waiting for the price to reach the basement, which it is not going to do so long as we have policies that artificially keep the prices high thereby keeping buyers away from the market (Once again, what in the world makes you think people are going to take out mortgages if there is no assurance that the housing prices are not going to keep going down? People with savings and income do not want to just do that and pay a mortgage that does not equate with the value of the house). If some banks become severely distressed, ensure their survival with direct, zero-rate interest loans if that is what it takes. After the dust settles, break up these distressed banks.

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I never argued that banks never do anything wrong. I pointed out that they do not engage in discrimination. Their goal is to maximize their profit, not to discriminate. If a poor minority cannot afford to pay back a loan, who is being done a service when a bank is forced to make a loan to this poor minority via government regulation (i.e., threats of fines that outweigh the costs of giving a bad loan to said minority)?

Banks make mistakes and fail all of the time. It is perfectly natural. But all banks do not fail together at the same time unless the government has created an environment of perverse incentives and moral hazard. It is true even if some quarters are trying to push a radical agenda that says otherwise.

[Politico]

You first said it was CRA and Fannie and Freddie, now you're changing your tune to moral hazard.

I did not change my tune. I have always said, as summarized in the last paragraph of the above post, that a combination of perverse incentives and moral hazard, both of them created by government entities/policies such as the CRA/Fannie/Freddie, are the root of the problem. Deregulation and securitization itself are not the problem.

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Correlation does not imply causation.

[Beet]

This is just not going to happen if the Fed simply ensures that the money supply does not contract. Put all of the foreclosed houses on the market right away, and let the market clear. I guarantee people will start buying houses again now that the price has hit the absolute low. There are so many dollars floating out there, especially abroad. People are just waiting for the price to reach the basement, which it is not going to do so long as we have policies that artificially keep the prices high thereby keeping buyers away from the market (Once again, what in the world makes you think people are going to take out mortgages if there is no assurance that the housing prices are not going to keep going down? People with savings and income do not want to just do that and pay a mortgage that does not equate with the value of the house). If some banks become severely distressed, ensure their survival with direct, zero-rate interest loans if that is what it takes. After the dust settles, break up these distressed banks.

Now you're talking about a massive government intervention to bail out the banks once your plan inevitably destroys them. The problem is that there is still no mortgage lending without the FHA, Fannie and Freddie. You understand that, right? The banks are not giving anyone mortgages, period. So your plan not only have the government continuing to support the housing market by providing mortgages, but another bank bailout.

Even with that said, I'm not sure your plan could work, but it's better than withdrawing all government support from the housing market. A big problem right now is that a lot of the troubled housing can't be foreclosed on because of paperwork delays. Also, driving down the price of housing below the current level would put many households further underwater, probably much more than today. You would need housing prices to drop to well below the historical average to order to 'clear' the market- possibly 50% lower. You're also betting on the Chinese to come in and massively buy up US housing, which is really risky not to mention politically problematic. And even then who knows if there'll be enough buyers?

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You tried to argue that banks could not possibly make a bad loan unless it was ordered to do so by the government. Probably one of the most absurd arguments I've ever seen on this board, and with opebo around that's saying something.

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Then you're wrong about that, too.

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No regulation is forcing banks to make any loan that can't be repaid.

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Banks have failed together in every financial bubble since the beginning of time- without the help of the government. The nature of the financial system is that confidence is intertwined. That's what a 'panic' is. Your argument is like saying companies never fail together in a free market. That's what a 'recession' is. You seem to be ignorant of the basic terms of economics that even a high schooler could understand.