Keynes Lives!

THE ABSURD TIMEs

Illustrations: Top, Paul Krugman wins the Nobel Prize in Economics. This illustrates the fact that the inane days of Milton Friedman are over. During his days of huge influence, every discussion I had with one of the morons ended with them saying "You just don't understand Economics." Now, I do understand Economics. All it took was a world-wide crash.

Second: One of you sent this: illustrates nicely the "flat earth" approach of "supply-side" economics.

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From the campaign: McCain starts off one of his speeches with "My fellow prisoners,...." Is he having flashbacks? No one on his campaign notices at all. Then his crowds start yelling "terrorist," "kill him," and so forth, and McCain just smiles. Finally, one woman called Obama "an Arab," and that was just too much. I mean, you can't let things get outta hand. McCain shook his head and said "No, he is a decent person."

They sent Sarah to drop the first puck at a Flyer's game in Plilly. This really show how out of touch they are. According to Bob Ueker, they boo kids at Easter Egg hunts. They have booed everyone except Kate Smith while she sang "God Bless America." I can't trust such an organization in the White House. Total lack of reality.

Here's another article:

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The Fannie/Freddie Flat Earth Theory

October, 14 2008

By Dean Baker
Source: t r u t h o u t

Dean Baker's ZSpace Page
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For the last month, most of the world has been watching the Wall Street gang drowning in their own greed as they threaten to pull the rest of us down with them. However, while we have been distracted, the Flat Earth Society has developed its narrative to explain the crisis.

In the Flat Earth version, the real villains in the story were the public/private mortgage giants Fannie Mae and Freddie Mac. Prominent Congressional Democrats like Senators Charles Schumer and Chris Dodd, and Representative Barney Frank, are cited as accomplices. According to the Flat-Earthers, the problem wasn't sleaze bag bankers pulling down tens of millions a year pushing predatory loans to people who didn't understand them; the real problem was Congressional Democrats, who wanted the government to help the poor and minorities buy homes.

Before addressing the Flat Earth argument, I should be very clear that I have long been a harsh critic of Fannie and Freddie. They committed a colossal mistake by failing to recognize the housing bubble. It is understandable that you could miss an $8 trillion housing bubble if you drive a bus or sell shoes for a living. It's a little harder to accept this sort of mistake from companies that own or guarantee trillions of dollars of mortgage debt.

I first warned that the collapse of the housing bubble would lead to serious problems for Fannie and Freddie in the fall of 2002 , before they began to move into the risky mortgages that were the immediate cause of their collapse. When almost all you own is mortgage debt, and the mortgage default rate rises to several times its normal level, it is virtually guaranteed that you're going to face serious problems. Obviously, Fannie and Freddie's venture into more risky mortgages in the years 2005 to 2007 worsened the problem.

While no one should shed any tears over the collapse of these two giants - the top management and shareholders got what they deserved - it is equally ridiculous to lay the blame for the financial crisis on the shoulders of Fannie and Freddie.

The underlying problem was the housing bubble, which Alan Greenspan allowed to grow unchecked and, arguably, actively promoted. The bubble was accentuated by the willingness of banks to ignore normal prudential standards in issuing mortgages and to make loans that they knew could not be paid off by the borrowers. And, of course, leveraging themselves to the sky guaranteed full-fledged disaster

Banks would issue these loans because they knew they could dump them into the secondary market where securitizers would peddle them off to suckers all round the world. This is where Fannie and Freddie came in. They purchased many of the junk mortgages issued by banks in the years 2005 to 2007. According to the Flat-Earthers, this makes Fannie and Freddie the cause of the current crisis.

There is one basic problem with the Flat Earth story: Fannie and Freddie jumped into the junk mortgage market because they were trying to keep pace with the private issuers of mortgage-backed securities. Fannie and Freddie made a conscious decision to dive into the junk in order to protect their market share, which was being seriously eroded by the aggressive tactics of private giants like Citigroup and Merrill Lynch.

The market share of Fannie and Freddie. in the years 2004 to 2007, never came close to its level before the junk market took off. According to data from the Federal Reserve Board, Fannie and Freddie securitized $315.2 billion worth of mortgages in 2002, accounting for 50.1 percent of the new mortgage debt that year. In 2006, they securitized $276.0 billion in mortgages, giving them a market share of just 34.8 percent.

Fannie and Freddie's conduct was despicable. Their decision to dive into the junk certainly contributed to the further expansion of the bubble and worsened the pain from its eventual collapse. However, they were followers, not leaders. They didn't cause the bubble and the subprime craziness. This train had already left the station. Fannie and Freddie's crime was going along for the ride.

Fannie and Freddie could have instead played a positive role in this crisis. Suppose in 2004 or 2005 one of these mortgage giants issued a statement warning of the dangerous over-valuation in many housing markets across the country. Instead of easing mortgage standards, imagine that Fannie or Freddie announced that it was tightening its rules for mortgages in the most over-valued markets, requiring nonborrowed down payments of 20 percent, or even 30 percent, in order to protect against anticipated price declines.

This action would have produced howls of outrage from builders, realtors, and other big beneficiaries of the housing bubble. It also would have led to headlines and possibly some serious analysis of the evidence for a housing bubble. It may have saved the country from much of the pain it is now suffering.

But this sort of step would have required real courage and leadership, traits rarely found in high positions in Washington, or on Wall Street. Fannie and Freddie should be blamed for following the herd off the cliff. They stand out as especially big sheep. But only the Flat-Earthers could make them the main villains in this story.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of "The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer" (www.conservativenannystate.org). He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues. You can find it at the American Prospect's web site.

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