The Great Depression: The sequel

Leonard seems to appreciate the gravity of the situation we are in. However, he doesn't seem to truly grasp the cause: a regulation failure, not a "free market" failure. Here's a letter I (apk) wrote to him which did not earn the privilege of any response:

Andrew,

I think your article is lucid in many ways, and I am glad to see someone else warning and sounding the alarm. But but there's something I don't get.

How can the reduction in "bailout" programs be a cause of the mortgage collapse and our other economic ills?

That is like saying that if we only had more people on food stamps, there would be no hunger problem. While that is true in a trivial sense, something would be seriously wrong with a country with 50% of its people on government food programs. One would hope no one desires for that to be the permanent state of things.

Further, what "reduction" in safety nets are you referring to? It's not as if Fannie, Freddie, FHA, and the FHLB's ever went away. In fact, Fannie and Freddie went on functioning as aggressively as ever even when their portfolios were capped due to their Enron-esque scandals -- the companies simply switched to securitizing loans instead of holding them for investment. Since the whole point of the GSEs is to apply a shady, quasi-government guarantee to private sector securities to make them cheaper for borrowers, the mission was still accomplished, and more efficiently than ever!

(And look where that got us).

Further, the FHA is little more than a government subprime lender (albeit, at less usurious rates, since the program is subsidized by everyone not on the program). Do you mean to suggest that the recent increase in that program's usage is a good thing? Forgive me, but as a renter I find it hard to get excited about this. Maybe I should "get with the program" and go get an FHA mortgage an hour's commute from anywhere worth being, which is how far I'd have to go to find affordable housing.

The line of reasoning reminds me of people who suggest that incomes are less evenly distributed now because of flatter taxes. But taxes don't effect income, they effect how much the government collects from it. So something else "environmental" is going on which is resulting in less evenly distributed income (and wealth) before the government takes whatever its cut is.

I think if you connect all the dots, you'll find that the cause has to do with access to capital, vs. access to debt, and with what happens to people's money after they earn it (hint: inflation, plus giving it to Wall Street sight-unseen are big problems). It has nothing to do with direct government bailouts or redistribution. These things are by their nature band-aids; they do not "fix the problem". Safety nets are not there for routine use.

I do indeed think something is seriously wrong with the "neoliberal" economic model that went into full swing with the Reagan era, but it isn't that it fails to be the FDR model. The problem is that it's closer to institutionalized cronyism -- a kind of "Wall Street fascism" -- than free market capitalism.

best,

Aaron Krowne
Implode-o-Meter