From Bubble to Depression - Why the housing crash ruined the financial system but the dot-com collapse did not.

And further, in this downturn, the government is compounding the problem by transmitting the losses to the public balance sheet at unprecedented levels, effectively shutting down the private markets it is "bailing out" in favor of public support (of course, with the private corporations and investors allowing to retain far more profits and avoid far more losses than they truly deserve).

The piece is pretty good. It drives home the point that various sorts of government intervention and folly combined to make this the biggest bubble in history. Bubbles this big don't happen purely (or even mostly) because of "private sector greed" (something our friends at iTulip.com have been early in pointing out).

A few nits to pick: we don't really buy that the failure to include home prices directly in the CPI "blinded" the Fed to rising house prices. Any such blindness was very willfull, especially with a Fed Chairman (Greenspan) who did his PhD on the wealth effect of rising home prices in housing bubbles. In truth, either no "financialized" assets belong in the CPI, or they all belong in the CPI (we favor a parallel "debt burden" cost of living index).

In addition, the piece leaves out the massive effect on mortgage rates due to "dollar recycling" of the trade deficit. Recall that when Greenspan started raising rates in 2006, mortgage rates stayed stubbornly low. This was called a "paradox", but it was likely due to the simple continuation of buying of Agency securities (Fannie, Freddie, and Ginnie) by foreign central banks, which was also present on the upside of the bubble. While this seems neutral, the policy is actually a histortically unusual one on the part of government, in that it involves endless and "effortless" growth of debt as a "solution" to imbalanced trade (Geithner, as it turns out, had a big role in promoting this approach in response to the Asian financial crisis).

But overall, a really refreshing article. Without saying so explicitly, it basically argues that the Keynesian and Monetarist analyses and policy approach to bubbles is wrong, in favor of essentially an Austrian money/credit analysis:

The events of the past 10 years have an eerie similarity to the period leading up to the Great Depression. Total mortgage debt outstanding increased from $9.35 billion in 1920 to $29.44 billion in 1929. In 1920, residential mortgage debt was 10.2% of household wealth; by 1929, it was 27.2% of household wealth.

The Great Depression has been attributed to excessive speculation on Wall Street, especially between the spring of 1927 and the fall of 1929. Had the difficulties of the banking system been caused by losses on brokers' loans for margin purchases in 1929, the results should have been felt in the banks immediately after the stock market crash. But the banking system did not show serious strains until the fall of 1930.

Bank earnings reached a record $729 million in 1929. Yet bank exposures to real estate were substantial; as the decline in real estate prices accelerated, foreclosures wiped out banks by the thousands. Had the mounting difficulties of the banks and the final collapse of the banking system in the "Bank Holiday" in March 1933 been caused by contraction of the money supply, as Milton Friedman and Anna Schwartz argued, then the massive injections of liquidity over the past 18 months should have averted the collapse of the financial market during this current crisis.

-apk