Correcting Krugman

Paul Krugman and Robin Wells caricature my recent book Fault Lines in an article in The New York Review of Books. The article, and their criticism, however, do have a lot to say about Krugman’s policy views (for simplicity, I will say “Krugman” and “he” instead of “Krugman and Wells” and “they”), which I have disagreed with in the past. Rather than focus on the innuendo about my motives and beliefs in the review, let me focus on differences of substance. I will return to why I believe Krugman writes the way he does only at the end.

First, Krugman starts with a diatribe on why so many economists are “asking how we got into this mess rather than telling us how to get out of it.”? Krugman apparently believes that his standard response of more stimulus applies, regardless of the reasons why we are in the economic downturn. Yet it is precisely because I think that the policy response to the last crisis contributed to getting us into this one that it is worthwhile examining how we got into this mess, and to resist the unreflective policies that Krugman advocates.

My book emphasizes a number of related fault lines that led to our current predicament. Krugman discusses and dismisses two — the political push for easy housing credit in the United States and overly lax monetary policy in the years 2002-2005 — while favoring a third, the global trade imbalances (which he does not acknowledge are a central theme in my book). I will argue shortly, however, that focusing exclusively on the imbalances as Krugman does, while ignoring why the United States became a deficit country, gives us a grossly incomplete understanding of what happened. Finally, Krugman ignores an important factor I emphasize — the incentives of bankers and their willingness to seek out and take the tail risks that brought the system down.

Let me start with the political push to expand housing credit. I argue that in an attempt to offset the consequences of rising income inequality, politicians on both sides of the aisle pushed easy housing credit through government units like the Federal Housing Administration, and by imposing increasingly rigorous mandates on government-sponsored enterprises such as Fannie Mae and Freddie Mac. Interestingly, Krugman neither disputes my characterization of the incentives of politicians, nor the detailed documentation of government initiatives and mandates in this regard. What he disputes vehemently is whether government policy contributed to the housing bubble, and in particular, whether Fannie and Freddie were partly responsible.

In absolving Fannie and Freddie, Krugman has been consistent over time, though his explanations as to why Fannie and Freddie are not partially to blame have morphed as his errors have been pointed out. First, he argued that Fannie and Freddie could not participate in sub-prime financing. Then he argued that their share of financing was falling in the years mortgage loan quality deteriorated the most.? Now he claims that if they indeed did it (and they did not), it was because of the profit motive and not to fulfill a social objective. Let me offer details.

In a July 14, 2008 op-ed in The New York Times, Krugman explained why Fannie and Freddie were blameless thus:

Partly that’s because regulators, responding to accounting scandals at the companies, placed temporary restraints on both Fannie and Freddie that curtailed their lending just as housing prices were really taking off. Also, they didn’t do any subprime lending, because they can’t: the definition of a subprime loan is precisely a loan that doesn’t meet the requirement, imposed by law, that Fannie and Freddie buy only mortgages issued to borrowers who made substantial down payments and carefully documented their income. So whatever bad incentives the implicit federal guarantee creates have been offset by the fact that Fannie and Freddie were and are tightly regulated with regard to the risks they can take. You could say that the Fannie-Freddie experience shows that regulation works. [emphasis mine]

Critics were quick to point out that Krugman had his facts wrong. As Charles Calomiris, a professor at Columbia University, and Peter Wallison, of the American Enterprise Institute (and member of the Financial Crisis Inquiry Commission), explained, “Here Krugman demonstrates confusion about the law (which did not prohibit subprime lending by the GSEs), misunderstands the regulatory regime under which they operated (which did not have the capacity to control their risk-taking), and mismeasures their actual subprime exposures (which he wrongly states were zero).”

So Krugman shifted his emphasis. In his blog critique of a Financial Times op-ed I wrote in June 2010, Krugman no longer argued that Fannie and Freddie could not buy sub-prime mortgages. Instead, he emphasized the slightly falling share of Fannie and Freddie’s residential mortgage securitizations in the years 2004 to 2006 as the reason they were not responsible. Here again he presents a misleading picture. Not only did Fannie and Freddie purchase whole sub-prime loans that were not securitized (and are thus not counted in its share of securitizations), they also bought substantial amounts of private-label mortgage-backed securities issued by others. When these are taken into account, Fannie and Freddie’s share of the sub-prime market financing did increase even in those years.

“Asset prices and bubbles have momentum. Even if Fannie and Freddie had simply ignited the process, and not fueled it in the go-go years of 2004-2006, they would bear some responsibility.”

Of course, one could question this form of analysis. Asset prices and bubbles have momentum. Even if Fannie and Freddie had simply ignited the process, and not fueled it in the go-go years of 2004-2006, they would bear some responsibility. Krugman never considers this possibility.

In the current review piece, Krugman first quotes the book by Nouriel Roubini and Stephen Mihm: “The huge growth in the subprime market was primarily underwritten not by Fannie Mae and Freddie Mac but by private mortgage lenders like Countrywide. Moreover, the Community Reinvestment Act long predates the housing bubble…. Overblown claims that Fannie Mae and Freddie Mac single-handedly caused the subprime crisis are just plain wrong.”

Clearly, Fannie and Freddie did not originate sub-prime mortgages directly — they are not equipped to do so. But they fuelled the boom by buying or guaranteeing them. Indeed, Countrywide was one of their largest originators of sub-prime mortgages, according to work by Ed Pinto, a former chief credit officer of Fannie Mae, and participated from very early on in Fannie Mae’s drive into affordable housing.

For instance, consider this press release from 1992:

Countrywide Funding Corporation and the Federal National Mortgage Association (Fannie Mae) announced today that they have signed a record commitment to finance $8 billion in home mortgages. Fannie Mae said the agreement is the single largest commitment in its history…The $8 billion agreement includes a previously announced $1.25 billion of a variety of Fannie Mae’s affordable home mortgages, including reduced down payment loans…

“We are delighted to participate in this historic event, and we are particularly proud that a substantial portion of the $8 billion commitment will directly benefit lower income Americans,” said Countrywide President Angelo Mozilo…”We look forward to the rapid fulfillment of this commitment so that Countrywide can sign another record-breaking agreement with Fannie Mae,” Mozilo said.

“Countrywide’s commitment will provide home financing for tens of thousands of home buyers, ranging from lower income Americans buying their first home to middle-income homeowners refinancing their mortgage at today’s lower rates,” said John H. Fulford, senior vice president in charge of Fannie Mae’s Western Regional Office located here.

Of course, as Fannie and Freddie bought the garbage loans that lenders like Countrywide originated, they helped fuel the decline in lending standards. Also, while the Community Reinvestment Act was enacted in 1979, it was the more vigorous enforcement of the provisions of the Act in the early 1990s that gave the government a lever to push its low-income lending objectives, a fact the Department of Housing and Urban Development (HUD) was once proud of (see the HUD press releases below).

Perhaps more interesting is that after citing Roubini and Mihm, Krugman repeats his earlier claim: “As others have pointed out, Fannie and Freddie actually accounted for a sharply reduced share of the home lending market as a whole during the peak years of the bubble.” Now he attributes the inaccurate claim that Fannie and Freddie accounted for a sharply reduced share of the home lending market to nameless “others.” But that is just the prelude to changing his story once again: “To the extent that they did purchase dubious home loans, they were in pursuit of profit, not social objectives—in effect, they were trying to catch up with private lenders.”? In other words, if they did do it (and he denies they did), it was because of the profit motive.

Clearly, everything Fannie and Freddie did was because of the profit motive — after all, they were private corporations. But I don’t know how we can tell without more careful examination how much of the lending they did was to meet the government’s affordable housing mandates or to curry favor with Congress in order to preserve their profitable prime mortgage franchise, and how much was to increase the bottom line immediately.? Perhaps Krugman can tell us how he determined their intent?

Interestingly, before the housing market collapsed, HUD proudly accepted its role in pushing low-income lending through the various levers that Krugman now denies were used. For instance, in 2000 when it announced that it was increasing Fannie and Freddie’s affordable housing goals, it concluded:

Lower-income and minority families have made major gains in access to the mortgage market in the 1990s. A variety of reasons have accounted for these gains, including improved housing affordability, enhanced enforcement of the Community Reinvestment Act, more flexible mortgage underwriting, and stepped-up enforcement of the Fair Housing Act. But most industry observers believe that one factor behind these gains has been the improved performance of Fannie Mae and Freddie Mac under HUD’s affordable lending goals. HUD’s recent increases in the goals for 2001-03 will encourage the GSEs to further step up their support for affordable lending.”

And in 2004, when it announced yet higher goals, it said:

Over the past ten years, there has been a ‘revolution in affordable lending’ that has extended homeownership opportunities to historically underserved households. Fannie Mae and Freddie Mac have been a substantial part of this ‘revolution in affordable lending’. During the mid-to-late 1990s, they added flexibility to their underwriting guidelines, introduced new low-down payment products, and worked to expand the use of automated underwriting in evaluating the creditworthiness of loan applicants. HMDA data suggest that the industry and GSE initiatives are increasing the flow of credit to underserved borrowers. Between 1993 and 2003, conventional loans to low income and minority families increased at much faster rates than loans to upper-income and nonminority families.

IIf the government itself took credit for its then successes in expanding home ownership, why is Krugman not willing to accept its contribution to the subsequent bust as too many lower middle-class families ended up in homes they could not afford? I agree there is room for legitimate differences of opinion on the quality of data, and the extent of government responsibility, but to argue that the government had no role in directing credit, or in the subsequent bust, is simply ideological myopia.

Let me move on to Krugman’s second criticism of my diagnosis of the crisis. He argues that the Fed’s very accommodative monetary policy over the period 2003 to 2005 was also not responsible for the crisis. Here Krugman is characteristically dismissive of alternative views. In his review, he says that there were good reasons for the Fed to keep rates low given the high unemployment rate. Although this may be a justification for the Fed’s policy (as I argue in my book, it was precisely because the Fed was focused on a stubbornly high unemployment rate that it took its eye off the irrational exuberance building in housing markets and the financial sector), it in no way validates the claim that the policy did not contribute to the manic lending or housing bubble.

A second argument that Krugman makes is that Europe too had bubbles and the European Central Bank was less aggressive than the Federal Reserve, so monetary policy could not be responsible. It is true that the European Central Bank was less aggressive, but only slightly so: It brought its key refinancing rate down to only 2 percent, while the Fed brought the Fed Funds rate down to 1 percent. Clearly, both rates were low by historical standards. More important, what Krugman does not point out is that different Euro-area economies had differing inflation rates, so the real monetary policy rate was substantially different across the Euro area despite a common nominal policy rate. Countries that had strongly negative real policy rates — Ireland and Spain are primary exhibits — had a housing boom and bust, while countries like Germany with low inflation, and therefore higher real policy rates, did not. Indeed, a working paper by two ECB economists, Angela Maddaloni and José-Luis Peydró, indicates that the ultra-low rates enforced by both the ECB and the Fed at this time had a strong causal effect in relaxing banks’ commercial, mortgage, and retail lending standards over this period.

I admit that there is much less consensus on whether the Fed helped create the housing bubble and the banking crisis than on whether Fannie and Freddie were involved. Ben Bernanke, a monetary economist of the highest caliber, denies it, while John Taylor, an equally respected monetary economist insists on it. Some Fed studies accept responsibility while others deny it. Krugman, of course, has an interest in defending the Fed and criticizing alternative viewpoints. He himself advocated the policies the Fed followed, and in fact, was critical of the Fed raising rates even when it belatedly did so in 2004. Then, as he does now, Krugman emphasized the dangers from a Japanese-style deflation, as well as the slow progress in bringing back jobs. Then, as he does now, he advocated more stimulus. Then, as he does now, Krugman ignored the longer term adverse consequences of the policies he advocated.

“The United States did not have to run a large trade deficit and absorb the capital inflows – the claim that it had to sounds very much like that of the over-indulgent and over-indebted rake who blames his creditors for being willing to finance him. “

Finally, if he denies a role for government housing policies, or for monetary policy, or even for warped banker incentives, then what does Krugman attribute the crisis to? His answer is over-saving foreigners. Put simply, trade-surplus countries like Germany and China had to reinvest their financial surpluses in the United States, pushing down long-term interest rates in the process, and igniting a housing bubble that eventually burst and led to the financial panic. But this is only a partial explanation, as I argue in my book. The United States did not have to run a large trade deficit and absorb the capital inflows – the claim that it had to sounds very much like that of the over-indulgent and over-indebted rake who blames his creditors for being willing to finance him. The United States’s policies encouraged over-consumption and over-borrowing, and unless we understand where these policies came from, we have no hope of addressing the causes of this crisis.? Unfortunately, these are the policies that Krugman wants to push again. This is precisely why we have to understand the history of how we got here, and why Krugman wants nothing to do with that enterprise.

There is also a matter of detail suggesting why we cannot only blame the foreigners. The housing bubble, as Monika Piazzesi and Martin Schneider of Stanford University have argued, was focused in the lower income segments of the market, unlike in the typical U.S. housing boom. Why did foreign money gravitate to the low income segment of the housing market? Why did past episodes when the U.S. ran large current account deficits not result in similar housing booms and busts?? Could the explanation lie in U.S. policies?

My book suggests that many — bankers, regulators, governments, households, and economists among others — share the blame for the crisis. Because there are so many, the blame game is not useful. Let us try and understand what happened in order to avoid repeating it. I detail the hard choices we face in the book. While it is important to alleviate the miserable conditions of the long-term unemployed today, we also need to offer them incentives and a pathway to building the skills that are required by the jobs that are being created. Simplistic mantras like “more stimulus” are the surest way to distract us from policies that generate sustainable growth.

Finally, a note on method. Perhaps Krugman believes that by labeling other economists as politically extreme, he can undercut their credibility. In criticizing my argument that politicians pushed easy housing credit in the years leading up to the crisis, he writes,? “Although Rajan is careful not to name names and attributes the blame to generic ‘politicians,’ it is clear that Democrats are largely to blame in his worldview.” Yet if he read the book carefully, he would have seen that I do name names, arguing both President Clinton with his “Affordable Housing Mandate” (see Fault Lines, page 35), as well as President Bush with his attempt to foster an “Ownership Society” (see Fault Lines, page 37) pushed very hard to expand housing credit to the less well-off. Indeed, I do not fault the intent of that policy, only the unintended consequences of its execution. My criticism is bipartisan throughout the book, including of the fiscal policies followed by successive administrations. Errors of this kind by an economist of Krugman’s stature are disappointing.


buck

a serial novel? paid by the word?

I dare say that such writing is not commensurate with the avg reader of this blog.

"My book suggests that many - bankers, regulators, governments, households, and economists among others - share the blame for the crisis. "

May I suggest that recessions are beasts of nature that man and woman may only attempt to quell, but recessions are enivitable creatures that arise from the trading of goods and services. As in nature, I surmise that whoever left the fox to guard the hen house has thou a good burden of blame. Possibly those are the banker, regulators, government and candle stick makers, though I am not quite sure.

Jorge

It is indeed very complicated to discuss, at the same time, what where the causes of our financial crisis and if the policies proposed by Krugman are adequate or not. I have the feeling that by getting into these broad arguments we sacrifice perspective and context. I have no idea the political motivations that you may or may not have in reference to your economic perspective. I do understand Krugman's and I think he is very clear and straightfoward about his political views and economic ones.
But the notion that this financial mess, developed and brewed at the center of our biggest financial institutions, with levels of leverage that were insane, trading on papers worth...whatever, and to somehow try to put the blame on the idea of helping poor people buying houses is a very bad joke. You used the words "some responsiblity" referring to F&F, fine, the word "some" is not a defined number. But if normal regulations had been in place, and the financial system would have not acted in such an irresponsible way, with the goverment looking somewhere else, the sub-prime mess would have never reached the magnitude of this crisis. The numbers simply do not add up.

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Matt

Krugman's no oracle, but at least he doesn't seem to have such strong, far-right, ideological views that his analysis can never do anything but verify those prior beliefs.

Perhaps unsurprising that a professor not even of economics but of finance from U. Chicago doesn't seem to have escaped this trap...

MjB

@ HD

You're argument that "no one held fire to banker's feet forcing them to make loans they KNEW could never be repaid." reflects the fundamental misconception that those that blame the private sector generally suffer. Obviously laws, regulation and government intervention don't generally say "Hey - go out there and cripple the society". They don't force people to do bad things (in normal times); society is crippled by theUNINTENDED CONSEQUENCES when they say, "Hey - we need to help poor people", or "Hey - we need domestic agriculture", or "Hey - healthcare is a right". The government created rules and regulations that allowed bankers to get off the hook as long as their loans furthered social goals. If the market were left alone, bankers would've realized that "Hey - this could blow up in my face", and they would have toned down the frenzy. Instead, they didn't even bother to look closely, because if it blew up it would blow up in the taxpayers face. If you make too many rules they become and end in themselves - that is what is ultimately responsible for this mess.

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Charles

The problem here is that economists are not scientists; at best they are applied scientists but even then there is rather little science involved.

Scientists care about getting causation right and are generally uninterested in "blame", which is a ungainly fusion of causation and morality.

On the causation side the inability to do serious empirical work degrades economic analysis into competing claims of statistical explanations that are inevitably self-determined by arbitrary recourse to alternative suites of variable rounding and data set choice. It would go too far to suggest that economic analysis can support any causation explanation in a given real-world situation (i.e. not the all too typical unrealistic theoretical simulation thereof!); however, economic analysis can generally support a very wide continuum of plausible causation claims for each given scenario.

But the worst part comes next: whether by directly appealing to moral belief systems or by presenting tendentious causal analysis that relies upon readers to connect the obvious dots, economists are hopelessly mired in morality plays. Morality is always going to be in the eye of the beholder and in Krugman vs. Rajan we have two very different beholders.

Because both warring protagonists focus on blame, their respective salvos are inevitably amalgams of causal analysis and moral judgment. Readers will generally pick one or the other on the basis of emotional identification with the particular morality advocated. But there is one and only one inevitable certainty: neither side will be able to base its arguments on anything even remotely resembling scientific rigor.

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Michael

PLEASE don't let Freakonomics get co-opted by this rubbish.

A friggin NOVEL-length rebuttal of a review the author didn't like? That's petty to begin with. An author takes his lumps and lets his book speak for itself.

The fact that Mr. Rajan spends any time at all attempting to discredit Krugman rather than stick to factual rebuttal is enough to have any decent editor draw a big red X through this one and assign it to the round file.

Donna

Mr. President, why don't you address mortgage fraud which caused billions of dollors loss for the Americans? Why not hold Wells Fargo accountable for making mortgage loan based on hugely inflated appraisal?

How many jobs have to be created and how hard taxpayers have to work in order to fill up the deep hole mortgage fraud has created for the society? Bottom line, where is justice when the largest mortgage lender Wells Fargo is foreclosing home based on fraudulent loan and hugely inflated appraisal. Isn't it prosecutable crime that majority of State Attorney General's offices are prosecuting?

Where is HOPE for homeowners? Is it too much to expect that Wells Fargo, the largest mortgage lender in US not to defraud homeowners like us by making fraudulent loan and foreclosing home based on hugely inflated appraisal?
http://www.wellsfargomortgagefraud.com

Kent

@Jorge (#18): Actually, I find the notion that poor people should be able to buy houses to be ludicrous. The entire definition of "poor" is "not able to buy much" and the idea that there was some financial sleight of hand that would make people without much money buy things that are very expensive was stupid, and look where it got us.

Yeah, a lot of things went wrong along the way to cause this catastrophe, on the part of regulators and the financial industry. But at the end of the day, this never would have happened if we'd just told poor people who wanted to buy homes that the answer was to simply work harder, save more money and be patient.

Instead, somebody got it in their heads that home ownership was a right guaranteed in the Constitution.

Barry Ritholtz

My book (Bailout Nation) was mentioned by Krugman (fn 5) as an example of "commentaries debunking the government-did-it thesis" that you (according to his review) adhere to.

I have not gotten to your book yet, but I will ask you the same question I ask everyone else who puts forth the "CRA/Fannie/Freddie did it" argument:

If the US legislative policies that encourage home ownership are the root cause of the crisis, why was there a simultaneous global real estate boom and bust ?

The CRA does not cover banks in Europe or Asia; Yet their home prices spiked, in many places, more than ours. (See this chart: http://www.ritholtz.com/blog/2010/07/global-housing-boom/)

Does Fannie Mae/Freddie Mac buy loans in Great Britain, Spain, France, Ireland, Norway, Denmark, Scotland, Italy, Portugal, Sweden or Netherlands? Of course the answer is no. So how come they had a an even bigger Real Estate boom/bust cycle than that in the US? Finland, S. Korea, and New Zealand didn't quite rise to the level of our boom & bust, but they came close. Why?

How did Fannie/Freddie (and/or the CRA) be responsible for what happened in these other nations when you had very similar, simultaneous, global rise and fall in prices?

Understand, I am no defender of the GSEs - we publicly recommended shorting Fannie Mae back when its stock was over $40, due to its terrible management, accounting frauds, and awful balance sheet. And now, I have accused the GSEs of becoming a backdoor bailout for the banks -- no congressional vote needed! -- and a dumping ground for much of the bigger banks bad mortgages.

My research found that Fannie & Freddie were just another pair of lousy banks, and they contributed to the collapse about as much as Citigroup and Bank of America did.

For those of you who still want to believe the political talking point that it was mostly FNM/FRE/CRA's fault, the question remains: What caused these other nations to boom the same time the USA did? If you cannot explain that, your argument fails.

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Barry Ritholtz

One last thing: as you tell from its title, the "Community Reinvestment Act of 1977" was actually enacted in 1977, not 1979 as you stated above.

For those of you who might be interested in reading the act and learning more about it, the act is here:

12 U.S.C. 2901
Section 801 of title VIII of the Act of October 12, 1977 (Pub. L. No. 95--128; 91 Stat. 1147), effective October 12, 1977]

http://www.fdic.gov/regulations/laws/rules/6500-2515.html

Owen

Why does this blog seem so nice for so much time and then spurt-random-right-wing-ideology? <-- that's from wikipedia right there.

Jake Wagner

Rajan correctly points out that there were several reasons for the economic downturn of 2007-2010. I agree that not only was the global trade imbalance a factor, but also the low interest rates of the Fed and the lax standards for loans for low-income borrowers.

Yet there is a fourth contributing reason. That is an issue that has been afflicting the US for a long time but only in the last decade has become a truly dominant contributor to declining living standards, rising unemployment and the development of the current Great Recession.

That issue is overpopulation. To put it simply, the US population has grown by 28 million in the last decade, which works out to a growth rate of .9% or 230,000 new residents every month. In order to provide the natural resources for stable living standards, one would need to grow water, oil and oil substitutes and land for growing food at .9% per year, or make improvements in technology that compensate for the inability to grow these natural resources.

Overpopulation is not just larger numbers of people, but also larger numbers of children among the poor who are least able to afford adequate educations. Thus the increased population also means a lower average level of skills for the new workers entering the economy.

Policies for addressing overpopulation are relatively simple, but politically unpopular. For one thing, the US must cut illegal immigration to zero. For another, the US should make all forms of family planning available and provide financial incentives for smaller family size.

The world no longer has abundant and plentiful new resources to exploit, and the effects of overcrowding are becoming increasingly evident. One effect, for example, is global warming. Without planning for zero population growth, the US is doomed to gradually declining living standards.

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Christopher Strom

I'm neither an economist nor connected to finance, but in engineering, when the root cause of a catastrophic failure (regardless of whether or not it is identified) is contingent upon a variety of overlapping and interrelated circumstances, one looks more towards a flawed process rather than a defective part.

When a house of cards collapses, if we spend our energies determining if it was the Jack of Diamonds or the Three of Clubs that precipitated the fall, we will find that we construct another house of cards to replace the first.

But then, fixing blame has ever been simpler than fixing a problem.

Tom Altman

Thank you for an outstanding, logical, well-reasoned, well-presented -- and oh so badly needed! -- response to Mr. Krugman. Some here disliked the length of the post; I found it entirely appropriate and most helpful, as it allowed Mr. Rajan to explain and document, rather than merely assert, examples of the errors and inconsistencies inherent in Mr. Krugman's articles.

Mr. Krugman has a bully pulpit and some fine credentials, but seems somewhere to have gotten so caught up in his policy advocacy that he has forgotten key basic economic principles and their inevitable implications. As Mr. Rajan notes here, Mr. Krugman has also resorted to a series of varying, inconsistent "reasons" for objecting to what he does not like -- it's stunning to see a single blog entry like this catch him in so many apparently deliberate misstatements and mis-recollections.

Per the old adage, Mr. Krugman and his followers are certainly entitled to their own opinions about these important and complex matters, but not to their own facts -- especially their efforts to change those "facts" as needed over time to continue to support what appear to me to be pretty badly discredited, demonstrably unsuccessful policy analyses and recommendations.

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WholeMealOfFood

This is excellent. Don't expect an intelligent response from Krugman...

jk

Dear Sir,

I have the patience of a tse-tse fly, so I have not even read you entire article, yet. But your point re FNMA & FRE are absolutely correct. You can completely go so far as to say, there is really, absolutely, no difference whether they originated 'sub-prime' loans or simply securitized them, in market terms, the distinction is irrelevant. They created the market for them by setting up the securitization process. And by the by, any loan that is not 20% down, even to borrowers with good credit, can be considered 'sub-prime'. A better term to use may be non-conforming. It eliminates the bad credit aspect of making 'sub-prime' loans. Even when you make a poorly collateralized loan to a person with good credit, it will perform differently than a properly secured loan to a person with good credit.

By setting up the super-structure for 'conforming fnma' loans, and insurance for the portion of loans above 80 LTV, and having rating agencies rate the various securities, the various government and private agencies insurances and assurances acted as a sort of lithium to investors. It was the appearance of due diligence and insurance, without the actual presence of it. Like so may other government agencies (food safety, mining, oil drilling......all have the appearance of oversight without any actual oversight) In this way government really acts as a facilitator of private interests, and not a regulator of them. Actually helping bubbles to build. A free market, with no oversight (other than lets say environmental), would compel investors more carefully consider various investments.

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jk

also to add--anybody that thinks this alphabet soup of government agencies need to exist is just wrong--its a litmus test non starter

Smitty

I think you are right to say that many share the blame for the crisis, including government. But by placing undue focus on the less important causes, like Fannie Mae and Freddie Mac, you are de-emphasizing the root causes of the crisis. By doing this, you make the road to recovery more difficult. If we can't face up to the true failures in our government, how will we fix it? By attempting to place the blame on a quasi government agency meant to promote house ownership, you would promote a solution of dismantling agencies that we still need, and draw attention away from the real issue: lax regulatory agencies and oversight of financial institutions. No one wants to hear that MORE government is the answer, but if that IS the answer, then semi-believable arguments like yours will just draw attention and support away from making the necessary changes to government. As teh expression goes: you are either on the bus, or under it.

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Wayne

I don't even bother to click on links to Krugman articles anymore. As you say, his M.O. is to trash and dismiss anyone who disagrees with him, since he's evidently the smartest man in every room he enters.

Matt Frohling

Today's Krugman commentary finally drove me over the edge. I've canceled my NY Times subscription. Why does he and everyone else in the liberal media continue to refer to tax cuts as "costing the government." Why not use "save the taxpayers."

It is NOT THEIR MONEY. I'm the one that gets up at 6AM and arrives home at 8PM to do the hard work to earn a living. I don't do that so they can take my hard earned dollars and waste them on needless programs!!!