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There is a connection between the two (primarily deregulation) and it’s laid out in those two episodes of T.A.L. I mentioned above.

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Essay:
Why are we still talking about the “housing bubble” in regard to the ruin of the American and possibly the World economy?

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I’m certainly no expert on much of anything, but I’ve read every relevant analysis and news report I’ve come across, and it seems to me that George Bush (and to a lesser extent Paulson and Bernanke) fits the description of a man who has no idea what he’s talking about on matters of the economy. Last year, Bernanke said that the fallout from the sub-prime housing crisis would be $50 billion. Now it’s becoming clear that $700 billion or $850 billion is just a drop in the bucket of losses.

And that’s what scares me. Everyone is blind and panicking, including our so-called leaders.

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OTOH, the worst panic was on Sept. 17, when the full effect of the failure to bail out Lehman Brothers hit the credit markets, threatening to do in AIG, with total panic ensuing and interest rates on US Treasuries going to an unheard of 0.06%. The announcement of the bailout was to undo that, and also to allow the bailout of AIG. This latter had been insuring much of the global derivatives market, and letting it go would have put us into 1931 territory. The markets plunged yesterday, but it could have been much worse.

This is a period of time in which all should be cautious. I have for a long time (along with Dean Baker) been warning that the collapse of the housing bubble would lead to some very nasty outcomes. However, I do not have an easy answer as to how we should deal with it. I am a bit appalled at all the people who have come out of the woodwork with their sudden answers who have no idea what they are talking about.

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Bank and commodity deregulation was predicated on an effective SEC, knowledgeable investors, and sophisticated rating agencies. Where was the SEC in their supervisory role of investment banks when they larded up the system with all this worthless opaque credit debt? Who, in the last 8 years has understood the value of mortgage-backed securities? And the current crisis is based on the lack of proper ratings on those investment securities. Its like the entire financial system became a faith-based operation with one guiding principal – we BELIEVE real estate always goes up in value. We BELIEVE in the universal wisdom of free markets. No checks, no balances, just blind faith.

Lobbyists wrote the deregulation laws, and they continue to fund John McCain’s campaign, even paying his campaign manager $2 million for access to McCain, because the last thing they want is meaningful change.

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But the “global pool of investors” won’t keep their money under the mattress forever. Eventually they’ll want to invest in something again and start earning interest on loans. Entrepreneurs will innovate, and investors will loan money and invest.

Several months ago, Prof. Rosser turned me onto Dean Baker’s blog. IMO, Baker’s one of the smartest economists in Washington. I highly recommend it to those looking for a reliable expert on the economy.

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