Comments appear not to work very well, so even though this should be more of a response to Nuttall, I'm making it a post.
I think that housing was a wise place for government to push investment (although for a contrarian view, see http://www.theatlantic.com/doc/200712/real-estate). I think where we went wrong is in lack of oversight, first in the area of subprime loans, and second in so many other areas that tangentially related to subprime loans, such as credit default swaps. (Although in some ways, I have to hand it to American capitalism. It's amazing how some of these financial instruments have managed to spread the costs of what started as an entirely local problem across the entire world).
Put it this way. Fannie and Freddie have been around how long? And this problem occurred when? After how many years of an intensely regulation-hostile administration? In my mind, blaming Freddie and Fannie--at least the idea of Fannie and Freddie--is like blaming your car engine for going out when you haven't changed the oil in 8 years.
The American economy is an ever-evolving machine, and that machine will constantly require maintenance. But instead of providing that maintenance over the last 8 years, our approach has been to avoid maintenance at all costs. Wall Street, being filled with some of our brighter minds because that's exactly the sort of labor capitalism rewards, will always find new ways to exploit holes and cheat the system. But this is no excuse to just give up on regulation. It's the reason why we must try harder to get it right.
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I'm going to try comments one last time. You guys keep a blistering pace on here, and I'm afraid I won't be able to keep up, but I'll try.
Karl, I think we have the same position on the potential benefits of the involvement of progressive government in business. Where might disagree--though I can't exactly tell yet--is the hurdle of credibility government needs to clear before being unleashed on a private sector issue.
I agree wholeheartedly that the issue in the recent crisis was one of oversight balance--and that's been my main point--that schemes requiring much hands-on management have an abysmal track record. If mismanagement of such a complex and delicate program can cause multi-trillion dollar swings in economic output and distribution, to what conceivable control system could we entrust it? A young, genius enlightened despot? Perhaps. Congress with its maximum 2 year time horizon? That makes me really nervous...
Constructing and driving such a dangerous vehicle (not just Fan and Fred, but the whole attitude of growing for its own sake) without timely feedback mechanisms to adapt it appropriately has turned out to be, frankly, alot like going to war for reasonably moral reasons but without any system or reasonable expectation of adapting to ground circumstances.
I'm with you when you say not to give up on regulation and fight to make it right. I'm just distressed at the track record.
Congratulations, James, your comment survived the jump to cyberspace.
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