either agents made implausible assessments of future risk/return tradeoffs, or were engaged in "looting" the system by exploiting implicit guarantees

The Spigot Theory is attacked by Menzie Chinn on Econbrowser:

"A New Meme: Blame It on Beijing (and Seoul, and Riyadh...)

Perhaps I'm overstating it, but I think this is the abridged version of the Bush Administration's perspective on how we got into the financial mess we find ourselves in. You might ask why I focus on the ideas of the outgoing government. Well, it's because I'm confident that this will be a thesis pushed by some commentators eager to absolve previous policymakers of blame( I AGREE. IT'S AN ATTEMPT TO SHIFT BLAME. ) [1]. And indeed (as Mish points out), this view has apparently adherents in high places.

But let me let the the Economic Report of the President [large pdf] (Chapter 2) speak for itself:

• The roots of the current global financial crisis began in the late 1990s. A rapid increase in saving by developing countries (sometimes called the "global saving glut") resulted in a large influx of capital to the United States and other industrialized countries, driving down the return on safe assets. The relatively low yield on safe assets likely encouraged( THAT'S ALL IT WAS ) investors to look for higher yields from riskier assets, whose yields also went down. What turned out to be an underpricing of risk across a number of markets (housing, commercial real estate, and leveraged buyouts, among others) in the United States and abroad, and an uncertainty about how this risk was distributed throughout the global financial system, set the stage for subsequent financial distress.
• The influx of inexpensive capital helped finance a housing boom. House prices appreciated rapidly earlier in this decade, and building increased to well-above historic levels. Eventually, house prices began to decline with this glut in housing supply.
• Considerable innovations in housing finance—the growth of subprime mortgages and the expansion of the market for assets backed by mortgages—helped fuel the housing boom. Those innovations were often beneficial, helping to make home ownership more affordable and accessible, but excesses set the stage for later losses.
• The declining value of mortgage-related assets has had a disproportionate effect on the financial sector because a large fraction of mortgage-related assets are held by banks, investment banks, and other highly levered financial institutions. The combination of leverage (the use of borrowed funds) and, in particular, a reliance on short-term funding made these institutions (both in the United States and abroad) vulnerable to large mortgage losses.
• Vulnerable institutions failed, and others nearly failed. The remaining institutions pulled back from extending credit to each other( A CALLING RUN ), and interbank lending rates increased to unprecedented levels. The effects of the crisis were most visible in the financial sector, but the impact and consequences of the crisis are being felt by households, businesses, and governments throughout the world.
• ...

There is greater detail in the section titled: "Origins of the Crisis", subheading "The Global Saving Glut":

...

As this influx of capital became available to fund investments, interest rates fell broadly. The return on safe assets was notably low: the 10-year Treasury rate ranged from only 3.1 percent to 5.3 percent from 2003 to 2007, whereas the average rate over the preceding 40 years was 7.5 percent. While to some extent the low rates reflected relatively benign inflation risk, the rate on risky assets was even lower relative to its historical average: the rate on a 10-year BAA investment-grade (medium-quality) bond ranged from only 5.6 percent to 7.5 percent from 2003 to 2007, whereas the average over the preceding 40 years was 9.3 percent. The net effect was a dramatic narrowing of credit spreads. A credit spread measures the difference between the yield on a risky asset, such as a corporate bond, and the yield on a riskless asset, such as a Treasury bond, with a similar maturity. Risky assets pay a premium for a number of reasons, including liquidity risk (the risk that it will be difficult to sell at an expected price in a timely manner) and default risk (the risk that a borrower will be unable to make timely principal and interest payments).

Thinking in terms of systems of supply and demand is a very useful disciplining device. And here I think resorting to this framework, even allowing for distortions in the markets, can be useful, for it reminds one that the outcome (current account balances or the mirror image, financial account balances, and interest rates) are the equilibrium outcome of supply and demand for saving. (A related, but distinct, perspective is Brad Setser's creditors/debtors story.)

I'll admit that it's plausible to think of an exogenous shift in excess saving (decrease in investment demand in East Asia, increase in corporate and household saving in China, etc.) as resulting in increased US borrowing from abroad. This is indeed a variant of the Bernanke "saving glut" thesis. The Bernanke focus is on the "depth and sophistication" of the US capital markets.

Well, I think this last point leads us to my critique. Was it really sophisticated capital markets in the US, or a mania in which either agents( YES ) made implausible assessments of future risk/return tradeoffs, or were engaged in "looting"( YES ) the system by exploiting implicit guarantees( YES ) and building up contingent liabilities for the taxpayers( YES ), that sucked in capital from the rest of the world.( YOU'VE GOT IT )

Three years ago, I'd surely have a difficult time convincing people that US capital markets weren't completely self-regulating and self-correcting. Maybe it's time to revisit the "saving glut" hypothesis, and say that perhaps capital "sucked" into America, rather than "pushed" into America.

Even if one were to say that the excess saving from East Asia -- and the oil exporters as we enter 2005-08 -- drove( HELPED ) the bubble (and I'm willing to admit that there is something to the argument that global imbalances exacerbated domestic imbalances, especially related to the housing sector), I have two big caveats.

The argument that the saving glut led to low interest rates is not unambiguously accepted. [2], [3], [4], [5] [6] [7]. Consider Wright's work [pdf] on how the conundrum can be explained without resort to a central role for international factors (although he allows for some; see also this post). Also consider the correlation between low interest rates and the US current account. Below is a graph from a post two years ago.

Figure 1: The Net Export to GDP ratio and the ten year constant maturity yield (end of quarter) yield minus the ten year ahead (median) expected CPI inflation rate. Source: FRED II and Philadelphia Fed.

But, thinking again about exogeneity, why were funds flowing to the US. Some of it was low national saving. And why was that saving low? Because we were piling tax cuts upon tax cuts (admittedly I'm sounding like a broken record here: [8] [9]). But then add to this question why did the oil exporters start building up current account surpluses of enormous magnitudes? Because demand for oil rose in China, and the US (some observers conveniently ignore the US and focus on China, but it was adding substantial amounts of incremental demand up to 2005 or so). But some of that Chinese demand for oil was "derived demand", driven by US consumption of Chinese made goods.

So, while I won't say that the idea of saving flows coming from East Asia had some role in the financial crisis we're now undergoing [is completely without content grammar corrected 11:15 Pacific 1/22]], I'd say one has to think about how those flows came about, as much as how big they are. We don't usually think of the rest-of-the-world driving macroeconomic events in the US (here's my take: [10]), and I still don't think it's time to start.

Figure 2: Trade balance to GDP ratio (blue) and trade balance ex. oil imports to GDP ratio (red). NBER defined recessions shaded gray. Sources: BEA/Census trade release for November, Macroeconomic Advisers [xls] (release of 15 January 2009), NBER, and author's calculations.

By the way, I am disagreeing slightly with Brad Setser's take on this subject, although I think it is more a point of emphasis than substance. My reading of his post is that excess saving from East Asia and oil exporters enabled( I AGREE ) (my phrase, not his) the US housing boom, and the search for yield. I think that's somewhat different from the ERP thesis."

This is basically my view.

"Coming next: The Clinton Center for Honesty and the Paris Hilton Center for Modesty."

Leave it to David Boaz on Cato:

"Bush’s Chutzpah Institute

Posted by David Boaz

The president who launched our longest war, arrogated more power to the executive than ever before, increased federal spending by a trillion dollars, pushed for the biggest expansion of entitlements since Lyndon Johnson, further nationalized education, tried to nationalize marriage, and held Americans in jail without access to a lawyer or a judge has found a theme for his presidential library: freedom.

The George W. Bush Presidential Center will include a “Freedom Institute” focused on a broad portfolio of topics, including the expansion of democracy abroad and education reforms of the kind Bush implemented during his presidency, according to organizers.

Coming next: The Clinton Center for Honesty and the Paris Hilton Center for Modesty."

I cannot improve on that riposte.

“The Bush administration has consistently turned a blind eye to Colombia’s serious human rights violations,”

From Human Rights Watch, we continue our pattern of looking the other way at human rights violations where it suits us, especially in the disaster called the Drug War:

"(Washington, DC, January 12, 2009) – US President George W. Bush’s decision to award the Presidential Medal of Freedom to President Álvaro Uribe of Colombia is a disturbing example of the Bush administration’s disregard for serious human rights concerns out of zeal to show unconditional support to governments that it views as strategic allies, seven leading nongovernmental organizations said today.( PATHETIC )

The organizations include Human Rights Watch, Amnesty International-USA, Center for International Policy, Human Rights First, Latin America Working Group, Refugees International, and the Washington Office on Latin America.

Bush is giving the award to Uribe at a ceremony in the White House on Tuesday, January 13, 2009.

“The Bush administration has consistently turned a blind eye to Colombia’s serious human rights violations,” said the organizations. “Its selection of Uribe to receive this award only further tarnishes the Bush administration’s own reputation on human rights issues in the region.”

The groups pointed out that President Uribe has repeatedly taken steps and carried out policies that are damaging to human rights in Colombia.

Under President Uribe’s watch, there has been a dramatic increase in reports of extrajudicial killings of civilians by the Colombian Army. And while Uribe’s government has strongly confronted the abusive left-wing guerrillas of the Revolutionary Armed Forces of Colombia (FARC), Uribe has failed to take a similarly clear stance against equally abusive drug-running paramilitary groups, who have massacred, raped, and forcibly displaced thousands of Colombians in recent decades. Fundamental flaws in a paramilitary demobilization process under Uribe have permitted many of the groups to continue to engage in abuses under new names. The president's verbal attacks on his country’s human rights defenders have been frequent and disturbing. And Uribe has often opposed efforts to break paramilitaries’ influence in the political system, including by making unfounded accusations against the Supreme Court justices who are investigating more than 70 members of the Colombian Congress for links to paramilitaries."

What a disgrace.

"I understand this is not completely due to GB II (the business cycle dominates a lot of this), but..."

From EconomPic Data:

Employment by President

I understand this is not completely due to GB II (the business cycle dominates a lot of this), but...( THE IDEA THAT THE PRESIDENTIAL ADMINISTRATION DOESN'T EFFECT THE ECONOMY IS SILLY. IN POLITICAL ECONOMY, THIS IS OBVIOUS.)

WSJ:

President George W. Bush entered office in 2001 just as a recession was starting, and is preparing to leave in the middle of a long one. That’s almost 22 months of recession during his 96 months in office.

His job-creation record won’t look much better. The Bush administration created about three million jobs (net) over its eight years, a fraction of the 23 million jobs created under President Bill Clinton’s administration and only slightly better than President George H.W. Bush did in his four years in office.

I've also added a line showing the difference between the jobs growth and population growth. Any negative figure means jobs grew at a slower rate than the population... not a good thing. "

Nicholas Kristof on Darfur in the NY Times:

"A New Chance for Darfur

By NICHOLAS D. KRISTOF

If Barack Obama wants to help end the genocide in Darfur, he doesn’t have to look far for ideas of how to accomplish that. President Bush and his top aides have been given, and ignored( TRUE ), a menu of options for tough steps to squeeze Sudan — even destroy its air force — and those will soon be on the new president’s desk.

The State Department’s policy planning staff prepared the first set of possible responses back in 2004 (never pursued), and this year Ambassador Richard Williamson has privately pushed the White House to squeeze Sudan until it stops the killing.

Mr. Williamson, who is President Bush’s special envoy to Sudan, wrote a tough memo to Mr. Bush this fall outlining three particular steps the United States could take to press Sudan’s leader, President Omar Hassan al-Bashir:

•

The United States could jam all communications in Khartoum, the Sudanese capital. This would include all telephone calls, all cellular service, all Internet access. After two days, having demonstrated Sudan’s vulnerability, the United States could halt the jamming. ( I AGREE )

•

The United States could apply progressive pressure to Port Sudan, from which Sudan exports oil and thus earns revenue. The first step would be to send naval vessels near the port. The next step would be to search or turn back some ships, and the final step would be to impose a quarantine and halt Sudan’s oil exports. ( I AGREE )

•

The United States could target Sudanese military aircraft that defy a United Nations ban on offensive military flights in Darfur. The first step would be to destroy a helicopter gunship on the ground at night. A tougher approach would be to warn Sudan that unless it complies with international demands (by handing over suspects indicted by the International Criminal Court, for example), it will lose its air force — and then if it does not comply, to destroy all its military aircraft on the ground.( I WORRY ABOUT THIS ONE. MAYBE )

Officials frustrated by the administration’s passivity shared these possible steps with me, partly to make clear that Mr. Obama can do more if he has the political will.

Mr. Williamson has been one of the unsung heroes of the Bush administration, fighting tenaciously and secretly — even twice threatening to resign — to redeem American honor by confronting genocide. President Bush himself seemed open to tougher action, officials say, but Secretary of State Condoleezza Rice and Stephen Hadley, the national security adviser, always resisted, backed by the Pentagon. Ms. Rice and Mr. Hadley tarnished their own honor and America’s by advocating, in effect, acquiescence in genocide.

The naysayers’ objection was simple: Those are incredibly serious steps, with grave repercussions( NOT GOOD ENOUGH ).

They’re right. But then again, genocide is pretty serious, too.

That’s something that Mr. Obama and his aides understand. Partly for that reason, Sudan fears the Obama administration, and now for the first time in years, there’s a real chance of ousting President Bashir and ending his murderous regime.

Several factors are coming together. The leaders in Khartoum feel their government wobbling, particularly after rebels clashed with government soldiers on the outskirts of Khartoum earlier this year. They know that the International Criminal Court is expected to issue an arrest warrant for President Bashir, probably in February, but that no other top leader will be indicted after Mr. Bashir.

China, which for years has been President Bashir’s most important international supporter, now seems to be backing away — just as it eventually abandoned genocidal friends like Slobodan Milosevic and the Khmer Rouge. And an Arab state, Qatar, is now leading a serious diplomatic initiative to try to end the slaughter( GOOD FOR THEM ).

Thus there are growing whispers that key figures in the Sudanese regime may throw Mr. Bashir overboard in the coming months. The other leaders are ruthless and have blood on their hands as well, but some of them have in the past proved more willing to negotiate deals than Mr. Bashir has.

Hovering in the background is the risk that the north-south war in Sudan will resume, leading to a slaughter even worse than Darfur. One ominous sign is that Sudan is now stockpiling cash and weapons, apparently so that it can wage war on the south even if Port Sudan is blocked.

Mr. Williamson has suggested providing surface-to-air missiles to the separate government of South Sudan. Such weaponry would reduce the chance that Sudan would attack the south( YIKES. MAYBE. ).

If Mr. Obama and his aides can work with Europe, China and Qatar to keep the heat on — and to make clear that Sudan has no choice but to hand over President Bashir once the court issues the arrest warrant — then we just might avert a new war and end the first genocide of the 21st century in the new year."

My only problem is with increasing arms in the area and our military involvement. However, if I could be persuaded that these would be competently done, I would support them. Letting this happen is an international disgrace.

"they seek to depict their own ambivalence about torture (American Torture, that is) as the only morally and intellectually respectable position,"

This Glenn Greenwald post needs to be kept. Since Jean Amery is one of my essential influences, and he wrote the essential piece on Torture in "At The Mind's Limits", you can guess that I accept no reason or excuse for torture:

"Torture ambivalence masquerading as moral and intellectual superiority

(updated below - Update II)

Behold the now-solidified Smart, Reasonable American Consensus on torture: the agreed-upon method for dismissing away -- mitigating and even justifying -- the fact that our leaders, more or less out in the open, instituted a systematic torture regime with the consent of our key elite institutions and a huge bulk of the American citizenry, engaging in behaviors which, for decades, we insisted were inexcusable war crimes when engaged in by others( SAD BUT TRUE ):

Sure, it was wrong. OK, we "crossed some lines." Yeah, we probably shouldn't have done it, etc. etc. etc. (yawn). But . . . . when American leaders did it, it was different( I THOUGHT THAT THESE PEOPLE WERE KANTIANS. NO RELATIVISM HERE. UNIVERSAL RULES. ) -- fundamentally different -- than when those evil/foreign/dictator actual-war-criminals did it. Our leaders had good reasons for doing it. They were kind and magnanimous torturers. They committed war crimes with a pure heart. They tortured because they were scared, because they felt guilty that they failed to protect their citizens on 9/11, because they were eager -- granted: perhaps too eager -- to keep us, their loyal subjects, safe from The Murderous Terrorists.( LEAVE ME OUT. I'LL FACE GOD TODAY RATHER THAN HAVE A FEW EXTRA YEARS AND TORTURE ON MY BRIEF )

Here are Tufts University Political Science Professor Dan Drezner and Stanford Philosophy Professor Joshua Cohen demonstrating how good-hearted, profoundly reasonable, oh-so-intellectually sophisticated Americans diligently struggle with -- torture themselves over -- what they have convinced themselves is the vexing question of whether our leaders should be considered "war criminals" by virtue of . . . . having committed unambiguous war crimes( TRUE ):

This is now the conventional wisdom, the settled consensus, of our political and media elites with regard to America's torture program. It's perfectly appropriate that Drezner cites and heaps praise on the self-consciously open-minded meditation on the torture question from The Atlantic's Ross Douthat because -- as I wrote in response to Douthat -- our political elites have now, virtually in unison, convinced themselves that ambiguity and understanding with regard to American war crimes are the hallmarks of both intellectual and moral superiority( GOOD LORD ).

This is the justifying argument the political class has latched onto -- one that was spawned, revealingly enough, by Bush DOJ official Jack Goldsmith: sure, some of this might have been excessive and arguably wrong, but it was all done for the right reasons, by people who are good at heart. So common is this self-justifying American rationalization that it has now even infected the mentality of long-time Bush critics, such as The Los Angeles Times Editorial Page, which today argued that prosecutions for Bush officials are inappropriate, even though they clearly broke multiple laws, because "they did so as part of a post- 9/11 response to terrorism( AND THAT EXCUSES IT HOW ? )." As this excellent reply from Diane at Cab Drollery puts it: "civility and understanding( NEITHER ALLOW TORTURE UNDER ANY CIRCUMSTANCES ) is far more important to them than simple justice( THAT SENTENCE IS MEANINGLESS )."

* * * * *

There are so many fallacies with this mindset that it's almost impossible to describe them all in one sitting. But the worst fallacy, the most destructive and self-delusional, is the stunted self-centeredness in which this view is grounded. As I detailed in the post I wrote about Douthat's flamboyant "struggle" on the torture question, virtually every single war criminal in history can recite good reasons for undertaking "excessive" measures. Other than psychopaths who do it exclusively for sadistic entertainment( THAT'S HOW THEY END UP USUALLY ), every torturer can point to actual fears, or genuine threats, or legitimate grievances that led them to sanction violence and brutality( SO THEY SAY ).

But people like Goldsmith, Drezner, Douthat, and The Los Angeles Times Editorial Page can only see a world in which they -- Americans -- are situated at the center. They cite the post-9/11 external threats which American leaders faced, the ostensible desire of Bush officials to protect the citizenry, and their desire to maximize national security as though those are unique and special motives, rather than what they are: the standard collection of excuses offered up by almost every single war criminal( TRUE ).

If ostensible self-protective motives are now considered mitigating factors in the commission of war crimes -- or, worse, if they justify immunity from prosecution -- then there is virtually no such thing any longer as a "war crime" that merits punishment( TRUE ). Every tyrant and every war criminal can avail themselves of this self-defense. But advocates of this view -- "Oh, American officials only did it to protect us from The Terrorists" -- can't or won't follow their premise to this logical conclusion because their oh-so-sophisticated and empathetic understanding that political leaders act with complex motives only extends to their own leaders, to Americans.( AMERICAN EXCEPTIONLISM IS RELATIVISTIC )

But the rest of the world's war criminals -- the non-Americans -- have no such complexities. They are basically nothing more than Saturday morning cartoon villains who commit war crimes not for any rational or justifiable reason or due to some grave predicament, but rather, out of some warped, cackling pleasure or to satisfy their evil, palm-rubbing plot for world domination and conquest. It's not an accident that, in the run-up to the war, our Government and media jointly issued a deck of illustrated playing cards to demonize Iraqi leaders, complete with cartoon villain names. It's how many Americans have been trained to conceive of whoever the Enemy de Jour is, but never our own leaders.

This is the self-absorbed mindset that allows the very same people who cheered for the attack on Iraq to, say, righteously condemn the Russian invasion of Georgia as a terrible act of criminal aggression. Russia's four-week occupation of Georgia is a heinous war crime, while our six-year-and-counting occupation of Iraq is a liberation. Russia drops destructive, lethal bombs on civilian populations, but the U.S. drops Freedom Bombs. Russian leaders were motivated by a desire for domination even though they withdrew after a few weeks; Americans, as always, are motivated by a desire to spread love and goodness. Freedom is on the March( A DISGACE ).

In the response I wrote to Douthat's piece, I wrote that this excuse-making for the Bush torture regime "isn't really anything more than standard American exceptionalism -- more accurately: blinding American narcissism -- masquerading as a difficult moral struggle." But that almost gives it too much credit. Really, this is nothing more than stunted adolescence. The definitive adolescent mindset is pure self-centeredness personified; it demands infinite understanding of and sympathy with one's own predicament and choices, and offers none for anyone else's. That's all this is: our Leaders -- Americans -- had good reasons to torture and therefore it shouldn't be punished; others who do it (the ones with foreign, unpronounceable names) have no good reasons and should be treated as criminals.( IT'S FINE IF YOU'RE A RELATIVIST AND DON'T BELIEVE IN UNIVERSAL STANDARDS )

* * * * *

There's an irony to the fact that this infinite capacity to self-justify is purely adolescent in nature. As the above-excerpted clip demonstrates, those who view American Torture as a fascinating moral dilemma over which Serious People publicly agonize -- as Drezner put it: "if you're a national security person, you don't care about the legal niceties . . . it is a complicated question; it's not cut and dried"( GOOD TO KNOW. IS ANYTHING CUT AND DRIED? ) -- have actually convinced themselves that their refusal to make clear, definitive judgments is a hallmark not only of their moral superiority, but of their intellectual superiority as well. Only shrill ideologues and simpletons on either side believe that the torture question is "cut and dried." They actually believe that their indecisive open-mindedness on such clear moral questions is a sign of their rich and deep complexity, even though it's nothing more than an adolescent inability to assess the world through any prism other than their own immediate reflexive desires and self-interest.

Independently ironic is the fact that these self-styled complex intellectuals are actually embracing the most intellectually superficial and simplistic form of analysis possible. On one side, they hear Dick "dunk in the water" Cheney and Rush "just blowing off steam" Limbaugh overtly justifying torture. On the other side, they hear what they perceive as the Far Left "civil liberties extremists" arguing that torture unambiguously is a war crime and those who order it are and therefore should be treated as war criminals( THAT'S MY POSITION ).

But all good, smart, Serious Broder-esque elites know that the Truth is never found on either extreme( THAT'S POISONING THE WELL, A LOGICAL FALLACY. ). It's always found in the center -- defined as whatever result is derived by randomly mixing the two poles( IT GENERALLY MIGHT BE, BUT YOU HAVE TO DEFINE THE QUESTION ). Even on questions involving the clearest legal and moral lines -- such as torture -- the Center is intrinsically right. Hence: "yes, torture is wrong; but no, our Leaders don't deserve prosecution for it because their hearts were in the right place." It's as intellectually shallow as it gets -- smart people always go to the center. That it's intellectually shallow doesn't prove it's wrong. But it's ironic indeed that these reflexive Centrists have convinced themselves that their reliance on this simpleton's crutch is proof of their elevated intellectual rigor( FUNNY THEY DON'T CREDIT AMBIGUITY AND GOOD MOTIVES ELSEWHERE ).

More simplistic still is the very idea that the motives of Bush officials -- including Dick Cheney and Don Rumsfeld -- can be reduced to one clear and pure desire( WE CAN'T KNOW THIS ): To Protect Us. Even one's own motives, let alone those of others, are notoriously difficult to ascertain( TRUE ). The certainty claimed by those who are defending Bush officials about what their motives were in torturing is absurd. There are all sorts of reasons to believe that they were motivated, at least in part, by the power that comes from torture, or a desire for vengeance, or the belief that the detainees in our custody were sub-human, or just general indifference to law and morality( TRUE ). How have those ignoble motives been ruled out by their defenders and noble motives so emphatically embraced? Ultimately, though, the reason leaders torture is irrelevant. It's one of those few absolute taboos, and it's almost as immoral to seek to dilute that taboo by offering motive-based mitigations as it is to engage in it in the first place.

Recall the Ward Churchill( I'VE MET HIM AND LIKED HIM, BUT HIS COMMENTS WERE DISGRACEFUL AND FALSE ) controversy, when an obscure academic was catapulted to infamy for a deeply satisfying Two Minute Hate Session, so that he could be held up as the consensus symbol of perverted anti-American amorality -- because he suggested that the acts of the 9/11 attackers should be understood, perhaps even deemed mitigated, by the justifiable grievances that motivated them( FALSE ). Yet just a few short years later, here we find that exact theory being hauled out in defense of our own leaders:

Sure, they engaged in acts that are universally criminalized and despised by all civilized societies, but it's not enough simply to evaluate those acts on their own. The underlying reasons -- their root causes -- need to be considered in order to determine how bad they really were. The motives of our leaders were good, and therefore their acts were, at worst, morally ambiguous.

A "root cause" theory( THIS THEORY IS ALWAYS FALSE )that is deemed unspeakably evil in American discourse when applied to non-Americans is immediately embraced by our elites when we need a way to explain the fact that our own leaders committed unambiguous war crimes( PURE RELATIVISM ).

It's certainly true that the Drezners and Douthats are nowhere near as extreme as the Cheneys and Limbaughs. After all, the former pay lip service to the idea that torture is wrong, whereas the latter explicitly defend it. But I actually prefer the Cheney/Limbaugh candor to the Drezner/Douthat pseudo-intellectual conceit, which is, ultimately, more pernicious. What they're offering is blatant excuse-making and mitigation-rationale -- the Ward Churchill defense -- thinly disguised as an intellectually sophisticated, profoundly reasonable moral struggle. They pretend to be offended by what was done while offering Reasonable Person theories that justify forgetting about all of it and even implicitly believing that it was done for noble ends. Most of all -- worst of all -- they seek to depict their own ambivalence about torture (American Torture, that is) as the only morally and intellectually respectable position, while those who call it a war crime and want it treated as such are blinded ideologues and extremists, impervious to the Serious, multi-layered complexities of the world( I GENERALLY ACCEPT THIS, BUT THERE ARE MORAL ABSOLUTES ).

UPDATE: Back in June, 2004, Matt Stoller wrote a piece -- entitled "Daniel Drezner, the Mediocre Reasonable Conservative" -- that captured much of the mentality I'm describing here. Matt's focus was on Drezner's various apologist behaviors for the Iraq War (which, needless to say, Drezner supported, and which I, too, wrote about before -- here: see Item 6). Back then, Stoller specifically said this about Drezner: "The problem as I see it is the essential unwillingness of someone like Drezner to admit what he knows is true - Iraq is an attempt at empire perpetrated by deeply illiberal individuals."( TRUE )

In reply, Drezner wrote -- and, remember, this was in June, 2004: more than four years ago:

Oh, please — an empire that sent in fewer troops than was necessary? An administration that now seems hell-bent on getting out of the country? Where’s your evidence for empire?

"Hell-bent on getting out of the country": that's from a self-styled expert in international affairs in 2004. This is why I've become increasingly resistant to the notion that the abuses and destruction of the last eight years should be blamed exclusively on the Bush administration. It's undoubtedly true they are culpable in all of it, but -- as several commenters here pointed out -- most of what the administration did was, with some notable exceptions, either actively cheered on or implicitly justified via this type of obsequious apologetics by our elite institutions: Congress, the media, academia, etc.( TRUE ) As demonstrated by the collective attempt now to prettify the "pure-at-heart" torture regime and thus relieve these elites of responsibility for it, none of these apologist efforts has abated in the slightest.

As always, it's important to emphasize that examining Drezner's comments here is worthwhile only as an illustrative endeavor -- not because his mindset is rare or unique to him, but precisely because it isn't. In fact, so appropriately and revealingly, this pro-war, torture-mitigating, "hell-bent-on-getting-out" academic is about to become, beginning early next year, the official blogger for Foreign Policy, the establishment journal of America's Foreign Policy Community.

That's a perfect microcosm of the last eight years: Support the Iraq War. Spout patently false claims to justify it. Rationalize and mitigate American Torture by insisting it's a complicated question and was authorized with good and noble motives. Have your credibility, visibility and establishment credentials enhanced. ( YIKES )

UPDATE II: Joshua Cohen, via email, objected to how his views here were characterized. After exchanging several emails with him yesterday, I was entirely unconvinced that I had mischaracterized anything he said, but nonetheless invited him to write a response, which I promised to post in full, unedited form and append to this post. The reply submitted by Cohen is here.

As I told him, it's a bit difficult to argue that one's comments have been distorted when the person criticizing the comments posts the full, unedited video of the original discussion, as I did here. I'm perfectly content to have everyone compare his actual remarks in the video to what I wrote in the one instance I mentioned Cohen and decide for themselves if his comments were fairly characterized here or not.

On his own blog, Dan Drezner has also posted a "reply," one that -- as the comment section to his post reflects -- is almost entirely bereft of substance. I replied to what he wrote in his comment section."

Torture can never be excused. Not if you value your soul. I've always doubted that many people do.

"This leads me to wonder how we should view the Bush Administration's stewardship of the economy."

Menzie Chinn on econbrowser scores the Bush Economic Disaster. As you know, I believe that the causes of this crisis are:
1) Effects on Investors of the Implicit and Explicit Government Guarantees to intervene in a financial crisis. This allowed much of the excessive risk. I also include here the lack of clarity as to what the government will or won't do.
2) Fraud, Negligence, Fiduciary Mismanagement, and Collusion. I include here lack of enforcement by the government.
3) The perceived incompetence of the Bush Administration. In my view, when this crisis hit, expectations were that the Bush Administration would make things far worse.
Now, let me add:
4) The budget deficit and debt run up in the last eight years. Truly speaking, this should be 3, but, in this crisis, I think that 4 added with other Bush disasters to push the total Bush Disaster Effect higher.

Here's the post:

"Stuff Happens": the Bush Administration's Economic Stewardship

As we near the end of the year, and the end of eight years of Bush economic policy, I think it's useful( BUT NOT PLEASANT ) to look back. The White House has recently tangled with the NYT regarding what got us into the current economic crisis [0] (see also [1]). This comes on the heels of the Paulson argument that he would not have done anything different( SO ASININE ), had he known the full extent of the looming crisis. This leads me to wonder( I DON'T ) how we should view the Bush Administration's stewardship of the economy.

Figure 1: IMF, Global Financial Stability Report (Oct. 2008), Box 1.3.

Candidate Explanations

In particular, when one examines the mixture of policies and events that have led us to the brink of possibly the deepest and most persistent downturn since the Great Depression, one can see several suspects listed.

• Fannie and Freddie( A BIT )
  
• Community Reinvestment Act( A BIT )
  
• CDO's and CDS's( NO. THE MISUSE OF THESE WAS FRAUD, ETC. )
  
• Global saving glut( NO )
  
• Monetary policy( A BIT )
  
• Deregulation( A BIT )
  
• Criminal activity and regulatory disarmament( 2nd MAJOR CAUSE )
  
• Tax cuts and fiscal profligacy( 4 MAJOR CAUSE )
  
• Tax policy( A BIT )
  

Red Herrings

I've already dealt with the first two "betes noire" -- favorite villains in the fevered commentary of certain noneconomists -- in this post, so we can dispense with these as key drivers (Jim attributes some blame, here, although I don't think he attributes central blame here either). I don't think CDO's and CDS's in and of themselves caused the crisis( I AGREE ), although they certainly obscured the primary problem of overleveraging (CDO's) and lack of transparency (CDS's). And the saving glut -- well, the saving glut was a worldwide phenomenon, but I think it safe to say the countries that did and didn't borrow from the Chinese have suffered in the current crisis( I AGREE ) (here is my critique from 2005; CFR report [pdf]).

Synergy

So what I want to think about is the toxic mixture of the last five items, which interacted in a synergistic manner to place us in the situation we are now in.

First, monetary policy. While there seems to be a widespread consensus that it was too lax in 2002-04, this is a viewpoint made with the benefit of hindsight. As Orphanides and Wieland (2007) [pdf] have pointed out, according to the Greenbook forecasts, monetary policy was not -- according to a Taylor rule framework -- overly lax.( I AGREE )

Second, deregulation. On this front, I think it's important to not indict all deregulation (eliminating the Glass-Steagall barriers makes sense to me, while the Phil Gramm-sponsored Commodity Futures Modernization Act exemption of regulation of CDS's does not( A FAIR POINT). I outline some empirical research on what factors were important in this crisis in this post.

Third, regulatory disarmament/nonenforcement and "criminal activity". I would have discounted this item in the absence of clear evidence, but now that we know about how the OTS "helped out" IndyMac [2] [3], I think we can be reasonably confident that we'll hear a lot more about how deregulatory zeal [4] [5] metastatized over into criminal activities on the part of regulators and the regulated.( 2nd MAJOR CAUSE )

Fourth, fiscal profligacy via tax cuts. I think it's important to focus on profligacy (because it pushed the economy more into a boom exactly at a time when not needed) and on tax cuts (because it made people feel like they had more discretionary income than reasonable), thereby pushing the asset boom. ( 4th MAJOR CAUSE )

Fifth, tax policy. In particular, I have been thinking about the tax deductibility on second homes, a provision dating back to 1997 [6] [7] [8]. (I've been thinking about this in part because mortgage deductibility on a second home never made sense to me, let alone on a first home). Capital Games and Gains has pointed out this provision, citing a NYT article. But even this last article doesn't locate primary blame here; rather it's cited as a contributing factor. I suspect that on its own, this provision wouldn't had a big impact, but in combination, it might have. My caveat here is that I haven't found much empirical work backing a big role for this factor.( MINOR )

Typically, in my academic work, I would think of these factors adding up in a linear fashion, so that each of the impulses would sum to the total effect. But (departing from a model, and with no econometric work to back up the hypothesis interactive effects), I think it's worthwhile to think about lax monetary policy, deregulatory zeal and criminal activity/regulatory disarmament, and tax cuts and tax policy changes, all combining to lead to the "bubble" (in a nontechnical sense) we've witnessed, the deflation of which has been associated with the ongoing financial crisis.

Consider one example of a pernicious synergy: the 2001 and 2003 tax cuts were aimed at higher income households, while the second home mortgage deductibility benefited mostly higher income households [7]; with regulatory oversight absent, and low interest rates, well the stage was set.

Prescient, or Not

I won't claim to have foreseen the full enormity of the crisis we're now undergoing. As I indicated when I posted my first blogpost some three years ago, I thought the sheer irresponsibility of the fiscal policy being pursued( TRUE ), against a backdrop of overconfidence in largely nontraded derivatives, would lead to grief in the form of a "sudden stop" of net capital flows to the US. In this respect, I was wrong -- what we've achieved instead is a sort of "global sudden stop" where the process of deleveraging proceeded in a discrete (and "disorderly") fashion( TRUE. DUE TO THE FEAR AND AVERSION TO RISK AND THE ACCOMPANYING FLIGHT TO SAFETY ). So, unlike some, I was only partially -- not completely -- blindsided. (And, I'm sure Akerlof and Romer were completely aware of what was coming...)

I believe history will look critically on the Bush Administration's economic stewardship, in particular how the policies propelled an unsustainable bubble, and tied our hands in the use of fiscal policy tools. In sum, I think Kevin (Dow 36,000) Hassett's view "Bush's Legacy May End Up Better Than You Think" will not prove true."

You are thinking very clearly. I believe that her Synergy is equivalent to my Bush Disaster Effect. Only she fails to see how the Wars, Katrina, etc., can effect economic behavior. For me, Economics only exists in the context and presuppositions of its time.

Taxpayers would no longer be on the line for subsidizing home loans.

The Washington Post on Fannie/Freddie:

"By Zachary A. Goldfarb

Washington Post Staff Writer
Monday, December 22, 2008; D01

Policymakers are looking to revamp the nation's home loan system next year after the collapse of U.S. housing and mortgage markets spurred the current economic crisis.

Under one possible approach, Fannie Mae and Freddie Mac, the federally run companies that control half of the nation's $11 trillion mortgage market, would disappear, leaving lending primarily to private banks( YES ). Taxpayers would no longer be on the line for subsidizing home loans( GOOD ). But analysts say it could become much harder to get a mortgage -- at least one with a relatively low interest rate and a 30-year term( AND ? ).

Under another approach, Fannie and Freddie would remain. They could continue as private companies, trying to strike the difficult balance between the demands of profit-seeking shareholders and those of policy-oriented lawmakers. They could also be turned into government agencies. In either of these cases, taxpayers would remain potentially exposed to trillions of dollars in losses( PLEASE NO ).

The debate comes after the nation endured a bruising effort to promote homeownership in the past decade. Fannie and Freddie provided hundreds of billions of dollars in loans to people with blemished credit records or other financial limitations, which led to huge losses and the government seizing the firms in September as the financial crisis escalated. The government agreed to cover as much as $200 billion in losses( TOO MUCH ).

Now policymakers are looking at ways to prevent a relapse while maintaining Fannie and Freddie's charge of supplying consistent funding for mortgages. Fannie, Freddie and government agencies are funding nearly all of the nation's home loans; private lenders have all but disappeared( CROWDING OUT ).

"If we want to divorce the federal government from the risks of the housing system, you would privatize it," said Howard Glaser, a housing consultant who has worked for Fannie and Freddie. "The cost of that is you never know if you'll have mortgage finance available. Case in point: today( NOT SURE OF THAT )."

Fannie and Freddie were chartered by Congress 40 years ago as private companies with a government mandate to buy mortgages from lenders, package them, guarantee them against default and sell them to investors around the world. As a result, borrowers in big cities or small towns could go to big banks or small thrifts and get a 30-year, fixed-rate loan at an affordable rate.

But risks always loomed. Investors assumed that the government backed Fannie and Freddie, even if they did not have such support officially( IMPLICIT GUARANTEE PROVED CORRECT ). As a result, the companies could borrow cheaply and grow big -- with as much outstanding debt as the U.S. government. But the housing crisis crippled the companies, prompting the Bush administration to take them over out of concern they'd severely damage the world financial system.

Some longtime supporters of Fannie and Freddie say they must change, but still see a need for the government to play a role. "The Fannie and Freddie model has to be approached and the private-public entanglement, I think, will be undone," Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, said in a recent interview. Frank said the reform of Fannie and Freddie is likely to include "some subsidy( THIS IS BETTER ) for enhanced affordability and increasing the flow of mortgages."

But there is little agreement about precisely how to restructure them. While Frank no longer thinks the hybrid model( THANKFULLY ) is viable, another influential lawmaker does. "The hybrid is the best( FOOLISH. ZERO LEARNING CURVE )," said Sen. Charles E. Schumer (D-N.Y.), who leads the Joint Economic Committee. "The hybrid nature should remain."

President-elect Barack Obama has said little on the topic. Obama's chief economic adviser, former Treasury secretary Lawrence Summers, has long been a critic of the risks posed by Fannie and Freddie. In a Washington Post opinion piece this past summer, Summers wrote that the government should use Fannie and Freddie to support the housing market during the crisis and that the government should then "divide their functions into government and private components, the latter of which would be sold off in multiple pieces( NO HYBRID HE SAID )."

One model gaining attention among some top policymakers would incorporate public and private elements, dividing Fannie and Freddie into separate components. One part of Fannie and Freddie's business involves buying mortgage bonds and other assets, holding them in a portfolio and trading them -- much like any other investment fund. This component would be privatized, with no government backing( FINE ).

A much bigger part involves the guarantee business, where Fannie and Freddie pool mortgages and guarantee timely payment of principal and interest. This area would receive explicit government backing( IF SO, IT SHOULD BE EXPLICIT ), possibly from the Treasury if it agrees to insure mortgages( CDSs ) in exchange for a fee.

Other options under discussion include turning the companies into public utilities, which would keep them highly regulated( THEY WOULD HAVE TO BE ), or cooperatives of large banks or of the Federal Home Loans Banks( FINE, IF PRIVATE ).

Some advocates of reducing or eliminating the government's role in the mortgage market argue that policymakers have erred in providing so much support to keeping mortgage rates low over the years -- not just through Fannie and Freddie but with tax breaks and accounting rules that made it easier for banks to own mortgage securities. Low interest rates, they argue, have artificially inflated housing prices and led too many people to buy homes with loans they cannot afford( I DON'T LIKE THE SUBSIDIES, BUT INDIVIDUAL HUMAN ACTIONS ARE RESPONSIBLE FOR BAD LOANS ).

"The problem with subsidizing mortgages is you're subsidizing people getting into debt. You're putting people into houses with no equity( THIS YOU SHOULDN'T DO )," said Arnold Kling, a former economist at both the Federal Reserve and Freddie Mac. "The goal should be getting people to own homes on a sound basis( TRUE )."

Kling would prefer that the government subsidize a down payment on a home, either through a tax-free savings account or another mechanism( I AGREE ).

Lawrence White, a professor of economics at New York University, argues that all the measures focused on the mortgage market have diverted capital from other important parts of the economy( TO SOME EXTENT THAT IS TRUE, BUT THAT'S UP TO INDIVIDUALS ).

"We invest more in residential structures and related things and less in factories and less in human capital," he said. "There are trade-offs. Investors have their choice between investing in a General Motors bond and a mortgage bond( TRUE )."

There are a number of risks associated with the private model. Anthony Sanders, a professor of finance at Arizona State University, argues that there's no guarantee that the private markets would do an adequate job of keeping the system functioning well. "Let's be honest: The commercial banks did not do a very good job since 2003" when they rushed into subprime loans, he said( BUT THEY ASSUMED IMPLICIT GOVERNMENT GUARANTEES ).

But Sanders also rejects the idea that Fannie and Freddie should be turned into a government agency, like the Federal Housing Administration. "If we load everything on the books of the federal government and there's no incentive to perform," he said, "we will see a lack of monitoring, we'll see underperformance( OK )."

In the past, the companies' powerful corps of lobbyists( YES ) could counter efforts to change the way they do business. Their lobbying activities stopped when the government took them over in September. Still, the companies themselves may weigh in.

Top executives at Fannie Mae and Freddie Mac have been assigned to study what the companies and mortgage market would look like if Fannie and Freddie were not what they are today, but they won't be making recommendations.

"I don't have a fixed view on this right now," said Fannie Mae chief executive Herbert M. Allison Jr., whom the government selected to lead the company. "I believe that the approach should be less about Fannie and Freddie and more about how to best meet the needs of the American public and promote responsible homeownership ( GOOD IDEA )."

Staff writer Lori Montgomery contributed to this report."

This report surprised me, given the supposed centrality of the Mayer/Hubbard plan in recent discussions, which would seem to necessitate a government role in the program.

Niskanen predicts that government intervention will prove to be “selective and temporary,” not “a long-term trend.”

Here's another Socialism Unbound post from Bloomberg. I don't see government intervention as the problem. The idea that the Democratic Party could stomach an enormous intrusion of the government into our lives is bogus. I, being a good Burkean, fear social unrest and revulsion with the whole political culture, leading to God knows what:

"By Simon Kennedy, Matthew Benjamin and Rich Miller

Dec. 22 (Bloomberg) -- What’s good for General Motors may not ultimately be best for the global economy.( DO TELL )

The Bush administration’s $13.4 billion rescue of GM and Chrysler is a fitting finish to a year in which governments around the world expanded their role in the economy and markets after three decades of retreat.( WHAT WAS THE S & L CRISIS? A SKIRMISH? HOW ABOUT MILITARY SPENDING? AND THE LOSS OF INDIVIDUAL RIGHTS IN THE LAST EIGHT YEARS? THAT CAN EFFECT THE ECONOMY. HOW ABOUT BUSH'S SPENDING AND THE DEBT AND DEFICIT OVER THE LAST YEARS? NO EFFECT ON THE ECONOMY? )

The intervention comes at what may prove to be a steep price. Future investment may be allocated less efficiently as risk-averse politicians make business decisions( AS COMPARED TO WHAT? COWERING BUSINESSMEN AND BANKERS? ). Whenever banks decide to lend again, they are likely to find new capital requirements that will curb how freely they can do it( IF GOVERNMENT GUARANTEED. THEY CAN ALWAYS CUT THEMSELVES LOOSE ). Interest rates may be pushed up by government borrowing to finance trillions of dollars of bailouts( TRUE. I APPROVE ).

“We’re seeing a more statist world economy( WE'RE SEEING A SHIFT IN POWER IN THE WELFARE STATE SO FAR. NOTHING MORE ),” says Ken Rogoff, former chief economist at the International Monetary Fund and now a professor at Harvard University in Cambridge, Massachusetts. “That’s not good for growth in the longer run( THAT DEPENDS. DO YOU INCLUDE CRISES LIKE THIS ONE AS THE PRICE THAT YOU HAVE TO PAY? IF SO, LET'S DO THE MATH, AND NOT ASSUME ANYTHING ).”

It’s not good for stocks either, says Paola Sapienza, associate professor of finance at Northwestern University’s Kellogg School of Management. Slower economic growth means lower profits( HOW PROFOUND ). Shares might also be hurt by investor uncertainty about the scope and timing of government intervention in the corporate sector( THAT'S WHAT CAUSED THIS CRISIS. AN APPLICATION OF BAGEHOT'S PRINCIPLES SHOULD CLEAR THAT UP ).

“If the rules of the game are changing, people are reluctant to invest in the stock market( TRUE. SO PUT IN BAGEHOT'S PRINCIPLES, AND STOP FOOLING AROUND LIKE THE BUSH ADMINISTRATION. ),” Sapienza says.

Record Lows

The bond market will also be affected as it is forced to absorb ever bigger increases in government debt. While yields on Treasury securities touched record lows last week, they eventually “will go up significantly and dramatically” under pressure from added supply( I'M A BIT WORRIED ABOUT THIS ), says E. Craig Coats, co-head of fixed income at Keefe, Bruyette & Woods Inc. in New York.

The increase in the government’s role in the economy has been breathtaking( PLEASE COMPARE IT WITH THE FRAUD AND STUPIDITY IN THE PRIVATE SECTOR ). The U.S. looks set to rack up a budget deficit of at least $1 trillion this fiscal year, while the Federal Reserve has already increased its balance sheet by $1.4 trillion since last December. By way of comparison, U.S. gross domestic product last year was $13.8 trillion.

Winding back the intervention may not be easy( OTHER ACTIONS, LIKE NATIONALIZATION, WOULD HAVE MADE IT EASIER ), says Sapienza, who has studied the effect of government ownership on bank lending.

When Italy nationalized banks in 1933, “the architects who designed the system envisaged it as temporary,” she says. “It was in place until the end of the 1990s.”( THAT WAS ITALY ) More recently, the Japanese government injected capital into banks to get them to lend to big corporations, keeping alive( BAGEHOT'S PRINCIPLES WOULD WEED THEM OUT LOVE ) “the zombie companies that economists talk about,” she says.

Investors ‘Gambling’

Already, investors trying to decide where to put their money are “gambling very much on what they think the government will do, not what they think about the company,” Sapienza says. “That’s why there’s so much volatility.”( TRUE. AND? )

GM shares plunged as much as 37 percent Dec. 12 after the U.S. Senate failed to pass an emergency loan plan( CAN YOU SAY IMPLICIT AND EXPLICIT GOVERNMENT GUARANTEES TO INTERVENE IN CASE OF A FINANCIAL CRISIS. THAT'S WHY THE BIG THREE ARE ASKING. THAT'S OUR SYSTEM. ). The shares recovered after George W. Bush said his administration would consider funding a rescue with money already set aside for bank bailouts, then shot up 23 percent on Dec. 19 when he announced the emergency loans( THAT'S BECAUSE THE GOVERNMENT INTERVENED. DO THESE INVESTORS SOUND LIKE CATO SCHOLARS OR REASON EDITORS? ).

The auto-industry lifeline is just the latest in an extraordinary year of market interventions that have redefined capitalism( PLEASE. WE HAVE OUR OWN VERSION OF THE WELFARE STATE. IT'S A HYBRID ). The U.S. government previously seized control of mortgage lenders Fannie Mae and Freddie Mac and insurer American International Group Inc. and took stakes in the nation’s largest banks.

‘Necessary Evil’

Government activism has become a “necessary evil”( ON THE CONTRARY, IT'S THE UNDERPINNING OF THE SYSTEM. EVIL WOULD BE DEALING WITH THIS MESS ON YOUR OWN ) to help pull the global economy out of recession, says Marco Annunziata, chief economist at UniCredit MIB in London. Even Bush, who ran for the U.S. presidency espousing smaller government, agrees. He told a CNN interviewer last week he has “abandoned free-market principles to save the free-market system.”( BUSH! HE EPITOMIZES THE CRONY WELFARE STATE. HE COULDN'T FIND A FREE MARKET EVEN IF HE SAT ON IT)

Policy makers elsewhere extended their reach, too. The U.K. nationalized mortgage lenders Northern Rock Plc and Bradford & Bingley Plc. French President Nicolas Sarkozy created a 6 billion-euro ($8.7 billion) fund to invest in “strategic” firms. And the European Commission last week relaxed rules on state aid to businesses.

It isn’t inevitable that bigger government will hamstring free enterprise, says William Niskanen, chairman emeritus of the Cato Institute, a Washington research group that generally favors free markets over government solutions. Niskanen predicts that government intervention will prove to be “selective and temporary,” not “a long-term trend.”( THANK GOD THERE'S ONE SANE MAN IN THE ROOM )

Shy Away From Lending

Still, greater government involvement will make businesses less likely to deploy( I'VE BANNED THE USE OF THIS TERM ) capital in ways that spur growth and profits, says Eric Chaney, chief economist at AXA SA in Paris and a former official at the French finance ministry. Carmakers may be slower to innovate or cut costs, and financiers may shy away from lending to entrepreneurs.( MOTHER MAY I? AND THEY MIGHT NOT )

“It’s the job of companies, not governments, to take risk and accept the consequences,” Chaney says. “There is no incentive for governments to take risk, so they won’t.”( WHAT ARE WARS? )

The history of public aid to automakers highlights the threat, says Stuart Pearson, an analyst at Credit Suisse Group in London.( WE GET IT )

While the U.S. rescue of Chrysler in 1979 gave then-Chief Executive Officer Lee Iacocca time to streamline the company and restore profitability, it also sustained an outsized U.S. auto industry, leading to its current woes( THERE WERE PLENTY OF IDIOTIC DECISIONS IN THE INTERVENING YEARS ), Pearson says. The 1975 bailout of British Leyland Motor Corp. ended up costing U.K. taxpayers 11 billion pounds ($16.8 billion) and failed to keep successor MG Rover Group Ltd. from sinking into bankruptcy two decades later.

Help, Obstruction

“Government help has only been an obstruction to getting the car industry into a more economic shape,” Pearson says.

Back in 1953, when the industry was booming, GM Chief Executive Officer Charles Wilson famously observed: “For years I thought what was good for our country was good for General Motors and vice versa.” If the automakers’ importance has declined, so -- until recently -- had the government’s.

Just a dozen years ago, U.S. President Bill Clinton declared that “the era of big government is over( HE WAS CORRECT. HE MEANT A CERTAIN IDEAL OF THE GOVERNMENT INTERVENING EVERYWHERE ).” Sarkozy won election last year promising a “rupture” from France’s history of heavy regulation; these days, the French president has changed his tune. “Laissez-faire( WHAT'S THAT? COME ON ), it is finished,” he declared last month.

Role of Government

Until recently, “investors could, broadly speaking, ignore the role of the government when thinking about markets” says Alex Patelis, chief international economist at Merrill Lynch & Co. in London. “This period is over.”( ABSOLUTE ROT. DIDN'T YOU JUST PROVE THAT INVESTORS WERE BANKING ON A BAILOUT FOR THE BIG THREE? WHAT WAS THE REACTION TO LEHMAN? )

Regulation is back in style as policy makers seek to avoid a repeat of the financial crisis. Leaders from the Group of 20 nations are crafting a plan to require banks to maintain higher capital levels and disclose more about their holdings.( MAYBE THEY WON'T MAKE A PIG'S BREAKFAST OF IT THIS TIME )

That likely means a lower “speed limit for growth( POSSIBLY WITHOUT WRECKS ),” as banks have less cash available to lend and invest, says Mohamed el-Erian, co-chief executive at Pacific Investment Management Co., the Newport Beach, California-based manager of the world’s biggest bond fund.

“There will be less lubrication( DON'T USE THAT TERM ) in the form of credit creation,” he says.

Bailouts and economic-stimulus plans are also running up government borrowing. Economists at JPMorgan Chase & Co. estimate( THEY COULDN'T ESTMATE MY ANGER ) the budget deficits of developed economies will more than double next year to 6.3 percent of gross domestic product.

Higher Taxes

Bigger deficits, while necessary now, could spell trouble down the road if they lead to higher borrowing costs or prompt consumers to save more now on the assumption that bigger shortfalls will mean higher taxes later( RICARDIAN EQUIVALENCE ).

“We’ll end a financial crisis with a fiscal crisis,” says Vito Tanzi, former director of fiscal affairs at the IMF. “We’ll get out with very large public debt and very large public spending. That, for sure, will slow down the rate of growth for the next 10 years or so( PREDICTION GOOD WITHIN A CENTURY ).”

While bigger government is the unavoidable result of dealing with the turmoil, “it makes all of us economists uncomfortable seeing the government doing all these extraordinary things( THAT's ACTUALLY A GOOD SIGN ),” says Barry Eichengreen, an economics professor at the University of California at Berkeley.

On the other hand, he says, “I would feel even more uncomfortable if they weren’t doing them( JOIN THE CLUB ).”

Niskanen made the most sense. I simply say that the real threat would be social, and, as of now, we're far away from that.

"Waiving down-payments requirements, dropping lending standards, allowing predatory lenders to flourish — that is what is the underlying cause"

Another sensible view about home ownership from The Big Picture:

"Let’s start out with a brief excerpt from Bailout Nation:

From Reagan to George W. Bush, each President of the past 25 years bears some responsibility for contributing to the belief that we can let markets govern themselves.

Of the four Presidents over that period of time, President George W. Bush is the one with the seemingly greatest culpability. Not just because this crisis happened on his watch — although that is reason enough to give him a fair share of responsibility. More significantly, the basis of his culpability is that he shared Greenspan’s and Gramm’s radical belief system — that markets could police themselves, and that all regulation was inherently bad. This philosophy colored all of the President’s appointments to key supervisory positions, as well as his legislative agenda.

That philosophy, and the executive, administrative and legislative acts, including political appointments, is where we should focus our ire at the soon the be former-President Bush. The belief system that leads to the conclusion that really bad behavior in the corporate world needs no proscribing is where you should look to place blame.

That Bush had as a goal increased home ownership is, quite bluntly, irrelevant. It is a worthy goal, and certainly one that could be achieved without forcing the collapse of the financial system.( I AGREE )

Indeed, as the chart at right shows (source: NYT), home ownership has increased every year since 1994. Funny, from that year and for each of the next 10 years, there was no collapse. You have to ask yourself why. No, the 1997 Tax Break, did not, as the NYT implied yesterday, Help Cause Housing Bubble. Home ownership was rising years before that went into effect.( TRUE )

What Bush did differently than prior Presidents was that he genuinely believed that regulations proscribing bad corporate behavior were unnecessary. It was that ruinous belief system, one he shared with other key players, that led to the crisis.( TRUE )

In fairness to Bush, many of the really bad policies that led to the boom and bust of Housing, and the collapse of credit, were in place before he was sworn into office. In particular, the repeal of Glass Steagall (Gramm-Biley-Leach Act), and the Commodities Future Modernization Act (CFMA), were both heavily lobbied for by the industry, sponsored by Phil Gramm, and passed by a Congress that didn’t bother to read them( TRUE ). They were both signed into law by Bill Clinton. That set of legislation is where you begin to find answers to The Reckoning.

Consider:

“Former Presidents Clinton, George H.W. Bush, and Reagan all have some responsibility, but far less. Bush Senior is probably the least culpable. Reagan did not reappoint Fed Chair Paul Volcker, and replaced him with Alan Greenspan. Regardless of other actions, this alone haunts his legacy, and gives the Gipper some degree of responsibility.

While some partisans have tried to paint the crisis a purely Republican debacle, history informs us otherwise. Yes, the GOP did control Congress from 1994 to 2006. However, President Clinton, a Democrat, bears a significant amount of responsibility too. He and his Treasury Secretaries, Robert Rubin and Lawrence Summers, each supported very limited regulation of free markets. Clinton, Rubin and Summers are one step behind W. in the hierarchy of proximate causes of the debacle.” (Bailout Nation) ( THAT'S TRUE. I DID TOO )

The requisite Fannie Mae/Freddie Mac discussion in the article is simply silly. Yes, FNM/FRE were cogs in the housing machinery, yes, they were corrupt organizations. No, they were not a proximate cause of the boom/bust/collapse( ALL TRUE ). For those of you who keep asking why I emphasize this, this article is why.

Increasing home ownership in America is a legitimate political goal. Waiving down-payments requirements, dropping lending standards, allowing predatory lenders to flourish — that is what is the underlying cause of boom bust and collapse.( I AGREE COMPLETELY )

Once again, we relearn that worthy ends do not justify foolish means."

"many Republican contributors in the financial sector were making a fortune on garbage mortgages? "

Dean Baker with another good post:

"Bush, the Political Philosopher, Reappears in the NYT

That's right, the headline of an NYT article tells us that, "White House Philosophy Stoked Mortgage Bonfire." Was it their philosophy? How about as an alternative hypothesis that many Republican contributors in the financial sector were making a fortune on garbage mortgages ( I AGREE )?

The article is actually reasonably good in making this point, but the headline writer certainly deserves some grief. The point, for the 946,326th time is that people get elected to office by currying the favor of powerful interest groups( THIS IS OUR SYSTEM ). They don't get elected for their excellence as political philosophers. Reporters and headline writers should know this.

The article also includes the remarkable revelation that people in the Bush administration first noted the soaring sale price to rent ratio in March of 2007 (okay, some did note it sooner). While this discovery is attributed to someone who is described as a 29 year-old "whiz kid," this is about the most basic statistic that one can use to examine house prices. Any analyst of house prices who was not familiar with this ratio should have been fired instantly for an ungodly level of incompetence. ( AN UNGODLY LEVEL OF INCOMPETENCE DESCRIBES THE BUSH ADMINISTRATION )

If you don't understand the central place of Interest Groups in our Political Culture, you won't be able to understand much of what takes place in it.

"Cerberus will be back to ask for more taxpayer dollars, and will continue to avoid responsiblity for repaying them. "

I have a different take on this than James Henley on Postive Liberty. I believe that the Automaker's Bailout is happening precisely to ward off posts like his:

"Not so widely reported in the auto bailout story is the link between Bush and principals of Chrysler owner Cerberus Financial Management. Amost immediately after stepping down as Bush’s Secretary of the Treasury, John Snow became chairman of Cerberus. Former Republican Veep Dan Quayle, who has been lobbying hard on this issue, runs one of Cerberus’s investment units. And Cerberus has just received a $4 billion loan from the government, thanks to Bush’s decisiont to tap the Troubled Asset Relief Program (TARP) funds. This decision is troubling on multiple dimensions.

First, the hint of crony capitalism just can’t be waved away by noting that Bush also made a loan, a bigger one, to GM. GM’s failure is a more serious issue than Chrysler’s by far, because it employs far more people, not just directly, but because of its larger production level, indirectly as well. And the death of Chrysler is not likely to be wholesale–the Jeep brand remains a valuable commodity that Cerberus could sell to recoup at least some of its loss, and thereby keep some of their production plants going.

Second, we once again see the president making decisions that bypass the legislative process and distort the purposes of legislation he himself has signed. The TARP money was authorized by Congress for the purpose of bailing out the financial markets. However good an idea it may be to also bail out the auto industry, the people’s representatives have chosen not to do so. But Congress’s decisions no longer matter to presidents. The evisceration of representative democracy continues apace, and we all collectively yawn as legislative power continues to shift away from the legislative branch to the executive branch.

Third, Cerberus may have gotten what they most wanted, the ability to avoid responsibility for the loan if Chrysler doesn’t survive. They originally asked for $7 billion, curiously similar to the $7.4 billion they paid Daimler to acquire Chrysler just last year. Although that was $30 billion less than Daimler paid for Chrysler nine years earlier, most observers still couldn’t figure out why Cerberus thought it was a good deal, even at the fire sale price. The amount Cerberus asked led to the suspicion that they were looking for the taxpayers to cover the upfront price of their bad business decision.

But that’s not the really bad part of it. One of the reasons Congress balked at giving Chrysler a loan was that Cerberus did not want to open their books. The suspicion remains that Cerberus’s coffers are capable of providing the funding needed, but Cerberus closely guards its figures and wasn’t willing to make them public in order to disprove that notion.

But that’s not yet the really bad part of it. Another reason Congress balked was that Cerberus wanted Chrysler alone to be responsible for repayment of the loan. That way, if Chrysler still went under, Cerberus would be wholly off the hook for the taxpayer money it begged for. A nice trick, if you can swing it, and it appears that Bush has allowed his former Sec Treas to do so. At least as reported so far, the details of the loan don’t hold Cerberus responsible for repayment. Yet again we see that Republicans, despite their long-standing claim, are not a party of fiscal responsibliity. If one group of them isn’t spending the public’s money like drunken sailors, another group of them will quickly step in to do so.

My prediction for the new year? Cerberus will be back to ask for more taxpayer dollars, and will continue to avoid responsiblity for repaying them. If only Carter had let Chrysler die 30 years ago."

The bailouts cannot be confined to simply a financial bailout. That already has plenty of charges of conflict of interest and cronyism. Many people see the Automaker's Bailout as a Jobs Bill, as opposed to a bailout of the employers. That is the reason the Fed and Treasury Department are working so hard to do something for the Automakers and Home Buyers. They need some Bailout money to effect the lives of Middle Class Citizens. Solely bailing out the Financial Sector will be perceived as Cronyism by Definition.

Also, if unemployment were to drastically rise after a failure to Bailout the Automakers, and bailing out the Financial Sector had failed to keep that from happening, that would be a disaster of enormous proportions for the Bush Administration.

By definition, the Big 3 are Bush Cronies in the minds of many people. That is why my bailout plan included replacing the management, even though their incompetence was more than enough reason. But the UAW and the auxiliary jobs associated with the auto industry are viewed as a Middle Class issue, and dearly important to some people, especially the ones who find the Financial Sector Bailout dubious.

The Cerberus connection should be investigated, in order to make sure that they did not receive special treatment in this bailout, but their power and connections with the Bush Administration are not enough to kill this deal. We are battling Deflation. Some people don't see that as a big deal, but I disagree. We do not know how to deal with deflation other than causing inflation, which is what we are trying to do now. Failure to bail out the automakers could be a second Lehman, and two Lehmans could send us into a Deflationary Spiral. Beyond a certain point, in order to get inflation, the result could actually be hyperinflation. We're not there yet, and we don't want to be.

This crisis has taxed all of our knowledge and expectations as it is. We cannot afford to move the battle to territory we have no real map or experience for. That could lead to not only economic, but social problems. Problems that this Burkean takes very seriously.

"conversion, whereby, for example, all existing mortgage debts could be wholly or partly converted into long-term, low and fixed-interest loans"

Niall Ferguson on FT talks about Leviticus:

"In the Old Testament Book of Leviticus, God commands the children of Israel to observe a jubilee every 50 years. Nowadays we tend to associate the word with celebrations of royal anniversaries such as Queen Elizabeth’s golden jubilee in 2002. But the biblical conception of a jubilee was more precise: that of a general cancellation of debts.

This point is spelt out in Deuteronomy: “Every creditor that lendeth ought unto his neighbour shall release it; he shall not exact it of his neighbour, or of his brother; because it is called the Lord’s release.” ( I BELIEVE THAT THIS WAS ALSO TO ENSURE THE LAND REMAINED IN THE POSSESSION OF EACH TRIBE )

Such injunctions may strike the modern reader as utopian. How could any sophisticated society function if all debts were cancelled twice a century – much less, as Deuteronomy seems to suggest, every seven years? Yet we know that such general cancellations of debt really did happen in the ancient world. In 1788 BC, for example, about 500 years before the time of Moses, King Rim-Sin of Ur issued a royal edict declaring all loans null and void, wiping out some of history’s earliest known moneylenders. ( WHY NOT HAVE SAVER NATIONS LIKE CHINA AND GERMANY CANCEL DEBT, AND THEN THE SPENDER NATIONS CAN START SPENDING AGAIN AND EVERYONE IS HAPPY AND DOING WHAT COMES NATURALLY TO THEM? )

The idea of a generalised debt cancellation is not wholly unknown in modern times. The late Gerald Feldman, the world’s leading authority on the German hyperinflation of 1923, drew a parallel between the ancient Hebrew yovel and the wiping out of all paper mark-denominated debts as a result of the collapse of the German currency (though, as he was quick to point out, those whose savings were wiped out were far from jubilant).

In the hope of avoiding the mark’s meltdown, the economist John Maynard Keynes had repeatedly called for a general cancellation of the war debts and reparations arising from the first world war. Though no such intergovernmental jubilee was ever proclaimed, debt cancellation was effectively what happened after 1931, beginning with President Herbert Hoover’s one-year moratorium on both war debts and reparations.

As 2008 draws to a close, there are many people on both sides of the Atlantic who yearn for such a simple solution to the problem of excessive indebtedness. Parallels with the interwar period are not inappropriate. It is all but inevitable that we shall see serious political and geopolitical upheavals in 2009, as the recession takes its toll on weak governments (Thailand and Greece are already reeling) and raises the stakes in inter-state rivalries (India-Pakistan). In the words of Hank Paulson, the US Treasury secretary: “We are dealing with a historic situation that happens once or twice in 100 years.” The stakes are high indeed. Has the time arrived for a once-in-50-years biblical jubilee?

Excessive debt is the key to this crisis ( BUT WHAT CAUSED IT? ); it is the reason we are confronting no ordinary recession, curable by a simple downward adjustment of interest rates. It is the reason we still have to fear, if not a second Great Depression, then very likely the biggest recession since the 1930s. We are living through the painful end of an age of leverage which saw total private and public debt in the US rise from about 155 per cent of gross domestic product in the early 1980s to something like 342 per cent by the middle of this year.

With average household debt rising from about 75 per cent of annual disposable income in 1990 to very nearly 130 per cent on the eve of the crisis, a large proportion of American families are submerging under the weight of their accumulated borrowings. British households are in even worse shape.

Looking back, we now see just how big a proportion of US growth since 2001 was financed by mortgage equity withdrawals. Without that as a means of financing consumption, the economy would barely have grown at 1 per cent a year under President George W. Bush. Looking forward, we see just how hard it will be to stabilise property prices and the prices of the securities based on them. Already, at the end of September, one in 10 American home owners with a mortgage was either at least a month in arrears or in foreclosure. One in five mortgages exceeds the value of the home it was used to purchase.

The financial sector’s debts grew even faster as banks sought to bolster their returns on equity by “levering up” ( THIS IS TRUE ). According to one recent estimate, the total leverage ratios (on- and off-book assets and exposure divided by tangible equity) for the two biggest US banks were 88:1 for Citibank and 134:1 for Bank of America. The bursting of the property bubble caused such ratios, which were already too high on the eve of the crisis, to explode as off-balance-sheet commitments and pre-arranged credit lines came home to roost. Only by borrowing from the Federal Reserve on an unprecedented scale have the banks been able to stay in business( THE BANKS CONSIDER IT INSURANCE AND WERE COUNTING ON IT ).

With estimates of total losses on risky assets now ranging from $2,800bn (£1,850bn, €1,960bn) to $6,000bn, a chain reaction is under way that will leave no sector of the world economy untouched. The American economy is contracting at an annualised rate of 5 per cent ( WE NEED TO WAIT ON THAT ). Commercial property is following the residential market into freefall. The Standard & Poor’s 500 index is down 43 per cent since its peak in October last year. The market for credit default swaps is pointing to a surge in defaults on corporate bonds( I BELIEVE THIS IS OVERDONE ). The automotive industry is already (against the will of Congress and the original intention of the Treasury) on life support. The US is at the centre of the crisis but Europe and Japan may suffer even larger aftershocks. As for the much feted emerging market “Brics” – Brazil, Russia, India and China – their stock markets have been dropping like, well, bricks.

What makes this crisis of burning interest to financial historians is the knowledge that we are witnessing a real-time experiment with not one but two theories( THEY'RE NOT MUCH HELP ) about the Depression.

On one side, Ben Bernanke, Fed chairman, is applying the lesson of Milton Friedman’s and Anna Schwartz’s A Monetary History of the United States, which argued that the Depression was in large measure the fault of the central bank for failing to inject liquidity into an imploding financial system. Mr Bernanke has not merely slashed the federal funds rate to below 0.25 per cent. He has lent freely to the banks against undisclosed but probably toxic collateral. Now he is buying securities in the open market. ( HE'S DOING WHAT LOOKS LIKE THE LEAST AWFUL ALTERNATIVE )

The result has been an explosion of the Fed’s balance sheet and of the monetary base. With assets approaching $2,263bn and capital of less than $40bn, the Fed increasingly resembles a public hedge fund, leveraged at more than 50:1. ( THE ASSETS OF THE AMERICAN PEOPLE BACK THIS )

On the other side, Mr Paulson has emerged as an unwitting disciple of Keynes, running a huge government deficit in an effort not merely to bail out the financial sector but also to provide a public sector substitute for sharply falling private sector consumption. Even before President-elect Barack Obama launches his promised infrastructure investment programme, estimates of next year’s deficit run as high as 12.5 per cent.

Once, monetarism and Keynesianism were considered mutually exclusive economic theories. So severe is this crisis that governments all over the world are trying both simultaneously ( THAT'S BECAUSE WE'RE NOT SURE WHAT TO DO ).

Although commentators like to draw parallels with Franklin Roosevelt’s New Deal, in truth the measures taken since the crisis began in August 2007 more closely resemble those taken during the world wars ( AND? ). After 1914, and again after 1939, there was massive government intervention in the financial system. Banks and bond markets were reduced to mere channels for the financing of huge public sector deficits. That is what is happening today, but without the stimulus to manufacturing that the world wars provided. We are having war finance without the war itself.( THANK GOD )

Yet the effect of these policies is essentially to add a new layer of public debt to the existing debt mountain. Added together, the loans, investments and guarantees made by the Fed and the Treasury in the past year total about $7,800bn, compared with a pre-crisis federal debt of about $10,000bn. The Treasury may have to issue as much as $2,200bn in new debt in the coming year. ( IT'S A PROBLEM, BUT NOT INSURMOUNTABLE )

For the time being, the distress-driven demand for dollars and risk-free assets is pushing down the cost of all this borrowing. Treasury yields are at historic lows. But it is not without significance that the cost of insuring against a US government default has risen 25-fold in little over a year ( THIS MIGHT WELL BE OVERDONE ). At some point ( WHAT POINT? ), with most big economies adopting the same fiscal policy, global bond markets are going to start choking.

Is it really plausible that the cure for excessive leverage in the private sector is excessive leverage in the public sector ( YES IT IS. IT'S PARADOXICAL, BUT MUCH OF LIFE IS ) Might there not be a simpler way forward? When economists talk about “deleveraging” they usually have in mind a rather slow process whereby companies and households increase their savings in order to pay off debt. But the paradox of thrift means that a concerted effort along these lines will drive an economy such as that of the US deeper into recession, raising debt-to-income ratios.

The alternative must surely be a more radical reduction of debt. Historically, such reductions have been done in one of four ways:( 1 ) outright default,( 2 ) restructuring (for instance, bankruptcy), ( 3 )inflation or ( 4 ) conversion. At the moment, more and more American households are choosing the first as a way of dealing with the problem of negative equity, while more and more companies are being driven towards bankruptcy. But mass foreclosures and bankruptcies are not a pretty prospect.( BUT THEY MIGHT HELP )

Inflation, by contrast, is hard to worry about in the short term, not least because the Fed’s expansion of the monetary base is leading to no commensurate expansion of the broad money supply; the banks would rather shrink than expand their balance sheets.( SO WHY NOT USE IT? )

That leaves conversion, whereby, for example, all existing mortgage debts could be wholly or partly converted into long-term, low and fixed-interest loans, as recently suggested by Harvard’s Martin Feldstein. (In his scheme, the government would offer any homeowner with a mortgage the option to replace 20 per cent of the mortgage with a low-interest loan from the government, subject to a maximum of $80,000. The annual interest rate could be as low as 2 per cent and the loan would be amortised over 30 years ( THEY DO HAVE TO PAY THE MONEY BACK ).

At the very least, this would rescue many homeowners from the nightmare of negative equity. A similar operation might also be contemplated for the debts of those banks that have been partially or wholly recapitalised by the state. This would not add to the federal debt in net terms and would reduce the interest burden, if not the absolute debt burden, of households.

Such radical steps would naturally represent a haircut for creditors ( FINE WITH ME, SINCE THE HOUSES THEY WOULD FORECLOSE ON WOULD BE WORTH LESS ), notably the holders of mortgage-backed securities and bank bonds. Yet they would surely be preferable to the alternatives ( NOT IF THEY FEEL THAT THEY CAN GET A BETTER DEAL FROM THE GOVERNMENT. ALSO, ARE YOU GOING TO MANDATE THIS? ). And they would certainly be a less extreme solution than the general debt cancellation envisaged in the Old Testament.

Financially, 2008 has been an annus horribilis. The answer may be to make 2009 a true jubilee year.

To be honest, I don't think he made a case for any of the four alternatives. It's an interesting plan, but it is dubious that it can be made to work in practice, due to a number of factors leaving lenders and borrowers to prefer other alternatives.

How fallow years led to a golden jubilee

Every seven years, God told Moses, the children of Israel should neither sow their fields nor prune their vineyards – a kind of self-imposed recession. After seven such sabbatical years, the trumpet of jubilee should be sounded: “And ye shall hallow the fiftieth year, and proclaim liberty throughout all the land unto all the inhabitants thereof: it shall be a jubilee unto you; and ye shall return every man unto his possession.”

Land that had been sold was to be redeemed or returned to the original seller and the poor were to be relieved: “If thy brother be waxen poor, and hath sold away some of his possession, and if any of his kin come to redeem it, then shall he redeem that which his brother sold ... If thy brother be waxen poor ... then shalt thou relieve him: yea, though he be a stranger ... Take thou no usury of him ...” In addition, Jews who were slaves were to be set free.

To modern eyes, however, the most striking of these divine injunctions was that debts were to be cancelled as part of “the Lord’s release”.