Alex,

As you note and I concur, Fannie and Freddie's culpability was called into serious question by the piece in the NYT. Mozillo's comment, self-serving though it was, had a great deal of truth to it. The market was going to push on with or without them. What the NYT doesn't note is that it did. In 2005 Fannie and Freddie's balance sheets shrunk as the only indirectly related accounting scandals brought them into disrepute in Washington. The response on Wall Street? A banner record setting year in ABS issuance, Wall Street balance sheets and deteriorating lending standards.

My last post here noted it's time we write this history before Republicans rewrite it (replete with important fact on that score), and I stand fast on that. What we are witnessing is nothing less than an epic bust of epochal standards. Those in power have a lot to lose, and every motivation in the world to obfuscate the record. Journalists and defenders of truth et al need to see to it that this doesn't happen.

http://letters.salon.com/tech/htww/2007/09/18/rate_cut/permalink/166ee43ce74aaf5723f939db878196d9.html

This is to say if [Bernanke] knows both of the irrefutable existence of a credit bubble, of its massive scope, its acute vulnerability, how it came to be, who has profited, who enabled it, who knew what when, and now at this late stage, the consequences of its endgame....

Make no mistake about it, there is no series of bubbles, just one big bubble that's been steadily inflating for 25 years (with a few interim hiccups that have dented sentiment in certain asset classes along the way). Any which way you slice it, the possibility of sustaining the amount of credit growth required have been exhausted.

And therein lies the rub. When you see that 2007's non financial debt growth from the flow of funds was $2.5tn, and then you note that this slowed to $1tn in the last quarter, you begin to realize the pittance that $700bn spread out over months really is. This package is insufficient if we want to prolong the endgame. Saying that, no package will prolong it indefinitely...

I appreciate their efforts, but I'm not a huge fan of either the positive or normative gist. This crisis is a meta-level event for which micro level analysis obscures salient dynamics. Indeed the money markets role was significant, paramount even- their import and failure is a direct consequence of the growth of the shadow banking system, a major development in the rise and fall that will come to characterize this crisis. However, the meta-level issues remain more important. A Credit Bubble developed and corrupted private and public officials alike, as it enriched the few at the expense of the many. The credit bubble knows only one thing- to propagate itself. And it was stunningly successful at doing so, up until it ran out of willing and able participants in the Ponzi scheme. Now there are simply too many negative cash flow entities- too many people relying on borrowed money to meet obligations of borrowed money. And short of the federal governments ability to create the sufficient credit to take over for all those defaulting negative cash flow entities, (and the Chinese to hold their nose as they continue to buy into the liklihood that all those treasuries will pay off), comes the fall.

As regards that idiosyncrasy, the way things used to work before deregulation together with 'innovation' and the reluctance of policy makers to evaluate and regulate it, is that the Federal Reserve ran monetary policy through the banking system. Using its tools and requirements of its member banks, it was supposed to be in total control of the money supply, and concomitantly of lending and system wide risk. But the towering shadow banking system that sprung up, largely in the last ten years, totally exploded that quaint notion.

Gathering its funding via money-esque (truthy?) commercial paper and repos, (the former of which grew to over $2 trillion at its peak, the latter of which grew to well over $1 trillion at its peak), this banking system commenced classic traditional banking activities- the making of consumer and other types of long term, credit exposed loans. It should be noted none of this vast growth in moneynever made it into any Federal Reserve measure of the money supply, not M0, M1, M2 or M3. The meaning of that is somewhat symbolic- the Fed hasn't since Volcker pegged its policy to any measure of the money supply. But it is more than that. In a legendary and notorious Op-Ed in the Financial Times, Chairman Greenspan defended his policy of lowering short term interest rates in the midst of a mortgage boom and keeping them there by amongst other laughable defenses, citing the meager growth of M2!!!.

In any case, there is no doubt the totally unregulated and rife with agency issues world of the shadow banking system (hedge funds, off-balance sheet conduits, Wall Street balance sheets, etc.) was able to generate VAST quantities of money which buoyed asset markets, housing investment, consumer consumption levels, and all manner of corrupt and problemed lending. So when the Minsky Moment in this credit crisis arrived with the subprime meltdown, the funding source of this world was shown to be as shaky as any has in an investment bust. And with no recourse to any lender of last resort, the financial system had a big problem. The failure of its liabilities, the money and repo markets, risked systemic crisis in precisely the same way that cascading bank failures risk systemic crisis. This helps to explain why the failure of Lehman Brothers, and the Feds letting that happen, has so accelerated this cataclysmic crisis.

Bottom line is, get the macro picture correct- the details are less important. Also know this: there is no way that anyone with knowledge and the will to investigate couldn't have seen this coming. The warning signs were as brazen as the ideological market fundamentalism that drove us into this ditch.