[Gfranc]

Fiscal austerity, as Friedman would agree, is unbelievably stupid at this time. However, because the government is so far in debt to begin with, adding debt through stimulus is guaranteed to be unpopular. The application of Keynesian policy deserves some dumping. When times get crappy it’s spend spend spend and lower interest rates, when times are booming its...maintain current monetary and lower interest rates? It seems they are only following Keynesian theory when times get tough. For political reasons, they are conveniently leaving out the difficult parts of application of Keynesian theory. Overspending and bad policy during times of plenty causes grief during times of trouble. From what I see, misapplication, including uncalled for low interest rates, deserves some blame.

Banks made bad loans (also) because their loans were risk free. They were leveraging because they could. I agree they shoulder the blame, but so do the guarantors of those loans, US Government.

Thanks again for the replies... I copied this and will review it several more times to further my understanding. I was obviously misguided.

I consider myself someone centrist, but I certainly lean towards limited government. Such talk of nationalizing banks to me is dangerous in the long term. I'm not even sure how that would be considered constitutional. But in our situation, hell, they are basically all quasi nationalized anyway. The current structure allows far worse in that only losses are nationalized. So our choice under current policy is to nationalize or recapitalize? We need better options and policy that allows for banks to fail when they make bad loans. But again, can Keynesian theory even be successfully applied in this environment? Don’t we basically have to have smaller banks or national banks in order for it to work? I agree with the idea that banks should be broken up. The TBTF are alive and well and bigger than ever. That is one of the #OWS grievances I can get behind. Most of the others, to me, are pure nonsense, but that is an entirely different discussion.

Again, thanks for the insightful discussion…time is limited.

[trevelyan]

Thanks for the thoughtful discussion.... Only one note: subprime loans were by definition those which did not quality for government guarantee. So Fannie/Freddie may be bad policy for other reasons, but they didn't cause the crisis -- they lost market share to private lenders throughout:

http://www.cepr.net/index.php/blogs/beat-the-press/george-wi...