I admit I am biased to trade flow explanations of international crises, for the simple fact that in my (admittedly shallow) perception, it seems like 90% of major economic crises were caused by severe trade imbalances. That said, Michael Pettis has been on this explanation from the day I first read him, and has been stunningly correct about its implications and what the actors would do in reaction. I do remember Martin Wolf writing a similar thing at the beginning of the year as well.

Other than that though, in general people have responded closer to deLong.

I have to partially disagree with you. Yes the greater cost was there with KBR doing the support, up to 27 dollars per meal served in Iraq and Afghanistan….However, the food was MUCH better than prior to that time. We went from MREs and SOS to very good food. Other than that, you're right on.

I'm pretty sure all sorts of economists talked about that for years, Martin Wolf wrote a book about it, Menzie Chinn wrote some high profile articles about circa 2006, Brad Setser seemed to talk of nothing else etc. Brad deLong even said that it was the crisis that everybody expected, rather than the one we actually got.

No?

The economic fall out though will mean this will only likely be tried if the FED goes bankrupt or something equally economically catastrophic.

Also while I have no problem with Ron Paul's vision in general, I don't see a way to get there without causing collapse due to institutional changes. Look at something as simple as the homeowner's mortgage tax deduction for example. We can't even get rid of that (despite near universal agreement that it's bad) because it would automatically lower home values by 10-15% and wipe out hundreds of billions in equity. I don't see anyway we could abolish the Fed and downsize the government like he's calling for without massive economic problems — literally 50%+ of leverage would dry up and lead to mass depression.

Of course that is the argument against inflationist policy in general and I am also sympathetic to the notion that it forces us to have rampant consumerism and environment overuse…it's a very intractable problem.

I do feel that your point about the public engagement being primary is right on. All countries have issues (primarily due to demographics) but a lot of socialist countries where the citizenry feels very engaged and informed — and is willing to quickly turn on groups (both public and private) that misbehave — have more of a social safety net while having equivalent (or often times lower) effective tax rates and equivalent real economy business friendliness. Of course all those countries are small, averaging around 10 million people, so I wouldn't pretend that they are universally applicable, and the larger socialist countries do have major structural problems similar to us.

It seems to me that there is the possibility of a neofederalist movement where both progressives and conservatives prefer local power structures because they are more responsive. A lot of times I wonder if the Liberal answer of large government is merely an historical accident that arose because of civil and labor rights issues, both of which have been nearly completely addressed.

Anyway, to me this is why the whole left/right political debate about more regulation or less regulation (or even what we were just discussing here, public sector oversight vs private market forces) is mostly moot. Both approaches can, and do, fail…especially when the public isn't paying much attention. You can have all the regulation that an ardent leftie would dream of, but if it's not enforced then it's completely meaningless. And what a lot of mainstream Dem voters seem to fail to notice is the frequency that their own party might give lip service to 'regulation' while actually making it toothless because they too are benefiting from the collusion.

What is emerging is that the people on the ground in nearly every institution (both government and private) saw what was going on, realized it was wrong, tried to warn their superiors and were marginalized or fired.

Yeah, basically I was thinking it sounds like the kind of rationalization you get when the regulators decide to collude with the private market interest, and mostly no one pays attention or stops to think about how the rationale doesn't really make any sense and could easily lead to an undesired outcome.

That's actually the problem with any system, MSF…on paper it looks great but when you add human beings the actual outcome isn't what is predicted or advertised. The reason that many of us still see capitalism as the 'worst system, except for all the others' though is that for the most part it works with the baser instincts of people instead of assuming that everyone will cooperate benignly for the greater good. Quite often (see my other comment for how that applies to this particular case, for instance) it's when things are done to tinker with the market forces that the greed of some individuals then goes unchecked. There also, of course, are instances when a particular sector or industry is immune from market forces or for various reasons there needs to be some regulation or intervention as well, so I'm not by any means advocating a completely laissez faire economy.

The article also left out another part that has still not been resolved. Several state AGs (e.g. connecticut's) sued the ratings agencies claiming that they give government bonds lower ratings than equivalent corporate ones.

The reason they are suspected to have done this is so the government bonds would be forced to buy insurance from the monoline insurers, raising the cost of the bond and indirectly defrauding the tax payers. Of course as you can see by the date, larger events overshadowed that allegation.

This part is baffling. Why was it necessary to 'promote competition' and how does that change even effect that outcome? Why shouldn't there have been competition among the investors who were paying for accurate analyses, instead of setting up and promoting the perverse incentive of having the sellers pay someone to rate their product. You wouldn't buy a house based on the home inspection paid for by the seller, and this makes no more sense than that does (less so, given the amount of money and risk involved in those transactions.)