Krugman vs. Zombies

It's too much to ignore

What's your name?
Who's your daddy?
(He rich) Is he rich like me?
Has he taken, any time (any time)
(To show) to show you what you need to live
-- 'Time of the Season'/The Zombies 1968

In today's rant, Krugman calls out zombies in the Right Wingnut brigade.

And crucially, the housing bubble was an international phenomenon; Spain had a bigger bubble than we did, followed by a worse slump. Did the U.S. liberals force Spanish banks to make bad loans?

And, of course, what's worse is that Spain's experience was largely based on bad vacation home loans. This is one of them.

The Great Recession had its roots (not that I'm following any orthodoxy that I know of) in the DotBomb. Following that meltdown, all the Big Money Holders went looking for some other place to stash their excess moolah. What they wanted was high return at low risk of another meltdown. No such instruments exist, of course. But, the answer was obvious to everyone: mortgages, particularly residential. Not spectacular returns, but better than Treasuries, and there's never been (so the legend went) sector/nation wide collapse of home mortgages. The problem was that if you had hundreds of millions (or more) of moolah, buying up individual mortgages was out of the question.

Enter, stage right, securitization instruments. There was a new problem: where was the necessary supply of securities to sop up all that excess moolah? The answer stage further right, was Countrywide, making loans for McMansions to the poor. If it all stopped there, then the mortgage companies would have gone belly up once it became clear that the poor couldn't pay for McMansions. But no one noticed when Blythe Masters invented the credit default swap (CDS). This grenade allowed anyone to bet on the solvency of anyone else in the form (titularly) of insurance, regardless of whether the bet was made by anyone involved. The result was a chain reaction through the finance sector when the Viagra wore off. The assumption, clearly, by the likes of Countrywide and the regular banks that lined up like lemmings, was that if a few/some/many of these subprime McMansion mortgages went stinky, well we still have the house, so we'll just sell it again and clear the note. The 'asset' didn't disappear. But supply doesn't create its own demand, alas.

Only the nuttiest of the Right Wingnuts still bray that supply side mantra, 'supply creates its own demand'. If that were true, producers would continue to not only continue production in the face of deflation and collapsing demand, but take advantage by boosting output. You do believe that's how the Real World Works, don't you? If it were true, there would never be recession, much less depression in any economy any where any time.

Among the early examples of mortgage-backed securities in the United States were the farm railroad mortgage bonds of the mid-19th century which may have contributed to the panic of 1857.
-- the wiki

What's that fable about those who ignore history?