A Sunday Canto For Krugman

Krugman is exactly where he needs to be, on the sidelines. His BIG GOVERNMENT SPENDING THEORY is pure socialism. America doesn’t need Krugman, it simply needs to go back to the basics. Quit spending money we do not have in the bank. Quit printing money which is debt to the future tax payers of this country, your children and grandchildren. Quit borrowing money from the Chinese and let the free market work its way out of this “economic crisis”. The longer Obama and Geithner keep interferring in the day to day operations of our banks, wall street and other various private companies the longer the insanity will last. You only have history to guide you by reading about what FDR did in 1937-38. We are repeating that history and it will prolong the economic pain the average American is now feeling. The Democrats did it then, and they are doing it now.

I won’t say anything to refute Rusty’s religious faith in mythical free markets other than to note that truly free markets are utterly incapable of dealing with the problem of pig feces.

No need to dream about what a truly free market society might look like, it was tried in Iraq.
Just read Imperial Life in the Emerald City to find out how it worked. I won’t spoil the ending.

Rustydog:
.
Do you think that the Federal Deposit Insurance Corporation is a bad thing?
.
Is that what movement conservatives believe…that the FDIC should go away?

The video itself could inspire some very interesting discussion on the relative influence of opinion columnists vs public officials. I’m willing to assert that Krugman has surprisingly significant influence exactly where he’s sitting.

Rusty you must have been out too late, here you are on Swampland vomiting all over the place again. Jeeze, stop drinking grain alcohol, sleeping with guns and eating squirrel meat. You really need to start sleeping with women. Of course good hygiene is important for the last part and that may be a barrier too high for you to accomplish. On second thought just go crawl back under that rock.

Michael Scherer:
.
After looking at the CBO Report, and thinking about Rumsfeld…I mean Paulson…I mean Geithner’s plan to put on a play about holding an auction to deal with banks’ worthless mortgage-backed securities, I think that I understand why Obama and Co think that they need to pass health care reform this year:
.
They aren’t terribly confident that the Congress will retain a Democratic majority after the 2010 midterms…

As a professor who admits to a huge nerdy crush on Krugman (brainy guys=love), I am forced to point out that, while academics have some great ideas (and may even win prizes for them), they are seldom held accountable for them. Besides, Obama has picked his house economist — Larry Summers. I am not sure there’s room for two.
.
That being said, I hope lots of people at least read Krugman’s work (beyond the blog) because the country could use a boost in its economic literacy. Then fewer people (ahem–Rusty) would think that nations behave (or should behave) like households.

Stuart since you are the only sane individual on this blog for the most part, with a few other exceptions, who does not use far left extremist attacks I will answer your question.
.
FDIC insurance is the way for banks to allow some security for their depositors, and required by the 1933 Glass-Steagall Act. And yes, FDIC is a good hedge against a possible failure of the bank. If you are implying that the Government solely backs FDIC then you are wrong. Participating Banks pay for FDIC in the form of an insurance premium.
.
Now, was the repeal of Glass-Steagall a good thing in the form of Depository Institutions Deregulation and Monetary Control Act of 1980? Absolutely not. In hindsight now, we can all agree I think this has lead to the current economic crisis. Allowing banks to become security brokers. Can we lay blame on the Republicans for this, yes. As well as the majority of Democrats in both the House and Senate, and President Clinton at the time who went along with the insane idea to deregulate the banks.
.
But just because I believe that deregulation of this specific instance was a bad idea, does not say I agree that carte blanche and universal Government control and regulation is a good thing for our free market economy.
.
I hope that answers your question, Stuart.

And, to joYOmamma. I have read Krugman and disagree with his un-tested theory of “Big Governement and Big Spending” practices. You only need to go to Europe to know what type of economy we would be living under which is the only models that are near what Krugman proposes. But, I would like to remind you that even France’s Sarcose said this week, “enough already with big Governement spending”!! Sometimes, even the French get something right.

The problem isn’t Krugman’s position. The problem is that Obama has chosen to basically ignore him. IF Obama picked up the NYT a couple of times a week, read what Krugman had to say, and called him to elaborate on his ideas…well, we wouldn’t need a formal appointment as a Cabinet Secretary to get huge improvements in how things are being addressed.

@stuartzechman:
Let me use your example to ask this question. Are we paying 2 times for these things? Or maybe even 3 times?

So, we give money to the ‘buyers’ at the auction-play. These gamblers buy the prop-movie with that money, to the banks. But didn’t we just pay the full value of the movie theater’s stock to these same gamblers by covering their ‘insurance policies’ @AIG, also just paid to them? (or god forbid, did we just pay 30x the value of these toxic things through AIG to these gamblers?)

So they end up having been paid twice, by our money, once from the auction-play and again through AIG? and they are also left holding the stock to all the abandoned development in arizona? As a reward for acting stupid enough to pull this off?

…and aren’t these same gambler’s going to be paid a third time for the exact same movie theater stock, probably paid for again by banks holding the money we gave to the participants of the auction-play?

and in return, we get 9-79% of various bankrupt companies? Isn’t that screwing the banks AND screwing ourselves BOTH at the expense of the parties that caused this all to happen in the first place?

Thank you so much for the cogent response, Rustydog.
.
And thank you for clarifying. You apparently agree with the reality-based community, which is encouraging.
.
There is a great deal of confusion with respect to where movement conservatives (and the Republican party) draw the line when it comes to state intervention in financial (and other) markets, mostly because of a legacy of incoherent statements by morons like this guy:
.

On Capitol Hill, [Republican Senator from Texas Phil] Gramm became the most effective proponent of deregulation in a generation, by dint of his expertise (a Ph.D in economics), free-market ideology, perch on the Senate banking committee and force of personality (a writer in Texas once called him “a snapping turtle”). And in one remarkable stretch from 1999 to 2001, he pushed laws and promoted policies that he says unshackled businesses from needless restraints but his critics charge significantly contributed to the financial crisis that has rattled the nation.
.
He led the effort to block measures curtailing deceptive or predatory lending, which was just beginning to result in a jump in home foreclosures that would undermine the financial markets. He advanced legislation that fractured oversight of Wall Street while knocking down Depression-era barriers that restricted the rise and reach of financial conglomerates.
.
And he pushed through a provision that ensured virtually no regulation of the complex financial instruments known as derivatives, including credit swaps, contracts that would encourage risky investment practices at Wall Street’s most venerable institutions and spread the risks, like a virus, around the world.
.
Many of his deregulation efforts were backed by the Clinton administration.
.
Mr. Gramm, ever the economics professor, disputes his critics’ analysis of the causes of the upheaval. He asserts that swaps, by enabling companies to insure themselves against defaults, have diminished, not increased, the effects of the declining housing markets.
.
“This is part of this myth of deregulation,” he said in the interview. “By and large, credit-default swaps have distributed the risks. They didn’t create it. The only reason people have focused on them is that some politicians don’t know a credit-default swap from a turnip.”
.
Mr. Gramm says that, given what has happened, there are modest regulatory changes he would favor, including requiring issuers of credit-default swaps to demonstrate that they have enough capital to back up their pledges. But his belief that government should intervene only minimally in markets is unshaken.
.
“They are saying there was 15 years of massive deregulation and that’s what caused the problem,” Mr. Gramm said of his critics. “I just don’t see any evidence of it.”

.
Either you are out of step with movement conservatives or Phil Gramm is out of his mind, Rustydog.
.
Democrats and liberals are left to politically exploit the fact that this guy speaks for Republican ideology on regulation. Do you see where I would get the idea that you would oppose the FDIC?
.
You guys need to really take the Phil Gramms and John Stossels of your movement aside aside and tell them to shut the f*ck up, because you need to let people know that the Republican party is actually not for Russian-style kleptocratic “free” markets (if that’s really the case, and you’re not an iconoclast).
.
Know what I’m saying, Rustydog?

requiring issuers of credit-default swaps to demonstrate that they have enough capital to back up their pledges
.
Actually that probably would have been enough to prevent what happened. The fact that AIG sold billions in vapor is the difference between a big problem and a meltdown.

mpk999:
.
But didn’t we just pay the full value of the movie theater’s stock to these same gamblers by covering their ‘insurance policies’ @AIG, also just paid to them? (or god forbid, did we just pay 30x the value of these toxic things through AIG to these gamblers?)
.
So they end up having been paid twice, by our money, once from the auction-play and again through AIG? and they are also left holding the stock to all the abandoned development in arizona? As a reward for acting stupid enough to pull this off?
.
Yes, that’s my understanding of the situation.
.
We’re overpaying AIG to (in theory, we don’t actually know all the details) cover a certain key amount of their crazy credit default swap policies that they sold to the banks –US and foriegn. Kicking and screaming, they have finally released information on where they have spent our money (hence the bonus fiasco), as I have written about in another thread:
.

So if someone can explain to me where we would get the money to nationalize the big banks I am open to hearing you out.
.
The argument is that it will cost less than what it’s costing now.
.
“Where we would get the money” is the same place we’re “getting the money” to hand over to AIG –so that AIG can take half of it and give it to the financial products divisions of US banks.
.

Country———AIG-related payments in billions of dollars
.
US————–43.5
.
France———-19.1
.
Germany———16.7
.
UK————–12.7
.
Switzerland—–5.4
.
Netherlands—–2.3
.
Canada———-1.1
.
Spain———–0.3
.
Denmark———0.2
.
.
Total———-$101.3 billion
.
Total to US counterparties: $43.5 billion
.
Total to non-US counterparties: $57.8 billion

.
Then we’re about to overpay the banks for the worthless mortgage-backed securities that the credit default swaps were meant to cover, by putting on Geithner’s fabulous production of “Oklahoma!” to which you are referring.
.
Since we’re overpaying (by giving away non-recourse –no collateral, no collection– loans) the big gamblers (investment capital) to come in and buy up the banks’ worthless paper, we are wildly, grossly overpaying at least twice for the bubble-valued burnt-down movie theater stock:
.
1) once by covering AIG’s whatever-to-one payouts of their credit default swaps –insurance policies on mortgage-backed securities
.
2) twice by putting up nearly all the money so that high-finance gamblers buy the worthless mortgage-backed securities (shares in movie theater ashes) from banks in the proposed theatrical auction
.
–and maybe a third time, if somehow the gamblers can talk the government into buying back the stock they loaned the gamblers money to buy from the banks.
.
So yes, you’re correct according to my obviously limited understanding of the situation.

We in America find ourselves in a desperate economic crisis – but the crisis is not helped by irresponsible reporting to gain a market share of the media. ……………..

http://thefiresidepost.com/2009/03/21/rovian-media-applying-the-dark-arts-to-aig/

Barney Frank is apologizing for Geithner on Face the Nation now.
.
He’s saying that the Geithner plan is waaaaaaaaaaaaaay different from the Paulson plan, and that, as President of the New York Federal Reserve Bank, Geithner had nooooooooooooooooothing to do with the original Fed AIG bailout.
.
Barney’s scrambling here…

Wow Stuart, comparing the current economic collaspe to Hollywood. What would your elitist friends in the movie industry say about that?
.
Even I would not dare tread on that turf. But, I have to admit I was watching “Gone with the Wind” while looking at my latest 401k statement.
.
And you are absolutely on target Stuart in expressing anger at the TARPs and bailouts. I have been against them from the start. Why pay for something twice, and also bail out the europeans at the same time. Idiots, complete and total idiots.
.
You prove my point well. Too much government involvement is not good. Allow the free market to move as it may. If Obama only knew to do that, then he would have all the money he knew what to do with to spend on more social welfare programs.

I understand that credit swaps are not insurance, per sey, but they were traded to cover their investment in these securities, similar in *function* to insurance, right? So if they get a payout on their failed investments, why does this ‘disappear’ as far as value goes?

.

Is the unregulation part of unregulated market mean that “insurance” doesn’t actually cover anything, and that’s why their AIG coverage money isn’t treated as a ‘replacement’ for burned down assets already? Or is it just that because its unregulated, we don’t know who got paid, so we have to ignore the intent of the CDSs? I just can’t grasp why it seems so obvious that there’s at least 2 or 3 payments from taxpayers to the poeple that made them worthless in the first place.

Out of curiosity, anyone know if the actual properties we’re talking about, actual buildings, were already paid for by developers and the only “lost” money is the inability to resell to someone? Or it was already bought and paid from the developer by a bank? And no one, the developers, financiers, or banks had regular insurance on its value, even BEFORE the bank needed to make a mortgage loan to a consumer to purchase it over time? The more i read, the more it seems that these ‘toxic assets’ have been paid for at least 4 or 5 times over, all *before* all this government intervention…

if any of this post *is* essentially what is happening, why on earth has no MSM explained that we’re paying the value of a 3rd or 4th payout of the cost of these assets?

SZ
.
The truth as I understand it is that it was the plan from the beginning for AIG to pay counterparties both foreign and domestic precisely BECAUSE if they didn’t they would sink not just the American financial system but also the GLOBAL finanacial system. I really don’t understand the politicians who are feigning dismay at this because if AIG wasn’t so plugged in damn near everywhere there wouldn’t have been a need to bail them out in the first place. Now there might be the thought of what do we care about whether Germany or France have their financial system collapse though I don’t think that most people who take a minute to ruminate over it would ask that question. Still it has to be said that if a financial system collapses around the country there will be chaos and in some form or another soon enough war. That was not a risk our government was willing to take and in my opinion rightfully so.
.
Now to the nationalization question here is what I am talking about.
.
http://dealbook.blogs.nytimes.com/2009/02/26/fdics-bank-fund-at-lowest-point-in-25-years/
.

The federal government’s bank insurance fund dropped by the end of last year to the lowest point in more than 25 years, and the number of banks at risk of failure nearly doubled, according to the head of the Federal Deposit Insurance Corporation, The New York Times’s Eric Lipton reports from Washington.

.
“There is no question this is one of the most difficult periods we have encountered during the F.D.I.C.’s 75 years of operation,” Sheila Bair, the agency’s chairwoman, said at a news conference on Thursday where she released a status report on the nation’s 8,300 federally insured banks.
.
Over all, the nation’s banks lost $26.2 billion in the fourth quarter, the biggest quarterly lost since the F.D.I.C. began collecting data on quarterly earnings. Almost one in three banks lost money, Ms. Bair reported.
.
Already this year, 14 banks have failed, compared with a total of 25 banks last year and 3 in 2007. Ms. Bair said that the agency had placed 252 institutions on its watch list — meaning they were at risk of failure—compared to 76 banks at the end of 2007.
.
With all of the bank failures, the F.D.I.C.’s insurance fund has dropped to $19 billion, the lowest it has been since 1993, at the end of the savings and loan crisis. The insurance fund had $52 billion at the end of 2007.

.
Now we have shoveled a lot more money by far into AIG than any of the other banks in TARP. To actually nationalize those big banks we would have to dramatically raise the level of intervention that we have put into them so far. Somehow I don’t think 19 billion is going to do it. And if the FDIC has to borrow money from the Treasury to get it done then where will that money come from? We would have to go back for another TARP bill and I don’t think its going to happen. Not in this political climate.

The problem with Krugman’s wishes is not economic reality but political reality. Anybody here think a Krugman plan could get implemented?

Brad Delong breaks from Krugman
.
http://delong.typepad.com/sdj/2009/03/the-geithner-plan-faq.html
.

Q: Why do we think that the government will get value from its hiring these hedge and pension fund managers to operate this program?
.
A: They do get 17% of the equity return. 17% of the return on equity on a $1 trillion portfolio that is leveraged 5-1 is incentive.
.
Q: So the Treasury is doing this to make money?
.
A: No: making money is a sidelight. The Treasury is doing this to reduce unemployment.
.
Q: How does having the U.S. government invest $1 trillion in the world’s largest hedge fund operations reduce unemployment?
.
A: At the moment, those businesses that ought to be expanding and hiring cannot profitably expand and hire because the terms on which they can finance expansion are so lousy. The terms on which they can finance expansion are so lazy because existing financial asset prices are so low. Existing financial asset prices are so low because risk and information discounts have soared. Risk and information discounts have collapsed because the supply of assets is high and the tolerance of financial intermediaries for holding assets that are risky or that might have information-revelation problems are low.
.
Q: So?
.
A: So if we are going to boost asset prices to levels at which those firms that ought to be expanding can get finance, we are going to have to shrink the supply of risky assets that our private-sector financial intermediaries have to hold. The government buys up $1 trillion of financial assets, and lo and behold the private sector has to hold $1 trillion less of risky and information-impacted assets. Their price goes up. Supply and demand.
.
Q: And firms that ought to be expanding can then get financing on good terms again, and so they hire, and unemployment drops?
.
A: No. Our guess is that we would need to take $4 trillion out of the market and off the supply that private financial intermediaries must hold in order to move financial asset prices to where they need to be in order to unfreeze credit markets, and make it profitable for those businesses that should be hiring and expanding to actually hire and expand.
.
Q: Oh.
.
A: But all is not lost. This is not all the administration is doing. This plan consumes $150 billion of second-tranche TARP money and leverages it to take $1 trillion in risky assets off the private sector’s books. And the Federal Reserve is taking an additional $1 trillion of risky debt off the private sector’s books and replacing it with cash through its program of quantitative easing. And there is the fiscal boost program. And there is a potential second-round stimulus in September. And there is still $200 billion more left in the TARP to be used in other ways.
.
Think of it this way: the Fed’s and the Treasury’s announcements in the past week are what we think will be half of what we need to do the job. And if it turns out that we are right, more programs and plans will be on the way.
.
Q: This sounds very different from the headline of the Andrews, Dash, and Bowley article in the New York Times this morning: “Toxic Asset Plan Foresees Big Subsidies for Investors.”
.
A: You are surprised, after the past decade, to see a New York Times story with a misleading headline?
.
Q: No.
.
A: The plan I have just described to you is the plan that was described to Andrews, Dash, and Bowley. They write of “coax[ing] investors to form partnerships with the government” and “taxpayers… would pay for the bulk of the purchases…”–that’s the $30 billion from the private managers and the $150 billion from the TARP that makes up the equity tranche of the program. They write of “the Federal Deposit Insurance Corporation will set up special-purpose investment partnerships and lend about 85 percent of the money…”–that’s the debt slice of the program. They write that “the government will provide the overwhelming bulk of the money — possibly more than 95 percent…”–that is true, but they don’t say that the government gets 80% of the equity profits and what it is owed the FDIC on the debt tranche. That what Andrews, Dash, and Bowley say sounds different is a big problem: they did not explain the plan very well. Deborah Solomon in the Wall Street Journal does, I think, much better. David Cho in tomorrow morning’s Washington Post is in the middle.

.
Keep in mind that every reaction to the “Geitner Plan” is really a reaction to the NYTimes EXPLANATION of the Geitner plan. And thats why like I said last night I will wait for the actual details to come out officially before feeling either way about the plan.

Austan Goolsbee, Economic Advisor to President Obama, is lying his head off to us now on Face the Nation:
.

Q: “Paul Krugman in his blog today said: ‘For the private investors, this is an open invitation to play heads I win, tails the taxpayers lose.’”
.
“I don’t think that that’s an accurate description, I mean, if the government doesn’t make money, the private sector doesn’t make money either. I mean these guys are…are coming in in a partnership, and one of the reason you want to have the partnership is precisely so that A) the government doesn’t massively overpay for these troubled assets that are on the balance sheets, and B) everybody’s got skin in the game and you don’t get into situations where you’re paying guys for failure.”
.
That’s incredible.
.
This is Rumsfeld-style dishonesty. I can’t believe it.
.
I just can’t believe this.
.
“Partnership”? Did that guy just say “partnership” with a straight face?
.
Did the New York Times completely botch the story?:
.
To entice private investors like hedge funds and private equity firms to take part, the F.D.I.C. will provide nonrecourse loans — that is, loans that are secured only by the value of the mortgage assets being bought — worth up to 85 percent of the value of a portfolio of troubled assets.
.
The remaining 15 percent will come from the government and the private investors. The Treasury would put up as much as 80 percent of that, while private investors would put up as little as 20 percent of the money, according to industry officials. Private investors, then, would be contributing as little as 3 percent of the equity, and the government as much as 97 percent.
.
What “partnership” can possibly be described by one party holding 97 percent of the investment, and the other holding 3 percent?
.
The “partner” doing the bidding is using 97 f*cking percent not-his-own-money! How does that “partnership” guarantee or even induce the government not to overpay? What “skin in the game” is 3 percent?
.
Austan Goolsbee isn’t stupid, folks.
.
He’s lying to us, hoping that the same stenographic, he said/she said reporting we had during the Bush/Rumsfeld era, and adult-sounding admonitions to “calm down everybody” will obscure this fact.
.
“Partnership”? 97 to 3?
.
Is this change we can believe in?

Sorry, here’s that quote from the Times properly formatted:
.

To entice private investors like hedge funds and private equity firms to take part, the F.D.I.C. will provide nonrecourse loans — that is, loans that are secured only by the value of the mortgage assets being bought — worth up to 85 percent of the value of a portfolio of troubled assets.
.
The remaining 15 percent will come from the government and the private investors. The Treasury would put up as much as 80 percent of that, while private investors would put up as little as 20 percent of the money, according to industry officials. Private investors, then, would be contributing as little as 3 percent of the equity, and the government as much as 97 percent.

SZ
.
To your question of whether the NYTimes botched the story, Delong says yes. I have no idea.

see #19:
an analogy:
Gamblers pay developers, or own the developers, or developers pay themselves, to pay for new construction. There’s regular insurance on their investment in the construction of these assets. Paid for once.
The banks ‘buy’ these assets and give out mortgage loans to someone to ‘buy’ these assets from them. They have insurance on these assets, and ultimately retain the property, plus insurance on the mortgage, plus insurance on their margin for the sale of said asset, and then also sell the loan on the secondary market. This is the first step towards the 30-1 leveraged ratio at the top, and the actual cost of the asset has been paid several times already at this point.
The secondary market took their loan assets, and is this what was sliced up by payment ratios into differently rated credit products sold into the CDO market? And then these sales are ‘covered’ by CDSs, in case the CDOs default?

And now, the taxpayer is paying to ‘own’ the fake CDO/CDS companies that are essentially paying out EVERY LEVEL of investment down to the abandoned buildings with the forced option to flat out buy the assets in the future, for the upteenth time, if the secondary market can’t resell them, after just now ‘rebuying’ them from us with our own money in a staged auction-play? It gets more and more asinine the more information they give us about whats going on.
Am I misunderstanding what is going on? And only 1 layer of all these purchases of the same asset, without an equal number of times sold, is ‘expected’ to be paid back from the gamblers, at no interest without regard to inflation? And we pay them personally millions and millions of dollars to do this? …and find out no taxes have been paid on all this?
.
If someone steals my car, insurance should pay me to cover the value of it. Probably not enough to buy a comparable replacement, but i’m covered. If the car is found, I don’t get to keep both. But at the same time, my car that I was paid for, if its never found by the police, is still in someone’s hands. Why is there no CDO for the private market I could also get a payout for, and then a third payment from the government to go buy back my stolen car to try to trade it in to a stupid car dealer for a comparable value discount on a new car. And then the government is guaranteeing again that used car shop can sell it back to government in the future?
.
.
Is this a ponzi scheme by the government? I mean, do they collect taxes for the federal budget each time a ‘sale’ is made, even with made-up freshly-printed taxpayer money, without comparable tax deductions for an {un}equal level of purchases for each of these sales? Or do the gamblers get a full tax deduction for the value of their ‘losses’ on top of everything else we are giving them?

Great point, SG
.
To your question of whether the NYTimes botched the story, Delong says yes. I have no idea.
.
Me neither. It wouldn’t be the first time that the Times failed the public in a colossal way. Maybe this is the Judy Miller of financial reporting.
.
I truly hope that the Times is just doing a sh*tty job again.

SG:
.
…on the other hand, Goolsbee didn’t say anything about the Times getting it wrong, he just says Krugman’s analysis is wrong…

SZ
.
The only thing I can think of that Dr. Krugman based his analysis on was the NYTimes article. And I wasn’t watching the interview but did they ask him if the Times article was accurate? If they only presented him with Dr. Krugman’s analysis then it would make sense to me that he only focused on refuting the analysis. I guess the question would be did Goolsbee’s answers resemble DeLong’s analysis. Either way I am tired of feelinig like I am watching a tennis match over a plan that hasn’t been officially released. I am in wait and see mode.

[...] Is Krugman in the best place to do the most good – some don’t think so …… By porphyrogennetos A great video. [...]

SG:
.
…but did they ask him if the Times article was accurate?
.
Great point again, the interviewer did not.
.
…did Goolsbee’s answers resemble DeLong’s analysis
.
Yes, DeLong is describing a partnership, as is Goolsbee.
.
What scares me about DeLong’s analysis is this:
.
Q: What if markets never recover, the assets are not fundamentally undervalued, and even when held to maturity the government doesn’t make back its money?
.
A: Then we have worse things to worry about than government losses on TARP-program money–for we are then in a world in which the only things that have value are bottled water, sewing needles, and ammunition.
.
That’s not analysis; that’s hope.

SZ
.
You only highlighted the one part of the question that you are interested in. If in fact the markets never recover just by itself DeLong is right. If the assets don’t make back our money even when held to maturity, because of what that would mean about the economy and the housing market, his answer would be correct. Now I am not saying you did anything wrong, but you do have to look at the context of the WHOLE question. Do you dispute his answer? I don’t.

Do you dispute his answer? I don’t.
.
I don’t think that the question was particularly well worded.
.
He managed to combine “markets never recover” with “not fundamentally undervalued”, and that’s not a conflation that makes sense, except in rhetorical terms.
.
Of course if the markets “never” resume any sort of normal operations, we’re all f*cked. That’s not the same as mortgage-backes securities being worthless –DeLong is putting the two together.
.
It’s the same as if the question was “What if the markets never recover, the assets are not fundamentally sound, and thermo-nuclear war breaks out across two hemispheres?”.
.
He’s right to say “we’re all in a Mad Max movie”, but that’s not really very helpful, is it?