How your view of the crisis of 2008-2009 impacts your understanding of today's big issues

Here is a link to a very interesting interview of former Treasury Secretary Hank Paulson by economist Larry Kudlow.

It is worth paying attention to, because it highlights the difference between major "belief systems" regarding what caused the 2008-2009 financial crisis, belief systems that play a crucial role today in shaping the different views on where the economy is right now and what measures should be taken to prevent a similar crisis in the future.

Former Secretary Paulson repudiates the arguments outlined recently by Steve Forbes in this column (in the February 8 edition of Forbes), in which Mr. Forbes argues that Fannie Mae and Freddie Mac, government interference in housing lending, and above all the disastrous role played by the introduction of new mark-to-market accounting standards in 2007 played in the 2008 meltdown. Interviewer Larry Kudlow mentioned that column in the first part of the above video.

Mr. Paulson's arguments against this view of the crisis are not very convincing. We ourselves have put forth arguments similar to those made by Mr. Forbes in numerous previous blog posts during 2008 and 2009 (see for instance:
"Big news on mark-to-market accounting" March 13, 2009
"It's a panic, not a Great Depression" January 21, 2009
"Taking stock of 2008" December 31, 2008
and "The wages of socializing," about Fannie Mae, Freddie Mac, and the Community Reinvestment Act, from July 16, 2008).

If, as we have argued, the crisis of 2008-2009 was a financial panic which then spread to the rest of the economy, then the sharp recovery (which began when Congress pressured FASB into removing the mark-to-market accounting rule at the heart of the panic) is not a surprise. It is also plain that the recovery has not been the result of government "stimulus" (for more on that subject, see our post from January 15 of last year). If this view is correct, then further stimulus is not necessary to keep the economy from collapsing again, and in fact (as we argued in that January 15 post), it will retard real growth.

These issues are very important for investors to understand, and are worthy of careful consideration.

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