Recession Case - Ditto Fanny and Freddie

This isn't a heinous capitalist conspiracy -- or a socialist conspiracy either, for that matter. It's the structure of the system, he says, a design flaw thrown up by the conflict between the rules of capitalism and the limits of democracy. "Politicians are there to do something about the pain and suffering people have, and my sense is that home ownership and housing credit was in some ways a path of least resistance -- it seemed to be working, and if you pushed it there were lots of positive consequences. It gives people a stake in society, it increases as society does well to give them a share in the growth and helps them borrow to enhance their lifestyles."

This isn't an attempt to absolve the greedy bankers, he says. "But we have to ask why did the financial sector suddenly want to lend to low-income housing?"

Ditto Fanny and Freddie, the quasi-government housing lenders right-wing ideologues like to blame for the crash. And the low interest rates set by the Federal Reserve. "I think we should recognize that this is a systemic crisis. This is not one bank gone crazy. This is many banks."

The larger problem is global, he says. "The U.S. is a country that tends to over consume and over stimulate in bad times, and as a result it tends to be a net absorber of goods from rest of the world. A counterpart to that is countries like Germany and Japan and some of the emerging markets like China and Malaysia, which have benefited hugely by exporting to the U.S. -- so I'm arguing that there is this pressure both from within the U.S. and from outside to support over consumption, and that is something that gives the financial sector an incentive to go overboard."

Consider Greece. The conventional wisdom, especially among conservatives, is that Greece is a classic example of the danger of overspending on government social programs. "But the fact that Greece overspent is not totally unrelated to the fact that Germany needs to export -- some of what Greece was doing was buying German goods."

So Greece buys off its people with early pensions and great services, and the U.S. buys off its people with easy credit.

But the conservative idea that the social safety net just makes people lazy isn't the answer either -- that if you increase unemployment insurance, Americans will turn into Europeans and kick back in their Lay-Z-Boys?

There's some truth to it, Rajan says, as we can see from Europe's high long-term unemployment rates. "I understand that market incentives work -- if you tell people they will be shot three weeks from now if they don't get a job, they'll go find a job. But is that the kind of psychological pressure we want to create?"

Again, the underlying problem is structural: when the U.S. economy was producing a lot of jobs, we didn't have to worry