They still don’t get it. I saw a TV show about a new book laying the Great Recession of 2009 at the foot of too many bad loans. It was not bad loans that started the financial meltdown that led to the Great Recession. The cause was erroneous valuations of securitized debt securities based, not on loans going bad, but property prices reaching a plateau. These erroneous valuations destroyed the capital bases of most lenders, that caused credit to dry up, that caused consumption to fall, that caused production to fall, that caused unemployment to rise.

The Feds recognized the error being made in valuing securitized debt. They stepped in with the TARP plan in October 2008 to shore up the banks’ balance sheets. The original idea was to buy up the securitized debt assets and hold them until the situation stabilized. It became quicly apparent, however, that this would be too slow so they injected the funds directly into the bank balance sheets and thus restored stability. This move was reinforced by lifting the so-called “mark-to-market” rules for valuing assets in April 2009.

This two step plan saved the financial system faster than even the most optimistic expected. Moreover, it did not cost one dime of taxpayer money. In fact it earned the Feds a tidy sum. And why did it work so quicky and effectively? Because the original problem came from erroneous valuations of debt assets, not from bad debt.

Unfortunately the financial recovery was not fast enough to stem the effect of erroneous valuations of securitized debt on the general economy. By the time we shored up the capital balances of the banks the credit freeze had already cut into consumption, that caused reduction in production, that caused job cuts. Only when job cuts became rampant did the rate of loan defaults and foreclosures begin to rise. At the end of 2008 the foreclosure rate for the country was about 2 percent. But by the end of 2009, when job loss became the order of the day, this rate had risen to 4 percent.

Bad valuations of securitized debt, not bad debts caused the Great Recession of 2009.