I love the hypothesizing about what might happen if the govt (through the Fed, or Treasury, or FDIC, or FNMA, or whatever) were to simply supply cheap money for borrowers buying assets at overinflated prices.

We don’t have to hypothesize! Since summer and fall of 2007, virtually all the money used to buy homes in the US has been provided thanks to the US govt. The Federal Home Loan Bank system kicked in quietly right away, FNMA continued to pour in vast amounts of money, and the Treasury and the FDIC and FHA and so on have been the reason for $8 out of every $10 spend on housing in the 1 1/2 years.

Of course, most of these govt institutions arranged for the money to be provided via ludicrously underpriced and overly risky guarantees on the loans. Since most people aren’t smart enough to understand that lending is only “difficult” to the extent that there’s a risk of non-repayment, they don’t get it that the govt is nearly 100% responsible for the risk on these loans, and actually believe that the govt is only involved at the margins. It’s this abysmal ignorance on the part of the general public that led to schemes like the PPIP, where the govt takes on almost all the risk, but uses private money as a shield to conceal its extreme risk-taking.

Sigh, like SDR, I get apoplectic about this stuff sometimes. I will go pour another glass of el vino.