How did we ever doubt the economic genius of Rick Santorum?

Oh for the love of heaven. You'd think this was from The Onion, but it's not.

"People had to pay so much money to air condition and heat their homes or pay for gasoline that they couldn't pay their mortgage."

So the economic implosion had nothing to do with:

• FDR's chickens coming home to roost, as Fannie Mae and Freddie Mac recycled mortgage funds, enabling banks' continuous bad loans.


• Carter, Clinton and George W. Bush using carrots and sticks to push banks into giving unsustainable mortgages to people who couldn't afford them.


• Loan officers and credit analysts ignoring their duties by approving unqualified borrowers, because banks were being pushed to make loans (again, carrots and sticks).


• Homeowners intentionally not paying their mortgages, often because they don't think it's worth it anymore (that means you, Jose, and you, M.R.). Others were simply stupid and didn't think a $700 interest-only monthly payment could become $3000, or they were stupid enough to buy a new house before determining their finances and finalizing arrangements to sell the old one.
  
  Then as banks lost money, they had to lay off hundreds of thousands of people. (Who can forget Citi cutting over 50,000 in one round alone?) The ripple effect goes to the grocery stores, clothing shops, electronics stores, restaurants, auto dealerships, everywhere that the people patronized but cut back on. Most people can't conceive of how interconnected all jobs are. Instead, they cheer on "fat cat bankers" layoffs, when it was those people whose spending habits power good jobs for middle-class people, and whose savings are what banks lend out in mortgages. When Mack the Mercedes salesman no longer has any customers, he finds himself at McDonalds or Walmart, and with no more "rich people" saving money at the bank, Mack can't get a mortgage anymore. But it's all fine when the federal government will give Mack free money...


• George W. Bush starting what Obama has amplified: hundreds of billions of dollars as just the start of the ultimate bailout, "rescuing" the banks that made all the bad loans, and giving sweetheart loan do-overs to irresponsible borrowers.
  
  And what the hell was wrong with Clint Eastwood? I've admired him as an actor and director for years, and this is so disappointing. I don't dismiss this as a product of old age, because having lived a long life, he should know better. Americans haven't "pulled together" for Detroit any more voluntarily than sheep are herded. The city could have been completely razed to the ground for all I cared, and even if I did care, it would have been more proper for a Borg cube to carve it right out of the Earth before a single person was forced to pay a single penny to sustain the automakers.


• The major credit rating agencies rubber-stamping the securitized mortgages as quality investments, which is to say, fraud. There's no "freedom of speech" when you misrepresent a product to your clients, whether it's advertising an apple as something you know it's not, or telling clients that an MBS is better than you know it is.


• And last but not least, and in fact the facilitator of all that went wrong: the Federal Reserve endlessly supplying money. Its evil is principally that it's monetizing federal debt, but most people don't realize how much the Fed has lent to banks that allowed all these bad mortgages to exist in the first place. Moreover, the Fed has bought up hundreds of billions in "toxic assets," which only served to prop up their values above what they're really worth.
  
  As I wrote over three years ago, when the federal government hides liabilities on other books, "few seem to bat an eye, and it's all perfectly legal." When the private sector does it, people are prosecuted for fraud.

But you see, none of these had anything to do with the financial crisis. Rick Santorum says so! In his warped reality, its because people were paying hundreds, thousands of dollars each month on petroleum fuels, and conversely, it was the low prices that spurred people to spend more on housing. By his illogical idiocy, gunshot victims don't result from a firearm being aimed and fired, but because the wind blew bullets into them.

The simple reason that high oil prices don't detract from the economy is that oil prices are very much a part of consumer activity. What is spent on crude oil, gasoline, heating oil, even paraffin wax, is as much a part of GDP as consumer spending on housing, cars and coffee. There would be no difference to GDP if I changed the allocation of my income on gasoline, housing and coffee. In fact, there would be no difference to GDP if I cut all of them by 10%. As long as I still earned the same income, any total spending cuts means I save more money, which a bank then loans back into the economy, or through stocks and mutual funds are invested into companies. What matters to GDP is Say's Law: people need to produce first before they can spend. If I'm spending and/or saving less because I lost my job or took a lesser-paying one, that impacts GDP. And that is why Bush's, Obama's and Bernanke's Keynesian efforts will never succeed.

Santorum isn't the first to blame oil prices. A decade ago, Stephen Roach blamed not just that recession, but previous recessions on high oil prices. It didn't wash then and didn't wash now. As a good student of the Austrian School, I know that recessions are one thing and one thing only: an unavoidable, in fact necessary economic contraction to bring all the economy's supply and demand curves back to alignment, after the government has imbalanced them in the first place. The 1970s should be no surprise in light of what Nixon did to U.S. money. Inflation and other government actions mean that people cannot make true rational economic calculations, but 1970s inflation was so wild that my generation can't conceive of living in such times. The early 1980s were inevitable after the Fed cut back on its inflationary policies. The recession that began in 1990 in fact began before the Gulf crisis caused a surge in oil prices. As I've said before, how could the 8% FFR in July 1990 not cause a recession?

Santorum's acolyte writes, "In 2009, economist James Hamilton published a paper that retroactively forecast what an oil shock, like the one we experienced in 2007-08, would do to GDP. And guess what? His model accurately predicated much of the collapse in GDP that resulted from the Great Recession -- as if there had been no housing bubble or financial crisis! The oil spike was that bad."I looked at his post, took a quick look at his paper, and it's absurdly simplistic in its assumptions and plotting of data. Does really think his red and black lines have any real correlation? Perhaps he does point to the wind as the primary reason why targets get hit with bullets.