Dead Cat Bounce?

After two days soaring, stocks turned lower again today, with the Dow down 372.75 or 3.25 percent at the close. They say that the third day after a bounce is the key to a sustained rally, so it looks like there is more to come on the bad news front.

When things turn south, we read in the books, the key is to find a scapegoat and sacrifice it. That's how primitive humans did it back in the day according to Rene Girard in Violence and the Sacred.  Since all this bad stuff happened on Bush’s watch it goes without saying that he is to blame.

But since Bush will soon be out of office, it seems hardly satisfying to give him the entire blame for the mortgage meltdown and the Fannie/Freddie meltdown and the Wall Street investment bank meltdom and doubtless more meltdowns to come.

I know, let’s blame the Democrats! Kevin Hassett from the American Enterprise Institute has the goods on them.

Back in 2005 responsible Republicans introduced S.190 in the United States Senate. It would have curbed Fannie and Freddie and maybe averted the meltdown. But Democrats were united in opposition.

Of course it had nothing to do with the money that Democrats were getting from Fannie/Freddie. Oh no. Even though Hassett writes that Sen. Barack Obama (D-IL) was one of the prime beneficiaries of Fannie/Freddie money.

Throughout his political career, Obama has gotten more than $125,000 in campaign contributions from employees and political action committees of Fannie Mae and Freddie Mac, second only to Dodd, the Senate Banking Committee chairman, who received more than $165,000.

That’s right. Chairman Dodd. He was a mere ranking Democrat in 2005, but the Senate changed hands in 2006. Don’t expect much from Chairman Dodd on the Fannie/Freddie reform front, not unless Secretary Paulson puts a gun to his head. Especially since Dodd was a “Friend of Angelo” at Countrywide Financial.

But the larger issue is to think back over the years of Fannie/Freddie excess. Was it really doing their low-income homeowner constituents a favor for Democrats to sluice money at housing? Wouldn’t they be better off if there had been no subsidies and no big runup in home prices? Wouldn’t they be better off if house prices weren’t in free fall right now?

The tragedy is that Democrats still don’t seem to have learned their lesson. At least not Barney Frank, the counterpart to Dodd in the House, according to the Wall Street Journal.

Fan and Fred’s patrons on Capitol Hill didn’t care about the risks inherent in their combined trillion-dollar-plus mortgage portfolios, so long as they helped meet political goals on housing. Even after taxpayers have had to pick up a bailout tab that may grow as large as $200 billion, House Financial Services Chairman Barney Frank still won’t back a reduction in their mortgage portfolios.

It’s the trouble with the whole welfare state model. You think you are helping the poor by sluicing out subsidies. But you only end up wrecking their families, failing to educate their children, and enticing them into buying more house than they can afford.

But at least you get their votes.