The Latest Mortgage Foreclosure Mess is just another Financial Crisis.

10/18/2010 08:56 pm ET | Updated May 25, 2011

The current mortgage crisis is not a real economic crisis.There have been no houses that have been actually destroyed - there has been no fire, no hurricane, or no earthquake damage. It's entirely a financial crisis, at least so far. So the government appropriate response doesn't include bulldozers, hammers and concrete. Just data entries into spread sheets in the Fed's computer.

The question is, are the authorities standing by with policy responses as needed to make sure it doesn't spill over into the real economy? To make sure people can still go to work, to grow food and to eat it, to build houses and live in them, to make shoes and wear them, to go hospitals and take care of sick people, to go schools and teach classes, to maintain the infrastructure of our country and to do cancer research?

Unfortunately the authorities are not doing any such thing. Therefore it all just might again needlessly/tragically spill over to the real economy, like it did in August 2008, when they let the last financial crisis spill over into the real economy, and from which we are only beginning to recover.

As I said then, and repeat once more, it's critically important to identify and punish the bad guys with a vengeance and alter incentives that support fraud. And it's even more important to not let the financial crisis spill over into the real economy by letting aggregate demand fall, sales collapse, and real jobs get lost.

And today, as in August 2008, interest rate cuts and just about anything else the Fed might do isn't going to do the trick, and more likely will probably just continue to make things worse. Now, as then, and as always, an immediate fiscal adjustment is the needed silver bullet that restores demand.

And now, as then, I continue to propose a full payroll tax (FICA) suspension which will immediately work to restore private sector aggregate demand, sales, and jobs. Private sector jobs are almost entirely a function of sales, directly or indirectly. Capitalism is driven by sales. When sales go up, jobs go up. A restaurant that's full doesn't lay anyone one off, no matter how much the owner dislikes the current tax structure, or the paper work.

Public infrastructure spending can also a valid option. But it takes time, and it's ok to do both. Suspend FICA taxes and put in place desired infrastructure project funding, presumably in a well thought out basis with an eye to efficiency, and not in a blind rush to support aggregate demand.

So why is our government not standing by to suspend FICA taxes?
And, even more pointedly, why haven't they already done so? Especially as it's a highly regressive punishing tax on the people we need and are hurting the most - the people actually working for a living who produce all the real goods and services that support our existence.

Yes, it's the first deadly innocent fraud at work. The government thinks it needs those FICA revenues to be able to make Social Security payments. The problem is our elected Federal government officials do not understand actual monetary operations. If they did they'd recognize that the function of federal taxes is to regulate the economy and not to raise revenue. They don't understand the function of federal taxes is to simply take dollars away from us; it is not to give them what they need to spend. Their first clue should be that if we were to pay our taxes with old $20 bills they'd give us a receipt and then shred those $20 bills. Furthermore, is their not removing what's restricting aggregate demand (FICA taxes) so that normal spending patterns can resume getting something for nothing.

Instead, however, the deficit terrorists remain firmly in control.
The best we can expect is for the decision makers not to raise taxes at year end when the tax cuts expire. There is no talk of actually lowering taxes for consumers, under any circumstances.

Even the media's 'deficit doves' (who remain THE PROBLEM), agree that the 'long term deficits' are a problem, by pointing to interest rates as evidence that markets are currently willing to fund deficit spending, and talking about how austerity today is not the way to bring down deficits longer term. In general, they flagrantly violate 'Lerner's Law' (don't concede the principle) or what Lerner called 'Functional Finance' in the 1940's - government policy should target full employment and price stability regardless of whether it increased or decreased public debt, short term or long term.

So will this latest mortgage crisis hurt the real economy? Probably (and hopefully) not, best I can tell. It looks more to me like it's a potential transfer of dollars from banks and lenders with no propensity to spend to borrowers with high propensities to spend.

But I could easily be wrong. There is always the risk that it all somehow results in a further cutback in credit to the real economy. And while this potential drop in aggregate demand is easily offset by a simple fiscal response, the odds of our current gaggle of regulators and elected officials getting it right with an appropriate fiscal response seems slim and none.

John Maynard Keynes, after initially backing away from Lerner's 'Functional Finance' proposals, subsequently accepted them, writing: "[Lerner's] argument is impeccable, but heaven help anyone who tries [to] put it across to the plain man at this stage of the evolution of our ideas."

I know the feeling!!!