Mark Zandi: Never Right, Yet Still Trusted

It's premature to say the economy is reviving in a consistent way, but I think it is fair to say the economy isn't going to weaken any further."

So predicted Moody's chief economist Mark Zandi on July 6, 2007, right in the midst of a deflating housing bubble.  As the rest of the world knows, the U.S. economy didn't bottom out till well over a year later.  Chalk up another failed prediction for Mr. Zandi who holds a worse record than Charlie Sheen in rehab.  Even more ironic is the fact that he works for one of the three stooges of rating agencies that were blind to the toxicity of subprime mortgage paper.

Like Alan Greenspan, whose over-hyped reputation as a central planner provided cover for easy credit policies which inflated the housing bubble, Mark Zandi still has the nerve to pop up on national media outlets and share his infinite wisdom.

Mr. Econ-extraordinaire recently came out in favor of Obama's newly proposed home refinancing program HARP (sounds devilishly close to TARP) which pushes Fannie and Freddie to "forgo borrower income verification and detailed home appraisals to keep costs down," as well as offer new refinancing options to borrowers including not charging add-on rates to those with low credit scores or who have lost a substantial amount of equity in their homes

So let's get this straight:  the government, including both the Bush and Clinton administrations, promotes home ownership by lowering lending standards, the Federal Reserve drops interest rates to unprecedented lows, a housing bubble is created, and now taxpayers are on the line for billions when the bubble finally bursts. 

And now the Obama administration, with Zandi's approval, wants to lower lending standards yet again.  Since when did the White House relocate to fantasy land?

As financial analyst Mike "Mish" Shedlock points out, "Common sense dictates (and history proves), losses accelerate as you loosen standards.  It is ludicrous to propose loan modifications to those with no job or no income, and those significantly upside down on their mortgage. The former cannot afford any payment and history proves the latter will walk away anyway."

Loose standards created the housing bubble.  It's no surprise Zandi thinks they are a solution.

What Zandi, and his fellow Keynesian economists, fail to realize is that government "prime pumping" to stimulate economic growth is short sighted.  Not only are spending programs designed to purchase free rides through the next election cycle, but they rely on econometric models which treat individuals like mechanized cogs. Just a little tinkering here and a few academic speeches there and voila!  Economic growth!  Take a recent Moody's Analytic Report authored by Zandi which claimed that, "the single most effective form of stimulus... are increased outlays for food stamps -- which create $1.71 in economic activity for each dollar in federal spending."

With a multiplier of 1.71, one ponders why the Obama administration isn't pushing for an expansion of the food stamp program.  After all, loosening standards for a federal program sounds exactly like something Zandi would endorse.  And the president could make the First Lady happy by pushing for food stamps to be used on organic food only.  Combining social engineering while pleasing the Mrs.; talk about killing two birds with one stone.

Unfortunately for Zandi, there has never been any empirical evidence of the Keynesian multiplier.  Government doesn't take one dollar and turn it into more by spending it.  God doesn't live in the White House, no matter how much Paul Krugman prays.

Judging by Zandi's horrid record, it's a wonder why Moody's even bothers to keep him around.  No worries though, given the Obama administration's requirement of incompetence as a prerequisite for employment, Zandi will surely find a comfy spot in the federal government to land on if he is let go.

Seeing how the economy is now "off and running" like Zandi predicted at the end of last year, the president couldn't do any worse.