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Why Is Paul Krugman Blaming Foreigners for the Financial Crisis?
...First, Krugman starts with a diatribe on why so many economists are "asking how we got into this mess rather than telling us how to get out of it." Krugman apparently believes that his standard response of more stimulus applies regardless of the reasons why we are in the economic downturn. Yet it is precisely because I think the policy response to the last crisis contributed to getting us into this one that it is worthwhile examining how we got into this mess, and to resist the unreflective policies that Krugman advocates. ...

...In absolving Fannie and Freddie, Krugman has been consistent over time, though his explanations as to why Fannie and Freddie are not partially to blame have morphed as his errors have been pointed out. First, he argued that Fannie and Freddie could not participate in sub-prime financing. Then he insisted that their share of financing was falling in the years mortgage loan quality deteriorated the most. Now he claims that if they indeed did acquire substantial amounts of sub-prime exposure (and he says they did not), it was because of the profit motive and not to fulfill a social objective. ...

...So Krugman shifted his emphasis. In his blog critique of a Financial Times op-ed I wrote in June 2010, Krugman no longer argued that Fannie and Freddie could not buy sub-prime mortgages. Instead, he emphasized the slightly falling share of Fannie and Freddie's residential mortgage securitizations in the years 2004 to 2006 as the reason they were not responsible. Here again he presents a misleading picture. Not only did Fannie and Freddie purchase whole sub-prime loans that were not securitized (and are thus not counted in its share of securitizations), they also bought substantial amounts of private-label mortgage backed securities issued by others. When these are taken into account, Fannie and Freddie's share of the sub-prime market financing did increase even in those years. ...

...In the current review piece, Krugman first quotes the book by Nouriel Roubini and Stephen Mihm: "The huge growth in the subprime market was primarily underwritten not by Fannie Mae and Freddie Mac but by private mortgage lenders like Countrywide. Moreover, the Community Reinvestment Act long predates the housing bubble.... Overblown claims that Fannie Mae and Freddie Mac single-handedly caused the subprime crisis are just plain wrong."

Clearly, Fannie and Freddie did not originate sub-prime mortgages directly -- they are not equipped to do so. But they fuelled the boom by buying or guaranteeing them....

...Of course, as Fannie and Freddie bought the garbage loans that lenders like Countrywide originated, they helped fuel the decline in lending standards. Also, while the Community Reinvestment Act was enacted in 1979, it was the more vigorous enforcement of the provisions of the act in the early 1990s that gave the government a lever to push its low-income lending objectives, a fact the Department of Housing and Urban Development (HUD) once boasted about (see here and here). If the government itself took credit for its successes in expanding home ownership, why is Krugman not willing to accept its contribution to the subsequent bust as too many lower middle-class families ended up in homes they could not afford?...

...Finally, if he denies a role for government housing policies or for monetary policy, or even warped banker incentives, then to what does Krugman attribute the crisis? His answer is over-saving foreigners. In short, countries with trade surpluses, such as Germany and China, had to reinvest their resulting financial windfalls in the United States, pushing down U.S. long-term interest rates in the process, and igniting a housing bubble that eventually burst and led to the financial panic....