It is hard to believe, but it looks like the government will soon use the taxpayers’ checkbook again to create a vast market for mortgages with low or no down payments and for overstretched borrowers with blemished credit. As in the period leading to the 2008 financial crisis, these loans will again contribute to a housing bubble, which will feed on government funding and grow to enormous size. When it collapses, housing prices will drop and a financial crisis will ensue. And, once again, the taxpayers will have to bear the costs.

In doing this, Congress is repeating the same policy mistake it made in 1992. Back then, it mandated that Fannie Mae and Freddie Mac compete with the Federal Housing Administration (FHA) for high-risk loans. Unhappily for both their shareholders and the taxpayers, Fannie and Freddie won that battle.

Now the Dodd-Frank Act, which imposed far-reaching new regulation on the financial system after the meltdown, allows the administration to substitute the FHA for Fannie and Freddie as the principal and essentially unlimited buyer of low-quality home mortgages. There is little doubt what will happen then.

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Even as work continues to repair our financial infrastructure and get the economy moving again, we need urgent action to forestall the next financial crisis. I fear that one will start in Washington. Total federal debt has doubled in the past seven years, to almost $14 trillion. That’s more than $100,000 for every American household. This explosive growth in federal borrowing is a result of not just the financial crisis but also government unwillingness over many years to make the hard choices necessary to rein in our long-term structural deficit.

Retiring baby boomers, who will live longer on average than any previous generation, will have a major impact on government spending. This year, the combined expenditures on Social Security, Medicare and Medicaid are projected to account for 45 percent of primary federal spending, up from 27 percent in 1975. The Congressional Budget Office projects that annual entitlement spending could triple in real terms by 2035, to $4.5 trillion in today’s dollars. Defense spending is similarly unsustainable, and our tax code is riddled with special-interest provisions that have little to do with our broader economic prosperity. Overly generous tax subsidies for housing and health care have contributed to rising costs and misallocation of resources.

Unless something is done, federal debt held by the public could rise from a level equal to 62 percent of gross domestic product this year to 185 percent in 2035. Eventually, this relentless federal borrowing will directly threaten our financial stability by undermining the confidence that investors have in U.S. government obligations….

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The draft recommendations of the president’s commission on deficit reduction call for closing popular tax deductions, higher gas taxes and other revenue raisers to drive tax collections up to 21% of GDP from the historical norm of about 18.5%. Another plan, proposed last week by commission member and former Congressional Budget Office director Alice Rivlin, would impose a 6.5% national sales tax on consumers.

The claim here, echoed by endless purveyors of conventional wisdom in Washington, is that these added revenues””potentially a half-trillion dollars a year””will be used to reduce the $8 trillion to $10 trillion deficits in the coming decade. If history is any guide, however, that won’t happen. Instead, Congress will simply spend the money.

In the late 1980s, one of us, Richard Vedder, and Lowell Gallaway of Ohio University co-authored a often-cited research paper for the congressional Joint Economic Committee (known as the $1.58 study) that found that every new dollar of new taxes led to more than one dollar of new spending by Congress. Subsequent revisions of the study over the next decade found similar results.

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The fact that nearly 20% of Americans say that President Obama is a Muslim has certainly not kept him from talking to Muslims. Just in the past week, the president gave his second major address to the Muslim world, and issued greetings to Muslims for Eid-ul-Adha, the celebration of Abraham’s “willingness to sacrifice his son.” Even in this small act of presidential courtesy, however, Obama had to tread very carefully. Note that the administration did not include the name of Abraham’s son. Muslims believe that Abraham was willing to sacrifice Ishmael, while the Jewish and Christian Scriptures contend that it was Isaac ”” indeed, this is one of the most fundamental divergences between these religious traditions. The president wants to acknowledge the Muslim holiday, without exacerbating religious tensions.

In matters large and small, Obama has to strike a delicate balance regarding Islam. It is not that he has taken an unprecedented interest in Islam: President Thomas Jefferson had his copy of the Quran, and President George W. Bush discussed Islam just as much as Obama. But because of the ongoing war against jihadist terror, the controversy about the Ground Zero mosque, and especially because of persistent (if absurd) rumors about the president’s own faith, Obama has a special burden to carry about Islam. He must communicate that America’s millions of Muslims are fully welcome here, and that America is not at war with the Muslim community at large. Yet he must also maintain moral clarity about the menace of jihadist terrorism.

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Given previous comments by Mr. Smith, taxpayers may soon be longing for the return of acting FHFA director Edward DeMarco. The Journal reports that, at a 2007 Senate hearing, Mr. [Joseph] Smith blamed predatory lenders and a lack of federal regulation for the housing crisis. Blaming the bankers and calling for more bureaucracy will earn Mr. Smith plenty of new Beltway friends, but if he remains unaware of the myriad steps regulators took to inflate the credit bubble and misallocate capital into housing, then no one should expect him to drive reform.

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This is a good exercize.

The [Deficit Reduction] report from the chairmen lists some of the best ways to raise revenue and cut spending. But it comes with no enactment strategy. In this climate, asking politicians to end the mortgage deduction and tax employer health care plans and raise capital gains taxes and cut benefits for affluent seniors is like asking them to jump on a buzzing sack full of live grenades. They won’t do it.

So we continue on the headlong path toward a national disaster. And along the way our dysfunctional political system will leave all sorts of other problems unaddressed: immigration, energy policy and on and on.

Yet, I’m optimistic right now. I’m optimistic because while our political system is a mess, the economic and social values of the country remain sound. My optimism is also based on the conviction that serious, vibrant societies don’t sit by and do nothing as their governments drive off a cliff.

Over the past few years, we have seen millions of people mobilize ”” some behind President Obama and others around the Tea Parties. The country is restive and looking for alternatives. And before the next round of voting begins, I suspect we will see another mass movement: a movement of people who don’t feel represented by either of the partisan orthodoxies; a movement of people who want to fundamentally change the norms, institutions and rigidities that cause our gridlock and threaten our country.

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Russell Long, of the famous Louisiana political dynasty, loved to tell how his Uncle Earl, the governor, advised a city slicker politician, hit by redistricting, how to successfully court rural voters.

He should rumple up the fancy white suit, loosen the tie, toss dirt on those shiny shoes, and reach into his pocket, bring out that big wad of bills and “spread the joy.”

That is the mirror opposite of what the fiscal deficit commission, Congress and the White House should do if they want to seriously address long-term budget deficits. They have to spread the pain.

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A draft proposal released Wednesday by the chairmen of President Obama’s bipartisan commission on reducing the federal debt calls for deep cuts in domestic and military spending starting in 2012, and an overhaul of the tax code to raise revenue. Those changes and others would erase nearly $4 trillion from projected deficits through 2020, the proposal says.

The plan would reduce projected Social Security benefits to most retirees in later decades ”” low-income people would get higher benefits ”” and slowly raise the retirement age for full benefits to 69 from 67, with a “hardship exemption” for people who physically cannot work past 62. And it would subject higher levels of income to payroll taxes, to ensure Social Security’s solvency for the next 75 years.

But the plan would not count any savings from Social Security toward meeting the overall deficit-reduction goal set by Mr. Obama, reflecting the chairmen’s sensitivity to liberal critics who have complained that Social Security should be fixed only for its own sake, not to balance the nation’s books.

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China kept up a drumbeat of criticism of U.S. easy money policies on Tuesday, warning two days before a G20 world economic summit that Washington could destabilize the global economy and inflate asset bubbles.

Nearly a week after the Federal Reserve announced it was going pump as much as $600 billion into the economy, world leaders continue to bash the plan, saying it will flood global markets with cash without doing much for the U.S. recovery.

President Barack Obama acknowledged in Jakarta that the Group of 20 rich and developing nations “still have a lot of work to do” to ensure balanced global growth.

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Last week we talked about the first stage of the U.S. fiscal crisis: the slow erosion of long-term growth because of mounting government debt. This phenomenon arises from a straightforward application of conventional supply-side economics. Government borrowing absorbs private saving that would otherwise be used for capital formation. The diminished capital stock reduces productivity, growth, and competitiveness.

This week we look at stage two: a rapid economic meltdown precipitated by an untamable accumulation of government debt. Stage two is much more difficult to understand than stage one. Government debt in distress is not something that gets much attention from economists who study developed countries. It’s not something they were taught when they went to economics school. So as the possibility of a crisis has become more real, they are trying out a lot of new ideas.

One nice thing about this otherwise gloomy state of affairs is that politics has not yet infected the economics. The research that you see is not by economists who are pushing a partisan agenda, but by people who are genuinely concerned that the economy may be running itself off a cliff.

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It is undeniable that we are on the path to fiscal collapse. This decline will occur in two stages. First there is the decay as the swelling national debt wears away the economy’s foundations and commits more and more future income to foreign creditors. We are already in stage one.

In stage two a lethal combination of phenomena arises in quick succession: greater default risk, looming inflation, higher interest rates, declining growth, financial market instability, and an acceleration of government borrowing. They feed on each other. The economy heads on a downward spiral. Between stage one and stage two there is a tipping point. Experts know it will come, but nobody wants to predict when. (See below.) This article is about the slow economic decline of stage one. Next week part 2 will describe the hell of a full-blown fiscal collapse.

There is no question economics has failed us. The old paradigms have been made obsolete by the hard reality of the 2007-2009 financial crisis and soaring government debt. But some ideas can be salvaged from the wreckage.

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The mid-term elections on November 2nd saw the biggest swing to the Republicans for 72 years…With a few results still to come, they have picked up over 60 seats in the House of Representatives, for a solid majority of at least 50. In the Senate they gained at least six seats, though they will fall short of control there.

For Mr Obama, the lesson is simple enough: sharpen up, and prepare for a tough two years. Yes, this was hardly an enthusiastic vote for his opponents, more a howl of rage against incumbents from citizens struggling after the worst slowdown since the 1930s. And he has a string of legislative achievements to his name. But plenty of centrists plainly fear that he has drifted too far to the left, that he dislikes business and that he does not understand middle America. He looks a far less competent figure than he did two years ago. With a hostile House and a gridlocked Senate, the chances of passing any big new laws are remote; and Republican victories in crucial swing states such as Florida, Michigan, Ohio and Pennsylvania will make the president’s re-election battle in 2012 a lot harder. If Mr Obama is to win again, he needs to move back to the pragmatic centre of what is still a pretty conservative country.

But so do the Republicans….

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U.S. Treasury Secretary Timothy F. Geithner refrained from pushing for current-account targets while China softened its stance on the Federal Reserve’s quantitative easing days before a summit of the Group of 20.

The Fed’s move to buy $600 billion of Treasuries could contribute “tremendously” to global growth, Vice Finance Minister Wang Jun said after Asia-Pacific Economic Cooperation forum finance chiefs met in Kyoto, Japan, Nov. 6. At the same gathering, Geithner said current-account deficits or surpluses aren’t “something that is amenable to limits or targets.”

Policy makers from Asia to South America have warned that the Fed’s decision to pump liquidity into the U.S. will depress the dollar and spark flows of capital to emerging markets that threaten asset-price bubbles. China’s Vice Foreign Minister Cui Tiankai said Nov. 5 the U.S. step may hurt global confidence, while rejecting state-planning style targets for trade deficits.

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A grand victory for Republicans in the 2010 midterm election? Yes, of course. But also no. In all three of the most recent earthshaking midterm elections ”” 1994, 2006 and now 2010 ”” the same candidate won: divided government.

That is not a coincidence. In the last two decades, a strong and persistent pattern has emerged, one that will dominate our politics for some time to come, because it is rooted in two important political realities. First, the public strongly prefers divided government. Second, it has every reason to.

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President Obama is likely to get a friendly but subdued welcome when he begins his visit to India on Saturday.

Many Indians feel that the United States has neglected India, while cultivating strategic relations with its military rival, Pakistan.

That perception will be tough to overcome as Obama seeks India’s help on a range of issues, from helping to balance the growing power of China to supporting the government of Afghanistan.

It could also hamper the president’s efforts to open some key U.S. business opportunities in India.

Read or listen to it all.

The Fed is essentially lending enough money to the government to fund its operations for several months, something called “monetizing the debt.” In normal times, this is one of the great taboos of central banking because it is seen as a step toward spiraling inflation and because it risks encouraging reckless government spending.

Read it all (my emphasis).

President Barack Obama steps back onto the world stage Friday, when he leaves for two economic summits in Asia after a big electoral rebuke.

But his troubles will not ease overseas.

The U.S. and nations abroad are at odds over economic policy. Among the issues, conservative governments in Britain and Germany are pressing for fiscal austerity measures in Europe that Mr. Obama’s administration is resisting implementing in the U.S.

“The rest of the world is looking more like the tea party,” which wants to rein in government spending, according to Kenneth Rogoff, a former chief economist at the International Monetary Fund.

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More conciliatory than contrite, Mr. Obama used that phrase, “take responsibility,” six times but rejected the suggestion that his policies were moving the country in the wrong direction. He conceded that legislation to limit greenhouse gases was dead and said he was “absolutely” willing to negotiate over the extension of tax cuts, including for the wealthy. But he drew the line at any major retreat from signature priorities, saying he would agree to “tweak” his health care program, not “relitigate arguments” over its central elements.

While Republicans also called for more cooperation, they suggested that Democrats might not have fully absorbed the lessons of their drubbing.

“Their view is that we haven’t cooperated enough,” said Senator Mitch McConnell of Kentucky, the Republican minority leader. “I think what the American people were saying yesterday is that they appreciated us saying no to the things that the American people indicated they were not in favor of.”

The trials awaiting a fractured capital could arrive swiftly when the departing Democratic-controlled Congress returns in lame-duck session this month with contentious issues like tax cuts, the federal debt limit, unemployment insurance, an arms control treaty with Russia and gay men and lesbians in the military all on the table.

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Even so, Republicans would be foolish not to act on the assumption that voters want policies sharply different from those of the Obama Democrats. No other administration in recent memory has suffered such a repudiation in its first offyear elections. Franklin Roosevelt’s Democrats actually gained House seats in 1934, as did George W. Bush’s Republicans in 2002; John Kennedy’s Democrats came very close to doing so in 1962. Dwight Eisenhower’s, Richard Nixon’s and George H. W. Bush’s Republicans in 1954, 1970 and 1990 suffered small losses, as did Jimmy Carter’s Democrats in 1978.

A more salient comparison is with the fate of Ronald Reagan’s Republicans in 1982. Both Reagan and Obama came to office with reputations as inspiring orators and with professional pedigrees (movie actor, community organiser) unusual for a practical politician. Both came to office while the economy was languishing and both saw recessions deepen in their first two years. But there was a big difference in voters’ responses. In 1982 the Republicans lost 26 seats in the House – a significant but not enormous loss. Exit polls showed that most voters believed that Reagan’s economic policies would produce a good economic recovery in the long run. Lower tax rates, reductions in scheduled government spending -voters believed these would lead to a private sector recovery after an extended period of economic stagnation.

Compare that with the results this week. The Obama Democrats lost about 65 seats – an unusually high number. And polling showed that most voters believe that their policies of increasing government spending and deficits and increasing at least some tax rates will lead not to a private sector recovery but to a continuation of the stagnation so apparent in just about every economic statistic.

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Change in government is almost always good for the country, in spite of the loss of experience in the process. A lot of that occurred in Tuesday’s elections. Now the newcomers have to figure out how to make government serve the people, as opposed to serving just themselves. Obstruction and electoral combat won’t be good enough. The short leash in power that the voters gave Mr. Obama’s party made that very clear.

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Tuesday’s election results represent a historic repudiation of the president. Yesterday, Mr. Obama acknowledged the severity of this loss and said that he assumes “direct responsibility” for our stalled economic recovery. He also said he was “eager to hear good ideas wherever they come from.” This is progress. He should now propose an agenda that goes a long way toward meeting GOP demands, while preserving a key number of his goals and priorities.

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DAVID BROOKS:…My main problem [with the President’s Wednesday Press Conference] was, he was asked several times, were there any policies implicated in this defeat? And, again and again, he sort of dodged that question, or said no, and said, it was the economy.

Now, the economy was obviously a big part of this election. But to say that a whole series of unpopular policies, cap and trade, health care, stimulus, bailouts, were not implicated, well, that — I think that’s, A, wrong, but, B, draws the wrong impression, that you don’t have to change anything.

And so, when he talked about the stuff he had done wrong, it tended to be procedural or message-oriented. But there are some policy implications here.

JUDY WOODRUFF: So, does that tell you that he’s not going to change anything?

MARK SHIELDS: Well, he’s still — I think it was premature for him to have the press conference today, because I think he’s still working it out. I really do.

I mean, I don’t mean to sound like a shrink, but — because he hasn’t come to grips with the reality that the policies were rejected. I mean, in campaign after campaign across the country, Republicans ran against specific policies that Democrats had voted for.

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Responding to [Newsweek’s Jonathan] Alter, George Mason University economist Don Boudreaux agreed that interest-group liberalism has indeed been leavened by idea-driven liberalism. Which is the problem.

“These ideas,” Boudreaux says, “are almost exclusively about how other people should live their lives. These are ideas about how one group of people (the politically successful) should engineer everyone else’s contracts, social relations, diets, habits, and even moral sentiments.” Liberalism’s ideas are “about replacing an unimaginably large multitude of diverse and competing ideas . . . with a relatively paltry set of ‘Big Ideas’ that are politically selected, centrally imposed, and enforced by government, not by the natural give, take and compromise of the everyday interactions of millions of people.”

This was the serious concern that percolated beneath the normal froth and nonsense of the elections: Is political power – are government commands and controls – superseding and suffocating the creativity of a market society’s spontaneous order? On Tuesday, a rational and alarmed American majority said “yes.”

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[President Obama]…should return to his original design for governing, which emphasized outreach to Republicans and subordination of party-oriented strategies. The voters have in effect liberated him from his confining alliances with Nancy Pelosi and Harry Reid and put him in a position where he can and must negotiate with a much wider range of legislators, including Republicans.

The president’s worst mistake may have been avoiding even a single one-on-one meeting with Senate Minority Leader Mitch McConnell until he had been in office for a year and a half. To make up, the outreach to McConnell and likely House Speaker John Boehner should begin at once and continue as a high priority.

Obama tried governing on the model preferred by congressional Democrats and the result was the loss of Democratic seats and his own reputation. Now he should try governing his own way. It cannot work worse, and it might yield much better results.

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The White House and a transformed Congress are bracing for a high-stakes battle later this month over a host of expiring tax breaks and benefits for the unemployed that will mark the first test of the new political dynamic in Washington.

If President Obama, his weakened Democratic allies and a resurgent Republican Party cannot find a way to work together, taxes will rise sharply in January for virtually every American taxpayer, and more than 3 million people will lose their unemployment checks – which together could suck more than $300 billion out of the pockets of consumers and business owners next year.

Economists across the political spectrum say such a blow would be devastating to the economy and has the potential to halt the fragile recovery in its tracks.

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US mortgage agency Freddie Mac has suffered a further $4.1bn (£2.5bn) loss on bad home loans in the past quarter.

Meanwhile its head predicted “renewed pressure” on the US housing market.

“We believe it will be a considerable time before the housing market has a sustained recovery,” said chief executive Charles Haldeman.

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A Congressional majority is a terrible thing to waste, as Rahm Emanuel might say, and yesterday the public took that lesson to heart. Americans erased a Democratic House majority and a huge swath of the “moderates” who Mr. Emanuel had personally recruited to build their majorities in 2006 and 2008 before he became White House chief of staff. They were ousted from power after a mere two terms for having pursued an agenda they didn’t advertise and that voters didn’t want.

Yes, the economy was the dominant issue and the root of much voter worry and frustration with Washington. But make no mistake, this was also an ideological repudiation of the Democratic agenda of the last two years. Independents turned with a vengeance on the same Democrats they had vaulted into the majority in the waning George W. Bush years, rejecting the economy-killing trio of $812 billion in stimulus spending, cap and tax and ObamaCare.

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We are especially interested in your take on the local races where you live, as you will have more knowledge of them than the rest of us.