November 16 (LPAC)--In an exchange with Executive Intelligence Review (EIR) correspondent Bill Jones today, White House Deputy Spokesman, Tony Fratto denied reality and insisted that insanity is a functioning part of the world economy. Here's the exchange:

EIR: Tony, there's been a lot of discussion, necessarily, on the housing crisis and the White House has taken some measures with regard to the foreclosures -- which probably will prove somewhat inadequate. But there has not been enough attention placed on the second shoe which will drop as a result of those foreclosures, and that is those banks who have given out these loans are going to be forced to close their doors as the money is not coming in. Has the President and his economic team taken consideration to the possibilities of a banking crisis coming out of this crisis in the sub-prime market?

MR. FRATTO: I'm not sure that I agree with the connect-the-dots story that you have outlined. And I think if you had been -- if we had been talking about this issue 20 or 25 years ago, that might be exactly what you might have expected. One of the complicating factors in the housing sector is that connection between the borrower and the bank is not the same thing that you see today, and that's because loans are sold now in secondary markets and securitized and sold around the world.

Now, there are benefits to that and there are also problems associated with that. Some of the benefits are that you spread risk everywhere. Some of the problems are that the lender can't go down to their community bank and ask them, how can we find a way to keep this mortgage going so I can stay in my home?

It is an incredibly complex relationship in that sector. Secretary Paulson, the HUD Secretary, Alphonso Jackson, are working on this. They're working with lenders and borrowers to try to bring them together and to keep as many Americans in their homes as possible. That's what the President wants to see. And we also hope that some of the administrative actions that we've taken, that the President announced a couple months ago, do help more than you think they will. We also call on Congress to pass the legislation that's been sitting on their desks for some time, so that we can make more progress.

EIR: A follow-up with regard to the banks. Obviously they're not the major lenders to the housing market, although there still is a lot of exposure. There are people who have taken money from banks to buy their houses and now they find themselves in difficulties, which will have a direct effect on the banks. But there's a second problem to that, to the extent that the banks have often used the sub-prime market to hedge funds in order to cover other loans that they have, and so that the effects of the sub-prime market is much more extensive in terms of the entirety of the banking system than simply the relationship of a lender to a borrower. And that will have its effects, to the extent that the banks will not get the predicted funds that they have gotten -- that they have expected through going out on the sub-prime market.

MR. FRATTO: That's true, and like I said, we hope that some of the reforms that we've talked about, and some of the work that Secretary Paulson is doing with banks and with the secondary markets can help to improve that. It is a very complicated issue.