Why has progressive economic analysis been so wrong?

The level of bad prognosis provided by "left" pundits like Duncan Black ("Atrios"),Yves Smith, DailyKos's "Bobswern" and others has been stupendously high - and even intelligent analysts like Krugman, Stiglitz, and Dean Baker have been swept up in the flood of nonsense. Here's something that you never would have expected if you had listened to those people.
The US Federal Reserve made a record profit of $80.9bn in 2010 and sent $78.4bn to the US Treasury as income poured in from its programme of quantitative easing. The figures show how the financial crisis has turned the Fed into the most profitable bank in history, earning income of $88.1bn in 2010 but paying only $2.7bn in interest and $4.3bn in operating expenses. FT
Here's Nomi Prins explaining it.
The Fed owns nearly $1.5 trillion toxic assets that already have no bid (actual buyer), and will have less of a bid the more uncertainty there is about the loans that fill them. The Treasury is directly backing $400 billion of GSE securities, and is behind another $6.8 trillion of indirect backup to the GSE's. Both entities are desperately hoping the financial market doesn't seize up (yes the market, they don’t seem to be bothered about individuals and their homes), so they don't become the only bid again (well, actually still) behind any securitized asset http://www.nomiprins.com/thoughts/2010/10/10/arent-geithner-and-bernanke-eerily-quiet-about-the-foreclosu.html
When I asked Ms. Prins how she could call those assets "no bid" given that there is a large active market buying and selling exactly the Agency MBS assets that the Fed purchased, she replied:

I think I might have to be more careful on literal vs. figurative phrasing next time around :) ....kind of like if you'd say it's raining cats and dogs, the idea is it's raining hard.

By "no bid", I mean no viable bid. If the Fed and Treasury were to dump all the securities they are holding into the open market, there might be buyers interested in them at some level, but it's highly unlikely they would bid for them at the level at which the Fed / Treasury are holding them, which is why they are still holding them.
So by "no bid" she means, if they dumped all their holdings on the market in a total panic, something that they would never have any reason to do, it's likely that prices would drop. Or more accurately, her argument is dishonest scare-mongering. But she was not alone.

So the Federal Reserve, with no approval by the president, the Congress, the people or their elected representatives, ended up purchasing $1.5 trillion of new assets of unknown quality. The Fed is controlled by our nation's banks, and so it shouldn't surprise us when it uses taxpayer money to save these very same commercial banks.

What concerns many knowledgeable investors is that the Fed doesn't have the money needed to purchase these assets and instead prints new money. [...] The Fed exceeded its original mandate and acted clandestinely and deceitfully, and because of this, American taxpayers face an additional cost of up to $1 trillion that they and their representatives never agreed to undertake. John Talbot
One of the features of the Federal Reserve purchase of mortgage backed securities that is generally ignored in these arguments is that the government was already guaranteeing those mortgages. So the Fed printed $1.5 trillion dollars, at a time when many trillions had just disappeared from the money supply, and purchased debt that the public had already been suckered into guaranteeing, and thereby was able to capture hundreds of billions of dollars of revenue without increasing the Federal debt. So why the scare stories that rely on the kind of argument that used to be reserved for Birchers/Ron-Paul and for the vultures of the bond market? Weirdly, progressives have been making this argument over the last two years. And not just silly ones: John Talbot is no dummy. Other programs got the same treatment. Here's the ever ridiculous Yves Smith on the "PPIP" program:
We have been saying from the first time the idea that Team Obama floated the idea of having a “public private partnership” buy toxic bank assets, that it was merely a very costly way to disguise overpayment. Now It’s Official: Public Private Partnership to Overpay for Toxic Bank Assets
And the very surprising Dean Baker.
Treasury secretary Timothy Geithner's latest bank bailout plan is another Rube Goldberg contraption intended to funnel taxpayer dollars to bankrupt banks, without being overly transparent about the process. The main mechanism is a government guarantee that would allow investors to buy junk with a 12-to-1 leverage ratio, where they only risk the downside on their own investment, not the borrowed money Dean Baker timothy-geithner-toxic-asset-plan
Baker was not alone. Here's "Atrios" (Duncan Black)skating over the issue of why buyers would overpay.
The issue isn't that they're worthless, the issue is that they aren't worth nearly as much as the financial institutions are pretending they're worth. Sellers have a huge incentive to not sell at lower prices because lower prices will potentially reveal that they're insolvent/essentially bankrupt
Dr. Black went on to explain:
Actually, it's worse than that, it's "If Timmeh is wrong about the ponies in Big Shitpile then it's Mad Max for all of us."
And it turns out:
Robert Waldmann is pleased to note that he was right and that Paul Krugman and Joeseph Stiglitz were wrongggg. They claimed that PPIP was a huge giveaway, because purchases of toxic assets would be 85% financed by no-recourse loans from the FDIC. I noted that this financing would only be available if the FDIC (not just Treasury) agreed, and that the FDIC had no intention of being taken to the cleaners. Now I read that, so far, PPIP has generated a 36% annual return for the Treasury.
Here is my "I told you so". Looks like "Timmeh" was doing the right thing and the brilliant economists of the left didn't have the faintest idea what they were talking about. You might think that after reverses of this level, there would be some, you know, re-evaluation at the various progressive economics sites but far from it, the story that the "hippies" are always right is one that they are sticking to. To me, the reason that the analysis has been so wrong is a combination of the hostility to the Obama administration that has marked the "progressive" left since the primaries and a reluctance to question the basic theories of conventional economics. If you accept neo-classical economics as fundamentally correct then you have to explain economic problems in terms of a scandal. But neo-classical economics is nonsense - as "the left" used to know and as even conventional American economists used to know. More on that in a later post.

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