Politicians and other talking heads (and therefore the general public) seem to agree that the current credit crisis was caused by a lack of government oversight of big bad bankers. In fact, it was the opposite. The cause of the crisis was pressure from the government (mainly, but not entirely, from Democrats in the White House and Congress) on the mortgage loan industry since the beginning of the Clinton era. The semi-government institutions, Freddie Mac and Fannie Mae, gave in to the pressure and, by rapidly buying an increasing number of shaky loans, made it very profitable for loan originators (mostly local brokers and bankers) and the “bundles “loan (Wall Street) to agree.

Beginning in 1992, a Democratic-majority Congress ordered Fannie and Freddie to increase their mortgage purchases for low- and middle-income borrowers. By operating under that requirement, Fannie Mae, in particular, became aggressive and creative to stimulate “minority earnings.” The Clinton administration investigated Fannie Mae for racial discrimination and proposed that 50 percent of Fannie Mae and Freddie Mac’s portfolio be made up of loans to low to moderate income borrowers by 2001. The Clinton administration criticized the mortgage industry considering “outdated criteria” such as the mortgage applicant’s credit history and ability to make a down payment. Threatening lawsuits, the Clinton Federal Reserve requested that banks treat welfare payments and unemployment benefits as valid sources of income to qualify for a mortgage. That is not a joke, it is a fact.

In 1999, liberals bragged about extending affirmative action to the financial sector. A Los Angeles Times reporter praised the Clinton administration’s affirmative action lending policies as one of the Clinton administration’s “hidden success stories,” saying that “Black and Latino homeownership has risen to the highest level. never registered “. After 2001, a major new market was found for these loans: illegal immigrants.

Meanwhile, some economists (but not politicians) were shouting that Democrats were forcing mortgage lenders to issue loans that would fail as soon as the housing market slowed and overstretched borrowers were unable to get out of their loans by refinancing or selling their loans. loans. houses. In Bush’s first year in office, White House Chief Economist N. Gregory Mankiw warned that the government’s “implicit subsidy” to Fannie Mae and Freddie Mac, combined with loans to unskilled borrowers, was creating a huge risk for the entire financial system. . Rep. Barney Frank denounced Mankiw, saying he had “no housing concern.” The New York Times reported that Fannie Mae and Freddie Mac were “under heavy assault from the Republicans,” but these entities still had “important political allies” in the Democrats.

During the 2004 presidential campaign, George Bush bragged about the fact that a greater percentage of Americans owned their own homes than ever before, but (except for praising low interest rates) he did not explain how or why this happened. President Bush pushed even more; asked lawmakers to eliminate the down payment normally required for FHA loans. So Republicans have dirty hands too.

However, in 2005, after Fannie and Freddie were investigated and severely fined for accounting fraud, Republicans in Congress wanted to strip Fannie and Freddie of privileged status, but by a strict party line vote, the Democrats won. and Fannie and Freddie were able to continue their business. largely unchanged, but on one condition … they had to increase their lending support for distressed borrowers. At the time, those who worked in the mortgage industry called these loans “liars loans.”

At the end of 2006, 30% of new mortgages in the US were subprime mortgages, up from 2% in 2002. Most of these mortgages were sold by the banks that originated the loans and became CDOs. , Securities backed by mortgage packages. Despite the junk loans in these packages, these securities continued to be rated AAA by the bond rating agencies. Many financial institutions around the world continued to invest in them, due to their AAA rating, their reputation for being backed by the US government, and a slightly higher interest rate than “comparable” securities. Many banks did not buy them at all, and some hedge funds entered into swaps whereby they made money if these securities lost value.

Lax standards for borrowers and low interest rates after September 11, 2001, expanded demand for homes, which, in turn, inflated prices. The seemingly reliable price increases attracted people who thought owning a second or third home would be a good investment, further increasing demand. The sheer demand pushed the home well beyond any sustainable price level. Confidence in rising house prices tempted many to cash in on their “earnings” by taking home equity loans.

When the housing bubble finally burst in 2005, the huge inventory of bad first mortgages coupled with second mortgages piling up on many properties sent the default rate on home loans skyrocketing. This caused the market for mortgage-backed securities to crash soon. Those who bet against these values ​​collectively made billions, but others like Merrill Lynch and AIG were stuck. Because no one would buy them, these securities had to be recognized on the books as essentially worthless, under one of the new regulations (“mark to market”) adopted after the Enron debacle. Under accounting standards, financial institutions that owned these securities had to write off these assets against their capital, causing huge declines in capital for some of the largest banks. These banks no longer had enough capital to meet the loan / equity ratios required by banking regulations, so they practically had to stop making loans of any kind, triggering the current credit crisis. Some big banks like Citigroup tried to get by by selling 10-20% of themselves to sovereign wealth funds, namely the investment arms of the Chinese and Arab governments, but these countries soon lost confidence in the system and withdrew more support. Eventually the major financial institutions began to fail. As some economists predicted, the affirmative action lending time bomb has exploded.

Now, at a cost of hundreds of billions of dollars, taxpayers will have to bail out one of the Democrats’ most important constituent groups: the wealthy Wall Street bankers. It’s likely that shortly after that deal is made, billions more will be spent to bail out a larger group of Democratic supporters: welfare recipients, illegal immigrants, and other unskilled borrowers, who were granted loans it makes. twenty years would have been considered ridiculous. .

The mainstream media has no stomach for criticizing the Liberal Democrats, who, more than anyone else, caused all of this. While government intervention caused the problem, the solution, ironically, is supposedly more government involvement (regulation) in the future. Politicians are participating in this cover-up, because almost all of them officially support easier-to-get mortgages and want people to believe that they have little to do with the cause of the problem. Both Obama and McCain say it is a pity that better regulations have not been implemented, as if it is possible to regulate against big companies that make bad investments. Both candidates likely had focus group data indicating that voters did not want to hear what the real cause of the credit crisis was.

The country has apparently learned nothing from this costly mistake, so it will only be a matter of time before the government ruins the economy again.