Starting years ago with good intentions, but bad economic theory, the Democrats pushed forward the federal intervention in the housing market that made credit too easily available. They wanted to make home ownership attainable to a larger segment of the American population. Through Fannie and Freddie, the Government made a lot more money available for mortgage lending. This did make it possible for more people to buy houses and to buy bigger and better houses; however, in doing so, they disrupted one of the free market's natural checks and balances. The free market normally hold's Wall Street's insatiable greed in check with risk. But the Government made home more mortgages less risky than they would normally be for the lenders. Risk was socialized while profits remained privatized. What a deal for the lenders! Through creative loan packages, they could make high-risk loans that they otherwise would not have touched and then quickly offload them to Fannie or Freddie who would repackage them and sell them off as securities. And if the borrower can't afford the loan in the long-term, hey, it wasn't their problem.
This worked for a while. Lots more people could buy homes or move up! The real estate market soared and so did housing prices. As long as people could get loans at artificially low rates, the party went on. Of course, there had to come a point when home prices got so artificially high that people couldn't afford them even with their complex hyper-packaged mortgages. That's when the bubble burst. So the Democrats, while trying to help more people own their own homes, made credit available to people who simply couldn't afford it. Had the Government not intervened and made it easy for banks and mortgage companies to sell-off complex high-risk loans shortly after making them, things would never have come to this point.
Now the Republicans contributed their part to this debacle as well. In the name of ideological purity, they would not let the Government regulate the free market. No Government meddling in the economy. Let Wall Street do its thing! Greed is good! It moves the economy. There's actually a perverse element of truth in this. However, by guaranteeing the value of home mortgage based securities, the Government had already meddled in the economy. They made risky loans less risky--for the lenders, that is. The Republicans let the tax payers absorb a big chunk of the risk, but would not let the Government regulate the lenders to make sure they staid within the bounds of prudence. Thanks to Democratic risk reduction and Republican pseudo-laissez-faire, Wall Street had a feeding frenzy--on a charge card.
Moral of the story: If you are going to follow a laissez-faire economic model, governments shouldn't meddle in the free market at all! They shouldn't do anything that might disrupt the market's natural balance of risk vs reward that restrains reckless financial moves. If you are going to intervene in the free market, no matter how noble your intentions, and interfere with its natural checks and balances, then you had damned well better regulate it to make sure that it doesn't overheat as it inevitably will. What's truly pathetic is that the Government made this same type of mistake with the savings & loan industry in the 1980s. They deregulated it while still guaranteeing the deposits. With the natural check of risk removed, the S&Ls were free to gamble. And gamble they did with predictably disastrous results. Alas, history has repeated itself. Some lessons are just never learned.
