What Caused the Financial Crisis?

[Jeff Wartman]

Full Text:  http://jeffwartman.com/what-caused-the-financial-crisis-part-one/

We've all heard it.  In the last couple months, the refrain of "deregulation and lack of government intervention" caused the financial crisis we're currently working through.  However, a quick look back shows that this wasn't the case.  In fact, it's pretty clear that the real cause is the exact opposite:  the crisis was caused by too much government intervention.

The fairy tale usually goes like this:  greedy financial companies gave unfair subprime loans to borrowers who couldn't qualify for standard mortgages and hid in the fine print the real terms of the mortgage in an attempt to fraudulently enrich themselves.

There are so many logical fallacies and outright laughable stupidity in that above fairy tale it's almost hard to take seriously anyone who actually believes that.  But, I'll try.

1) The first fallacy that needs to get out of the way is that the mortgage companies handed out the subprime loans because they didn't care whether the person would be able to stay in the home or not.  That idea shows a strong ignorance of the way credit institutions work.  No one wanted the borrowers to stay in their homes more than the lending companies.  If the mortgage goes into default, the lending company stands to lose a lot of money.  Foreclosure is a losing proposition for the lending company.

2) The subprime loans we're given out in the first place because the Democrats demanded it.   This is a historical fact.  It shouldn't be hard to follow the logic:

• Democrats demand that poor borrowers be given access to mortgages.
• Because they have poor credit, these borrowers cannot qualify for standard mortgages.  Hence subprime interest rates.
• The banks then bundle these mortgages into securities which are purchased by a government sponsored entities nicknamed Fannie Mae and Freddie Mac.
• The borrowers then default on their loans, the securities go bad, and Fannie Mac/Freddie Mac become insolvent.

The current debate over which party wanted to reform Fannie and Freddie in the early part of this decade is irrelevant.  The fact of the matter is that Democrats caused the beginnings of this crisis by demanding that people who had bad credit be given mortgages.

This crisis was not caused by a lack of government intervention.  The crisis was caused by too much government intervention.

There is another aspect of the financial crisis that generally goes unreported.  The reason?  Both the Republican Party and the Democratic Party are to blame for the other reason.  I'll get to that in Part Two.