As the Bush tax cuts reach their expiration point, it is time to remind ourselves of the incompetence of the people running our country. After all, we remain in the midst of a recession. What caused the recession? That we can debate, but one thing should be obvious. Government has no business being in the mortgage lending business.

One of the myths is that Wall Street created the mortgage lending crisis. Undoubtedly, Wall Street greed had a role, but government largely engineered the mess. Here, in Fannie Mae Unsold $5 Billion Homes Bring Peril to Shareholders, we show that Fannie Mae (a government sponsored lending agency) had significant exposure to subprime mortgages. In addition, Fannie Mae owned a lot of Alt-A loans which are just about as absurd.  When Fannie Mae’s and Freddie Mac’s mortgages became insolvent, that created a cash crunch that forced Uncle Sam to take them over (not that Uncle did not effectively control each agency already).

Here, in Key facts about Fannie Mae and Freddie Mac, is the thoroughly Liberal view. Reading this article, you would never know the extent to which Fannie and Freddie (one of Fannie’s smaller cousins) exposed us to bad loans. Instead, you would think Fannie just suffered from the bad decisions of Wall Street.

Here, in Countrywide VIP loans reached deep into Fannie Mae, we have a rare bit of real news from the AP.  The AP reports the cozy relationship between the dearly departed mortgage lender, Countrywide, and Fannie Mae executives.

In addition to providing a bit of history, this article, The Fuel That Fed The Subprime Meltdown, explains how subprime and other bad loans got packaged with good loans.

This article, Subprime Lending: Helping Hand Or Underhanded?, explains how government created and encouraged subprime lending.  The Community Reinvestment Act of 1977 put the government (once again) in the role of promoting a certain outcome instead of just regulating business transactions to prevent fraud. Remember that blindfold on Lady Justice? Do we really want our government to pick winners and losers?  Is that not the same as taking up one man’s cause at the expense of another?

Here, in Housing policy must be set on sustainable basis, former Treasury Secretary Hank Paulson speaks up. He is most certainly not my hero. Unlike him, I want government completely out of the lending business.  However, he does “politely” point out something important. That so-called financial reform bill did not address the root cause of the financial collapse.

Because our government sponsored Fannie Mae and Freddie Mac, our government backed bad loans as investment securities. People believed (and it turned out they were right) that Uncle Sam would pay up even if the loans went bad. So they took risks that they should not have taken. As a result, our government put agencies with trillions in assets in conservatorship.

Was the cause of the collapse exclusive to Fannie Mae and Freddie Mac? No. Private businesses also took unacceptable risks.  But who were they competing with for investor funds? Who encouraged this crap?

There is a difference between good political decisions and good business decisions. That’s why we should not allow politicians to make what rightfully are business decisions. Thus I suggest one more refernence. In Fannie Mae, Freddie Mac Still Too Big to Nail, Jonathan Weil begins by observing:

The White House says it’s finally ready to consider new ideas for what to do about Fannie Mae and Freddie Mac. Still absent from the government’s agenda is any serious effort to hold anyone accountable for their ruin or investigate why they collapsed.

Since government, particularly the Democrats, would have a lot to explain if anyone investigated Fannie’s and Freddie’s collapse, is the absence of an investigation a surprise?

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