No doubt there were various factors at work that caused the mortgage crisis. Democrats and their friends in the media like to blame the Reagan-era deregulation and many conservative commentators wish to blame the Carter-era Community Reinvestment Act, while others point to other causes.
One undeniable factor, if not the primary factor, was the irresponsible practices of Fannie Mae and Freddy Mac. Fannie and Freddie do not make loans of course but purchase the paper of the mortgage companies that do make the loans.
In the 1990’s, encouraged by the Clinton administration as a means of advancing homeownership, Fannie Mae and Freddie Mac started buying sub prime loans. Previously there was a much smaller market for sub prime mortgages, but with Fannie and Freddie buying the paper the availability of sub prime loans skyrocketed. With time-tested lending practices out the window, these two institutions ended up controlling 90% of the secondary market for mortgages. Those within the organizations who raised objections to the irresponsible lending being encouraged by Fannie and Freddie were overruled and eased out.
Fannie and Freddy began hiring Democratic operatives as CEO’s and upper management.
At the same time, Fannie and Freddie began making huge contributors to Congress, spending millions to influence votes. While some Republicans also received financial contributions from the two institutions, most of the money went to Democrats. Top recipients of those campaign contributions were Barney Frank and Chris Dodd, the Chairmen of the Committees that should have been providing over site of the two financial giants. Barack Obama and Hillary Clinton were also among the top receipts of Fannie and Freddy campaign contributions.
Wall Street investors liked the new arrangement and the easy money. Democrats liked the votes they could garner by being the party that advanced homeownership and they liked the dependable source of campaign contributions. This was the “crony capitalism” that led to the crisis.
By the early part of this decade it became clear that Fannie and Freddie were advancing a market in risky loans. If these practices continued an economic meltdown was inevitable. In 2004 Fannie Mae was caught in an accounting scandal overstating their earning and their financial stability. Congress conducted dozens of hearing and Democrats defended Fannie Mae and denied that a problem existed. (See above video.)
Principled Republicans, let by John McCain, called for the reform of Fanny Mae and Freddy Mac and President Bush proposed a bill to tighten regulation of the institutions. (For a record of the Bush administrations efforts to rein in Fannie Mae see Just the Facts: The Administration's Unheeded Warnings About the Systemic Risk Posed by the GSEs)
The bill to tighten regulation over the Government Sponsored Enterprises (Fannie and Freddie) was introduced in Congress in January 2005 but Democrats blocked it. If one single person gets credit for blocking reform that could have averted the mortgage crisis it has to be Barney Frank. (See, Fannie Mae’s Patron Saint)
While there are other factors at play that led to the economic meltdown, the bulk of the blame must be laid at the feet of Congressional Democrats who turned a blind eye to what was going on, benefited from it, and blocked reform that could have averted it.
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