Also, the timing of the bubble strongly correlates with Janet Reno’s market intervention. As Laura mentioned, the article you cited completely ignores President Clinton’s role in expanding the CRA.

Moreover, the fact that some reckless “independent mortgage companies” acted more risky than more conservative banks means nothing. Most mortgages come from banks. Banking activity caused this nonsense.

And the government held a gun to the head of all bankers.

After the bubble took off, it seemed perfectly rational for everyone else to invest in the bubble…until it burst.

Incidentally, your quote mentions derivatives, which is a bit like a Democrat mentioning guns. There’s nothing wrong with derivatives, only with how some people make use of them. In fact one of the largest uses of derivatives until recent years was to manage risk, trading off a little return for less risk.

The central idea behind the GSEs was that they would encourage home-ownership by buying mortgages from banks. This was in an era when federal law forbade interstate banking–which meant that most banks were necessarily small. When Fannie or Freddie bought a mortgage, it freed up the bank’s limited capital, allowing it to make more loans. The purchase also relieved the bank of both the credit risk and the interest rate risk–that is, of having to worry that people might default, or that interest rates might rise during the life of the loan. Fannie and Freddie are one reason America is one of only two countries where lenders offer 30-year fixed rate mortgages. (Denmark is the other, by the way.)

Their congressional charters give Fannie and Freddie advantages unmatched to this day even by such giants as Citigroup and Wells Fargo. For example, the Treasury is permitted to buy $2.25 billion of each company’s debt (commonly referred to as Fannie and Freddie’s line of credit). Fannie and Freddie are exempt from state and local taxes and have much less stringent capital requirements than banks. Best of all, their cost of capital is only a smidgen higher than long-term Treasuries–and lower than that of even the most creditworthy companies. This last advantage, however, is not due to any regulation. Rather, it is the result of the market’s belief that Fannie and Freddie’s debt is safer than even AAA-rated corporate debt. Why? Because thanks to Fannie and Freddie’s congressional charters, the markets believe that the U.S. government will never let them default.

In fact, there is no such federal guarantee, something Fannie and Freddie are forced to point out in their federal filings. But the two GSEs play what former assistant Treasury secretary Rick Carnell calls “a double game”–disavowing federal backing in their public boilerplate, while quietly encouraging the notion. In 1998, for instance, Fannie argued in a letter to the Office of the Comptroller of the Currency that its securities were safer than all AAA-rated debt because of the “implied government backing of Fannie Mae.”

Fannie and Freddie dominate the mortgage market, but they don’t originate home loans. Instead, they make their money in two major ways. One is conservative: They get a fee for guaranteeing the payments on mortgages they buy, which they then resell to investors, usually in the form of mortgage-backed securities. The more aggressive way is to hold on to the mortgages, assume all the inherent risk, and make money on the spread between their low cost of capital and the higher yield of the mortgage portfolio. (Alan Greenspan would later call this “the big, fat gap.”) The more mortgages the GSEs buy, the faster their profits can grow. Since 1995, Fannie and Freddie’s holdings of residential debt have grown an average of 20% a year, and together they now carry $1.5 trillion in home loans and mortgage securities on their books–more than the top ten commercial banks combined. Thanks in large part to this growth, Fannie has had double-digit profit gains for the last 17 years–and an average return on equity of 25%. But the GSEs’ size has people increasingly worried about what might happen if anything went wrong–and not just to Fannie and Freddie but to the entire financial system.

There is one additional concern: derivatives, which institutions rely on to hedge interest rate risk. Over time, Fannie and Freddie became two of Wall Street’s top users of derivatives. Of course, derivatives have their own risks–as America discovered in 1998 when hedge fund Long Term Capital Management blew up–and very nearly brought down the U.S. financial system with it. The idea that its activities might pose a danger infuriates Fannie Mae, which describes itself as “a bulwark of our financial system.” For some of its critics, though, Fannie’s refusal to acknowledge that its portfolio posed any risk would become the scariest thing of all.

Blaming the current crisis on the CRA and the 2 F’s seems pretty clearly wrong to me, however, at least as a major factor. Check out this article that points out that most sub-prime loans weren’t covered by the CRA, that the lenders who were subject to CRA made fewer dangerous loans than those that weren’t, and of course reminds us that CRA was passed when I was 6.

Democrats, and many Republicans, have clearly pushed for affordable housing. I’ve seen no complaints from lenders, however, that Democrats were making them loan money to unemployed people with no savings and few prospects. That’s because greed made them do that, and lax oversight let them.

Check out the following information, and look at who was trying to improve government oversight of the issue.

“These two entities—Fannie Mae and Freddie Mac—are not facing any kind of financial crisis, the more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.” ~ Senator Barney Frank, Massachusetts Democrat (2003)

Steve, government intervention caused the housing bubble, an unnatural phenomenon.

The Republicans cult of “deregulation” created the anarchy that spun out of control and has seriously damaged America’s ability to claim being THE financial super-power.

Regulations that were stripped over the last 28 years of conservatism (and that includes Clinton) are entirely responsible for edging this country close to a second Republican engineered Great Depression.

And now to prevent, or at least forestall until after the election, the financial collapse, REPUBLICANS ARE TURNING TO GOVERNMENT TO BAIL THEM OUT.

Congratulations, you’ve been slavishly following a Communist Repulic(an Bush) leader who’s nationalized businesses and expects everyone to cough up cash to bail out his buddies.

I know Ed is busy, AND HE IS A GREAT FRIEND….but I swear…the things that get “stolen” from us little guys conspire to KEEP us little.

I know I don’t OWN the news, but honestly, I work HARD for the links that are MY OWN.

Thank you again.

I hope you are buying gold like its cool, and moving to the country so we can live like Olivia Walton here soon…because it IS coming.