Tuesday, September 23, 2008

Origins of the current crisis

The Wall St. Journal has an excellent article today that explains the origins of the housing/subprime credit crisis. Here's my short summary: Freddie, Fannie, and Congress are the major culprits. It started in 2003 when Congress pressured F&F to make housing more affordable. F&F responded by becoming the largest buyers (total GSE exposure exceeded $1 trillion ) of subprime and Alt-A mortgages. Without F&F's voracious appetite for these loans, the mortgage industry likely would not have created more than a fraction of the loans that have now brought our financial markets to their knees. The Senate banking committee in 2005 tried to pass a major F&F reform bill supported by Republicans that would have prohibited F&F from holding portfolios and would have subjected them to regulation similar to that of banks. "McCain endorsed the legislation in a speech on the Senate floor. Obama, like all other Democrats, remained silent." Democrats refused to allow the bill to come to a vote. And the rest is history.

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