Most critics, including those in congress and the media, are blaming the current financial crisis in the United States on President Bush and the GOP’s economic policies. Many feel that the GOP’s laissez-faire policies have led to corruption and greed on Wall Street. A recent poll shows that almost half of North Carolinians feel that the Republican party is to blame for the current economic crisis. A closer look at the facts and events that led up to the current credit crisis reveals a different story.  The cause of the current economic crisis is a result of Government intervention in financial markets, growth and corruption of the United States government, and an increase in credit use in the United States.  Let’s examine how government intervention, in large part by Democrats, through supplying capital to secondary mortgage markets, influencing markets through social and political pressure, and the use of interest rates for economic stimulation have impacted the current financial crisis.

Government intervention in financial markets through the supply of capital is one of the primary causes of the credit crisis. It all started in the Great Depression when there was a general lack of confidence in the free market due to the severe economic correction in the 1930s. In 1938 as part of Franklin D. Roosevelt’s (D) New Deal, the largest expansion of the federal government in U.S. history, The Federal National Mortgage Association, better known as Fannie Mae, was created as a federal agency to support the mortgage market with cash to increase home ownership. This Government Sponsored Enterprise was created to provide capital to loan originators – banks and other financial institutions. In 1968, Fannie Mae was made a private corporation in an attempt to balance the federal budget. In 1970, to provide competition for Fannie Mae and to expand the secondary mortgage market, the Federal Home Loan Mortgage Corporation, or Freddie Mac, was formed. Freddie Mac bought mortgages in the secondary market, packaged them, and sold them to other financial institutions as investments. Fannie Mae and Freddie Mac are the root cause of the current credit crisis because they provided the “guarantee” of capital to banks and other lending institutions and kept the flow of credit running.

Further influence on financial markets came in 1977, when the 95^th United States Congress passed and President Jimmy Carter (D) signed into law the Community Reinvestment Act which encouraged U.S. banks to lower their lending standards to increase lending to lower income applicants. In 1999, the Clinton Administration encouraged Fannie Mae to increase lending to low-and moderate-income borrowers. In the mid  2000s, Fannie Mae and Freddie Mac began investing billions in subprime loans as a public good to provide liquidity to the secondary mortgage market and provide loans for subprime borrowers – putting people into homes that they couldn’t afford. As part of their class-envy and income redistribution ideology, Democrats used their influence over financial markets through Fannie Mae to encourage home ownership for those who couldn’t afford them. When credit is added to the housing market, especially at the rate mortgages were being given from 1999 to 2007, demand for housing was artificially increased. Millions of Americans were able to get mortgages who were never able to get them before under normal lending standards. Thus, millions of additional Americans flowed into the housing market in the 1990s and 2000s, increasing home prices dramatically. Towards the end of the .com bubble, interest rates would play a role in adding more buyers to the U.S. housing market.

It disappoints me greatly to hear democrats in Congress blame the “free market” for our current problems and to know that some Americans agree with them. When discussing credit markets, the price of the products sold – i.e. mortgages, loans, etc. – is controlled centrally by the Federal Reserve Bank which is part of the federal government. This is far from a free market. In a free market, interest rates would be allowed to fluctuate with supply and demand. Towards the end of the Clinton Administration, Alan Greenspan, Chairman of the Federal Reserve, began using interest rates as an instrument to stimulate the economy when the stock market began a downward trend during the .com bust. The Federal Reserve began slashing interest rates as a policy to help grow the economy with debt. This policy discouraged saving and encouraged Americans to invest money in real estate using risky, subprime loans backed by Fannie Mae and Freddie Mac. From 2000 to 2007 Average Americans with extra money to invest saw traditional investment vehicles as fruitless because of artificially low interest rates , were weary of the stock market because of the .com bust, and saw real estate as a sure thing. They put their savings down on a mortgage, leveraging debt to speculate in the real estate market. This introduced more buyers into the housing market which drove prices higher, especially in key markets such as California, Nevada, Arizona, and Florida.

Together with government-sponsored, low-income borrowers, these investors met the supply of sub-prime loans driven by Fannie Mae and Freddie Mac putting the entire U.S. financial system at risk and dependent on one thing – the hope that home prices would continue to rise. In 2006, when the revelation that Fannie Mae and Freddie Mac had grown out of control and inflated with these sub-prime assets, the lending machine began to slow leading to a slowdown in the housing market. Declining home values along with sub-prime borrowers defaulting on their mortgages are the culprits that led to the downfall of all of the institutions that invested sub-prime mortgage assets including Fannie Mae and Freddie Mac, Lehman Brothers, AIG, etc. What we have is the perfect storm of government intervention – a supply of money through Fannie Mae and Freddie Mac, government policy applying pressure to lending institutions to give mortgages to people who couldn’t afford them, and monetary policy that uses interest rates as the tool to promote debt as a way to acquire wealth.

Many Americans are looking for information on who’s to blame for the crisis we are in. I thought I would share my thoughts on the real problem – Government, especially Democrats who have created enterprises who pump cash into credit markets, have made homeownership into an implied right, and who have used monetary policy to get Americans further in debt.

Tell us what you think and come back for more truth about the bailout.