How did we get into this jam? The Roots of the Crisis offers an answer:
...Fannie Mae and Freddie Mac were going through a crisis. In 2003 and 2004, an accounting scandal was revealed. The two public-private partnerships were cooking the books to show phantom profits. The Bush administration and its allies on the Hill pushed a strong bill to reform how these institutions operated. The measure came very close to passing, but Fannie and Freddie cut a deal. They would refocus on expanding mortgages for low-income borrowers if the feds kept out of their operations. The bargain worked. Virtually all the Democrats and a few Republicans backed the two companies and the reform effort failed.
Fannie and Freddie then went on a subprime bender. They made it clear that they wanted to buy all the subprime or Alt-A mortgages that they could find, eventually acquiring around $1 trillion of the paper. The market responded. In 2003 subprime mortgages made up less than 8 percent of all mortgages. By 2006, they were over 20 percent....
Unfortunately, after several years of a housing boom, the available pool of households who could responsibly use the more exotic financing products had dried up. In short, there were no more people who traditionally qualified for even a subprime mortgage. However, Fannie and Freddie were still signaling that they wanted to buy these products. At the same time, activist groups were agitating for more lending to low-income families. Banks realized they could make even more exotic loan products (e.g., interest-only loans), get the activists off their backs, and immediately diffuse their risk by selling the mortgages into MBSes. After all, Fannie and Freddie would buy anything.
In short, Fannie Mae and Freddie Mac were "cooking the books". When they got caught, their friends in government allowed them to keep on cooking the books so long as they doubled down with more mortgages for people less likely to repay them.
Fannie Mae and Freddie Mac, at governmental urging, "went on a subprime bender". Because "Fannie and Freddie would buy anything", banks invented more and more "exotic loan products". The scheme eventually unraveled, causing the government to step in and bail out Fannie and Freddie and everyone in bed with them.
Do you find it unsettling that the same politicians and their banking friends who dug us into this hole are now telling us that, for $7,000,000,000, they'll try to dig us out? They assure us that the bailout will help regular people, too, in regular towns like Athol MA and Orange MA, but do you wonder why "I"m from the government and I'm here to help you" carries such a huge price tag?
If you do, read the Roots of the Crisis.
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