benlonghair:
No law to force it, but they did make laws that took away the risk of making those loans. There was (potentially) money to be made there, and since there's no risk, why wouldn't a bank make those loans?

We need to put risk back into the equation. That requires repealing the laws that back loans with (basically unlimited) government funds.

Fannie and Freddie did not cause the housing bubble. IN fact, they were too swept up in their own problems to be much of a buyer in 2006 and beyond. Most of the loans were private.

The real problem with the financial crisis was that CDOs, CDSs, in-rate auction securities, and other financial derivatives were designed to provide long-term investment rates with the benefit of demand deposits. However, in a time of great fear, like we have now, we are experiencing a massive bank run.

On top of that lack of long term investment regulation, we also eliminated leverage ratios for the major investment banks, and transferred many SEC regulations to computer software that banks themselves monitored. My Money, Bank, and Finance TA in college had been a computer programmer who wrote and designed such software. Interesting guy.

Lastly, coupled with the non-regulation of many financial derivatives, our media has failed us. Despite many, many warnings, cable news and many other sources claimed for months that nothing was ever wrong; that capitalism never fails. And worse, the financial editorials- Moodys, Barrons, etc...- failed even worse by rating derivatives as AAA despite warnings otherwise.

Quite frankly, we let the financial industry get too inbred. There was profit to be made in every transaction, even if added up it was a negative for society.

Persepolis: Yes, the fact that there was a time that anyone with a pulse and a pen could qualify for a mortgage. (Adjustable rate? Why, that's mere dollars a day for the first few months, and I'm going to flip this house before the rates go up like they do on the TeeVee! Weee!)

This is one of the main reasons we're in the position we're in. There needed to better regulate Freddy and Fannie a few years back, and they didn't, now we're in the position we're in..

Fannie and Freddie are a scapegoat. They were a small part of the housing bubble.

The reality is that investment banks, regular banks (google Wells Fargo), and other "financial services" companies realized about 15 years ago that you could make a quick buck off of poor people and never take a loss.

They designed their financial instruments so that everyone else would get hurt in the investment but them. However, if everyone is hedging their bets that way, and everybody purchases those poor investments, then all of society takes a loss.

It's not that we can't give poor people loans, or that all sub-prime loans are bad, or that government promoting housing programs is bad- greed above all else is bad. That's where Rand is wrong. You cannot think only for yourself because you live in an interconnected society, and if everyone is always trying to screw everyone else- well everyone gets screwed.

Republicans keep coming up with strawmen because it was their God- Reagan- whose broken ideology was the foundation for all of this. And the Democrats don't correct them because they went along with it. You want a good financial system- put the fervor we instill in the DEA into financial regulation.

They could have caught Bernie Madoff. They could have figured out the fraud of CDSs. The problem is that we treat businesses like they are queens that need to be pampered.

The Icelander: We let most businesses get too big. If a corporation is so large that it will destroy the economy if it fails, then it needs broken up, not bailed out. Capitalism cannot work if businesses are not allowed to fail.

Adam Smith quote aside- yes this is true of many industries. However, it is not true of all of them. Any supply chain expert, knowledged economist, etc... will quickly tell you that the Auto industry almost requires this because of the economies of scale gained.

Persepolis: I was under the impression that they set the national standards as far as mortgages were concerned, so while the mortgages that we troubled were in the hands of private institution, it was all going on with a nod from Freddie and Fannie.

No. Fannie and Freddie invest in AAA rated CDOs in order give more capacity for banks to lend. However, due to accounting scandals in 2004-6, they made up a paltry sum of the housing boom. Fannie and Freddie may give certain signals to the markets, and have influence, but they are not the a communistic authority in a capitalistic society.

The reality is that- as I said in another post- banks and other financial services companies figured out that they could make a cheap buck by lending money and selling it elsewhere. This is why the rest of the world is feeling the hurt- they all bought our CDOs, not just Fannie/Freddie. (In fact, I believe most of the bad loans- or at least subprime- were done by financial services companies like GMAC, and not banks).

Any time you let banks/financial companies transfer paper without regulation, you are going to let them transfer significant moral hazard with significant risk. NPR had an interview with the former head of WaMu who said that at one point the issue was brought up in a board meeting, and everyone just agreed that profits were up, so don't worry about it.