What caused the economic crisis?

During the first presidential debate, Senator Barack Obama blamed the current economic crisis on the "notion that the market can always solve everything and that the less regulation we have, the better off we're going to be."

The "Community Reinvestment Act" ("CRA") was signed by President Carter in 1977. CRA encouraged the Federal National Mortgage Association ("Fannie Mae") to lend to low-income homebuyers. It also empowered the Federal Home Loan Mortgage Corp. ("Freddie Mac") to buy mortgages and sell them as mortgage-backed securities on the open market.

In 1995, Congressional Democrats and President Clinton greatly expanded CRA, encouraging lenders to issue $1 trillion in "subprime loans" that, unlike traditional bank loans, failed to mitigate risk with savings deposits. Fannie Mae added more fuel to the fire in 2000, issuing another $2 billion in subprime loans.

CRA grossly distorted the housing market, requiring lenders to issue interest-only mortgages with zero money down, no income verification, and with bad or no credit! Fannie Mae said, in effect, "No problem -- we will guarantee those loans."

President Bush jumped on the bandwagon in 2002, noting: "Under 50 percent of African-Americans and Hispanic-Americans own a home. That's just too few." He called on Fannie Mae "to unlock millions of dollars, to make it available for the purchase of a home."

In 2003, Republicans in Congress sensed danger ahead and proposed the creation of a new federal agency to oversee Fanny Mae and Freddie Mac. Many Democrats became irate. Rep. Barney Frank (D-MA) argued, "These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis; the more people exaggerate these problems ... the less we will see in terms of affordable housing."

Bush never put the full power of his office behind Republican efforts to regulate Fannie and Freddie. Running for re-election in 2004, Bush wanted more, not less, subprime mortgages: "We're creating ... an ownership society in this country, where more Americans than ever will be able to open up their door where they live and say, 'Welcome to my house, welcome to my piece of property.'"

In 2006, Sen. John McCain sounded the alarm: "For years I have been concerned about the regulatory structure that governs Fannie Mae and Freddie Mac ... and the sheer magnitude of these companies and the role they play in the housing market." McCain warned: "If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that (they) pose to the housing market, the overall financial system, and the economy as a whole."

Senator Charles Shumer (D-NY) defended the status quo, stating," ... I think Fannie and Freddie over the years have done an incredibly good job and are an intrinsic part of making America the best-housed people in the world." All attempts to rein in Fannie and Freddie were blocked by the Democrats.

As more and more homes were sold, the cost of housing skyrocketed. Housing prices peaked in early 2005, began declining in 2006 and have not yet bottomed. The crisis began when the housing bubble burst and low-income homeowners began to default on their mortgages. Defaults increased dramatically during the economic downturn in 2007, when nearly 1.3 million homes went into foreclosure, up 79 percent from 2006. Then mortgage-backed securities collapsed, leading directly to the current financial meltdown.

Blaming the free market for the failure of government intervention is an old trick. Ayn Rand observed, "One of the methods used by statists to destroy capitalism consists in establishing controls that tie a given industry hand and foot, making it unable to solve its problems, then declaring that freedom has failed and stronger controls are necessary."

More government is not the solution to our economic crisis; government is the problem!

Giorgino is a retired Navy Surface Warfare Commander and a Gulf War veteran. He graduated from the University of San Diego School of Law in 2000 and practices law in San Diego. He may be contacted at

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