Zerohedge.com carried an posting on 1/1/2010 titled, Origins of an American Kleptocracy in which the author states:
“Precious few assumptions are required to come to conclusions laying responsibility for the largest economic disaster in recent memory at the feet of the GSEs.
“First, that the GSEs had substantial influence over the mortgage market.
“This is a no-brainer with the GSEs either holding or guaranteeing 51% of outstanding home mortgage debt in 2003. To put this in perspective, that figure was around 33% of the GDP of the entire United States in 2003. Read that last line again. Anyone wishing to play in the market had to compete with the rates set by Fannie and Freddie.”
One of the points made is that in depressing interest rates on home mortgages, and in relaxing lending standards, and in jawboning mortgage originators to lend to anyone with a pulse no matter what their financial condition (over 50% of home loans made in 2007 were to sub-prime borrowers), government assumed a risk for which there was a cost, and should have been reserves set aside to cover.
To the politically-driven members of Congress overseeing Fannie and Freddie, these were detached and abstract concepts, and they were ignored. We have YouTube video of Franklin Raines telling Congress that since home values never go down, it was perfectly safe to lower the reserve levels of the GSEs down to 2%.
But no matter how you slice it, the roots of this crisis lay in the expansion of credit, which means the creation of money out of thin air to push into the economy. As economist Ludwig von Mises said long ago, this causes the “appearance of prosperity”. One other side of this same coin is to confuse money with wealth.
Government, and fractional reserve banks under license from government can create money out of thin air. But that does not change the level of wealth in the economy, nor the amount of net wealth being created by people working. The only solution is for government to stop attempting to create the appearance of prosperity, and the appearance of “affordable housing” and to return to sound money, and sound financial policies. Above all, to stop creating money out of thin air no matter how it is done, by allowing banks to do it, government to do it, or GSEs to do it.
