Blame Washington - Not Wall Street for the Current Financial Crisis

The collapse of many financial institutions and the implications of this for the economy is the major economic concern in the United States and around the world as we head into the last quarter of 2008. The immediate cause of the crisis is the drastic reductions in the value of the assets of financial companies due to the large number of sub-prime (low credit quality) mortgages in their portfolios. However, the sub-prime mortgage problem is a sub-set of the collapsing of the housing market bubble. Basically, rising demand for housing and the profits to be made in meeting this demand led to increasing numbers of people moving into the housing market and seeing it as a means of getting rich. As prices continued to rise and thousands of people became wealthy as a result, more and more people jumped into the market. In times of frenzied activity in the market for a particular good, housing in this case, the mania takes on a life of its own as increasing numbers of people rush into the market hoping to get rich while knowing nothing about the mechanics of investing. At some point prices peak and those who entered last panic when they suddenly realize that rather than making large amounts of money they are about to lose everything. Their reaction is to cut their losses and sell, an act that begins to drive prices down causing others to begin frantically selling in their haste to exit.

Seemingly irrational economic behavior such as this is not uncommon as evidenced by the seventeenth century Tulip Mania in Holland when tulips became popular there and the large demand for tulip bulbs led to frenzied speculation that drove the prices of tulip bulbs to astronomical heights. The eighteenth century witnessed the South Sea Bubble when frenzied trading in the stock of the English South Sea Company drove the price of the stock way up before suddenly collapsing. Then there was the Dot Com bubble in the U.S. in the 1990s when people believed that the stock of the new Internet companies were the keys to never ending wealth and speculation led to the prices of many of these stocks being bid up to unbelievable heights before collapsing. The recently deflated housing bubble is just the most recent occurrence of this phenomena.

As with any new economic turbulence, the knee jerk reaction of liberals in government and the media has been to immediately call for more regulation while, at the same time seeking to exploit the situation for their own political gain. Portraying themselves as our saviors, they are now busy pointing accusing fingers Wall Street and promising to punish them for their greed which they claim caused the problem, while at the same time promising a fix which, as usual, will cost citizens big time in terms of both tax dollars and loss of freedom. However, in their zeal to point fingers and fix blame they forget my grandmother's admonition that when you accusingly point a finger at someone you should remember that your other three fingers are pointing back at you. In this case it is the three fingers pointing back at the liberals which are the ones pointing in the right direction as the major source of the problem is located in Washington, D.C. and not Wall Street. And it is government, not the free market which bears much of the blame for the origins of the problem and all of the blame for the financial crisis that has resulted from politicians' misguided attempts to fix the problem.

The causes of the rise and bursting of the housing bubble and the mortgage crisis that accompanied it were many. Greed did play a part but this was not so much the unrestrained pursuit of wealth at the expense of others, which is the definition of greed that earned it a place among the original Seven Deadly Sins as defined by the early Church, but rather a greed that becomes an obsession which clouds peoples' judgment causing them to make stupid mistakes. There were some shady dealings and outright fraud involved in the actions of some of the players in this crisis, including both small marginal players and large players whose ranks included many in top positions at Washington based Fannie Mae and Freddie Mac. A close look at the classic definition of greed makes it clear that it is difficult to accuse bankers, securities dealers and investors on both Wall Street and Main Street of greed in the classic sense in this case as the heart of the present problem is the large number of sub-prime loans (loans whose chances of default are high because they were made to borrowers with limited or no savings and jobs subject to layoff during an economic slowdown) made to people who would not be able to qualify for loans to purchase a home under normal lending rules. Looked at this way the actions of the banks and investors appear to be noble and in accordance with the conventional liberal notion of social justice in which those with money use it to help those less fortunate. But, unlike traditional liberals, whose idea of charity is to raise the funds for good deeds by taxing one's neighbors rather than using their own funds, these individuals and companies were using, nae risking, their own funds in this noble cause. Of course, as will be shown in more detail below, the real motivation here was to make more money by acting recklessly because they believed, with some good reason, that the government would bail them out if the high risk borrowers suddenly defaulted on their loans. The sin here was not so much the conscious act of gaining at someone else's expense, but the potential financial harm they exposed themselves and their companies to by focusing entirely on the potential profits thereby both ignoring the potential dangers and failing to expand the effort needed to make good financial decisions. Stupidity or hubris, rather than greed, better describes the actions of most on Wall Street in this case.

The accusation of Greed and even fraud can, however, be more appropriately applied to Washington and specifically to the actions of the Clinton Administration, Congress and the top management of Fannie Mae and Freddie Mac. According to a 1999 article in the New York Times, Fannie Mae in response to "...increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people..." acquiesced and reduced its credit standard's to buy loans made high risk, or sub-prime, borrowers. As will be explained below, this action opened the door for banks to do the same thing as Fannie Mae would now buy these high risk loans as soon as the banks made them. But the greed did not stop here as both Fannie Mae and Freddie Mac have always enjoyed a special relationship with the government and, to keep Congress happy and on their side, donated freely to the campaigns of members of both parties with both individual contributions from the mega salaries of the top executives of the two companies as well as generous contributions from their employee financed Political Action Committees (PACs). A September 11, 2008 posting of data, released on September 2, 2008 by the Federal Election Commission, on the OpenSecrets.org website of the Center for Responsive Politics lists the total contributions by individuals employed by Fannie Mae and Freddie Mac and contributions from the employee Political Action Committees (PACs) of these two companies to each member of Congress from 1989 to the present (Democratic Senator Chris Dodd, Chairman of the Senate Finance Committee is number on on the list as the recipient of a total of $165,400 of which $116,900 came from individuals, Democratic Presidential candidate Senator Barack Obama came in second with a total of $126,349 of which $120,349 was from individuals, Democratic Congressman Barney Frank, Chairman of the House Financial Services Committee is number 26 on the list with a total of $42,350 of which $11,850 came from individuals, and Republican Presidential Candidate Senator John McCain is number 62 with a total of $21,550 all of which came from individual contributions). Here we have the Democratic Administration of the liberal President Bill Clinton carrying out the policies of his hard left supporters by exploiting the poor in a financial experiment that is certain to harm many of them and putting the taxpayers at risk all for his own political gain. Liberals in Congress, of course, supported President Clinton's efforts to reduce underwriting standards for sub-prime borrowers while members of Congress as a whole either quietly looked the other way or openly defended Fannie Mae's risky underwriting practices while accepting millions of dollars in campaign contributions from Fannie and Freddie. As for Fannie Mae itself, management ignored their fiduciary duty to maintain prudent lending practices and embarked on a risky venture gambling that the economy would remain strong enough to handle their gamble but believing that if it didn't their ability to tap the U.S. Treasury would save them and cover their losses. This is classic greed whereby the perpetrators - in this case the elected officials in Washington and the top management of Fannie Mae and Freddie Mac - all sought to increase their wealth and power at the expense of both the poor (who were essentially the lab rats in this social engineering experiment) and the taxpayers who, with the passage of the bailout bill yesterday (October 3, 2008) are now responsible for paying at least $700 BILLION of their hard earned money to get us out of the financial mess brought on by the unrestrained greed of those running our government.

As noted above, the present financial crisis began as a classic economic bubble. Such bubbles occur naturally and when they burst some innocent people, such as the workers in high tech companies who lost their jobs when the DotCom bubble burst, get hurt along with those who throw caution to the wind by getting caught up in the frenzy of of the get rich quick atmosphere of the mania. However, there are really only two ways to protect people from being harmed by these bubbles. The first is to give people the freedom, accompanied by an equal amount of responsibility to bear the consequences of their actions, to control their lives and the second is to strip them of all their freedom and place responsibility and decision making for their lives in a third party such as the government or a cult. In his book, The Cash Flow Quadrant, author Robert Kiyosaki (whose previous book was the very popular Rich Dad, Poor Dad) describes his exercise of this freedom and how it led him from a successful management job to being broke and homeless to becoming the millionaire he is today. People need the freedom to make their own choices, as well as accept the consequences of their mistakes in order to learn from their mistakes and find success. In addition to making and learning from mistakes, people have to accept the fact that success requires hard work and not the squandering of their time or money on get rich quick frenzies which end in disaster especially for those who jump into the jump in last. As for the second option, one only has to view the 1999 movie The Matrix which depicts a world in which the masses spend their lives in a comatose state in which they experience perfect safety and security via images designed by and fed into their brains by a group of controllers who run the world.

Freedom, of course, requires hard choices and sometimes none of one's options are good and the individual is forced to choose the one that is the least bad. Take the bursting of the DotCom bubble. While no one knew exactly when it would burst, only those actually living in a coma were unaware of warnings that it would eventually burst. This left workers making good money in the industry with the choice of hoping history and those warning of an eventual bursting of the bubble were wrong, or taking steps to either leave their good paying jobs for something more secure or building a financial cushion against an eventual crash and layoff (this also meant moving a good portion of their investments away from high flying tech stocks and into something with lower returns and more security). The Enron crash is another example liberals cite as an example of unrestrained greed requiring government protection. While there is no question that top executives in the company allowed their greed to blind them to the consequences of their stupid mistakes, led to the dereliction of their fiduciary duties to their stockholders and employees and lulled them into believing that their cozy relationships, which were well lubricated with campaign contributions, with politicians of both parities would bail them out if things crashed. However, it is also true that many of the employees also closed their eyes to the problems building for the company as evidenced by the fact that right up to the day before the stock crashed many were begging the company to allow them to buy more Enron stock for their 401(k)s. This despite the fact that there were an increasing number of people writing in The Wall Street Journal, Barron's and other publications warning that Enron was about to crash. That Enron was about to crash was relatively well known months before it happened the only unknown was the exact date the crash would occur. Like previous bursting bubbles, there were plenty of warnings about the possibility of the increasing amount of sub-prime lending would lead to an eventual crash which could threaten the nation's financial system. As I mentioned above, even the generally left wing New York Times in a September 30, 1999 article, nine years before the actual crash, warned "In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's. "

For at least a decade warnings that this risky venture would eventually collapse fell on mostly deaf ears. The recent sudden financial collapse of the sub-prime market was not an unexpected event, the only surprise was the government's, in its haste to appear to be on top of the problem, decision to force financial institutions to mark their sub-prime loans and securities to market. Marking to market is an accounting technique that involved having the banks determine what their loans and securities would bring if offered for sale on the open market the next day and then compare this value to the value of the money they held as deposits for their customers. Given the panic in the markets over the uncertainty as to how many of the borrowers responsible for making payments on these sub-prime loans would default, the resale value of the loans and securities was close to zero and banks whose asset portfolio contained a large portion of these loans and securities found themselves insolvent as their assets were not sufficient to cover their deposit liabilities. While marking financial assets to market is an accounting tool that can provide useful information for management and regulators, this meat ax approach to regulation made little sense. First of all, even today (October 4, 2008) as I write this, I am not aware of any reports of runs on banks (which is the situation where bank depositors rush to withdraw their funds in en mass - there is a scene in the 1946 movie classic It's a Wonderful Life staring Jimmy Stewart in which Stewart's character, George Baily, as the head of a savings and loan is faced with a classic run on the bank during a panic) and, while the resale value of these loans and securities is near zero, the default rate is still low and the banks are receiving their payments on time. It is easy to conclude that this was a panic driven publicity stunt on the part of government, designed more to shift blame away from them for their own previous laxity in allowing, let alone encouraging, the reckless sub-prime lending by lenders in the first place. The result of this mark to market fiasco, has been the destruction of billions of dollars worth of stockholder equity along with a world wide financial panic that threatens the world economy as a whole.

To fully understand the causes of the current crash we have to go back to the roots which, like the other big financial bubble that is about to burst - Social Security - have their origins in President Franklin D. Roosevelt's New Deal.

Among the many laws rushed through Congress by President Franklin D. Roosevelt in his attempt to implement socialist style economic regulation of the U.S. economy following his election in 1932 was a major banking reform act known as the Glass-Steagall Act of 1933. Among the numerous restrictions on bank's activities included in the 1933 act was a provision that prohibited interstate banking - the law forbid banks from doing business in more than one state. Many states further limited banks operating areas by dividing themselves into banking districts which forced each bank to operate within just a portion of the state (Illinois and some other states went even further and outlawed branch banking entirely, leaving each bank with just a single office). Since demographics tend to vary from area to area, some banks found themselves in markets with high loan demand but low savings deposits while others had an abundance of savers but little demand for loans. Since the business of banks is to make money on the difference between the interest they pay savers on their deposits and the interest they charge on their loans, it is important that they have both borrowers and savers in their customer base. By placing limits on the size of the area where a given bank could operate, the government's action with the Glass-Steagall Act made it difficult for many banks to remain in business. To get around the difficulty of lack of savers or lack of borrowers, banks with high loan demand and low savings deposit rates began making bilateral arrangements with banks in other areas which had high deposit rates and low loan demand whereby they would sell their loans to the banks which had a surplus of deposits. Thus, the secondary mortgage market came into being. However, there were transaction costs involved with forming and maintaining these relationships as well as the costs of performing due diligence on the loans and distant properties that secured them and these costs tended to limit the growth of the market. The Roosevelt Administration saw and understood the problem but, instead of taking the simple and practical step of repealing the restriction on interstate banking and letting the market work, they responded by enacting more legislation in 1938 that created an agency known as the Federal National Mortgage Association with the acronym FNMA which everyone pronounced Fannie Mae.

The mission of Fannie Mae was to use taxpayer money to buy and sell loans on a national scope which created a national secondary mortgage market. Had interstate banking been allowed we would have had the same result without the federal government being involved. Fannie Mae was very successful in creating an efficient secondary market for mortgage loans and, in the process became the dominant player in the market. in 1954 Fannie Mae was partially privatized by being given a corporate charter with non-voting preferred stock in the corporation being sold to the U.S. Treasury and non-voting common stock sold to thrift institutions doing business with Fannie Mae. However, management and control of Fannie Mae remained in the hands of federal bureaucrats. In 1968 Fannie Mae was fully privatized with common stock (that included voting rights) being listed on the New York Stock Exchange and made available to the public as a whole to purchase.

Successful as Fannie Mae and the secondary market were, there were still inefficiencies in the market due to the government's heavy handed regulation of the industry. To take over the job of taking mortgage loans purchased by Fannie Mae and putting them together in large packages and then selling shares in the package to big investors like insurance companies and pension funds as well as banks, the government created a new agency known as the Federal Home Loan Mortgage Corporation whose acronym FHLMC was pronounced Freddie Mac. These packages or pools became known as Mortgage Backed Securities, the type of securities which are at the heart of the present financial crisis. Freddie Mac was originally operated by the government's Federal Home Loan Bank System which was the Federal Agency created to supervise and assist the old Savings and Loan industry (an industry which the regulators managed to destroy in the late 1980s with their mark to market rules while at the same time creating a financial crisis similar to the present one). Like Fannie Mae, Freddie Mac was eventually privatized and its stock sold to the general public.

While Fannie Mae and Freddie Mac were private companies with all of their stock held by private investors, they were not truly private. In addition to having been created by the government they also retained some very special privileges unavailable to real private companies. Among these were exemption from state and local taxes (an exemption enjoyed only by Federal Government entities as a result of the 1819 McCulloch v. Maryland decision by the Supreme Court, exemption from regulation by the Securities and Exchange Commission (which meant that they did not have to publicly disclose information about their finances and activities as other companies whose stock is held by the public are required to do, and had a line of credit with the U.S. Treasury. Instead of going to a bank or other private lenders for operating or emergency funds, Fannie and Freddie could just dip into Uncle Sam's coffers.

This last special privilege, a line of credit with the U.S. Treasury, gave rise to the myth, a myth that Fannie, Freddie and their friends in Congress, did not appear to try to refute, that the U.S. Government would stand behind and guarantee the mortgage securities that Fannie and Freddie were creating. Adding credence was the fact that, in addition to their overly close ties to the U.S. government, Fannie and Freddie were very large in terms of assets and a late 20th century belief in bank regulatory circles was that very large financial institutions could not be allowed to fail for fear that the failure of such institutions would have a devastating effect on the economy. When Continental Bank of Illinois, the seventh largest bank in the U.S. at that time, was in deep financial trouble and on the verge of collapsing in 1984 the government concluded that they could not allow such a large institution to fail so they pumped $4.5 billion dollars worth of taxpayer monies into the bank to keep it afloat. This precedent reinforced the idea that the government would move in to cover losses in the event that the securities created by Fannie and Freddie proved unsound.

The term moral hazard is an insurance term describing the danger of overprotecting people from risk. Insurance is designed to protect people's property from risks that are beyond their control such as damage from an unexpected storm or the unexpected death of a breadwinner. However, insurance companies are very careful when writing policies so as not to encourage people to engage in reckless behavior simply because insurance protects them from losses. Thus, a fire insurance policy will pay to replace the loss of a home in the event of an accidental fire but will not pay when someone simply burns the place down themselves in order to collect the insurance. Similarly a life insurance company will pay when an insured dies of causes beyond his/her control but will not pay in the event of suicide or murder by the hand of the person named as beneficiary. Imagine the gambling frenzy that would take place if casinos in places like Las Vegas or Monte Carlo had a policy of refunding losses while allowing gamblers to keep their winnings. This is, in effect what happened, in the mortgage backed securities market when investors willingly brought risky mortgage backed securities knowing that they would get a large return because of the high rates borrowers were paying on the sub-prime mortgages in the package while at the same time believing that, in the event these high risk borrowers lost their jobs and stopped making their payments that the government would step in and cover the losses. After all, Fannie and Freddie had direct access to the U.S. Treasury for funds and their sheer size meant that their failure would have severe economic repercussions. There is nothing like the appearance of a safe bet to induce people to throw caution to the wind and bet the farm.

Investors were willing to buy the mortgage backed securities despite the risk posed by the sub-prime loans mixed in the pools of mortgages that formed the mortgage backed securities. Fannie and Freddie's stockholders liked the big profits the two were generating, so when the Clinton Administration began pressuring Fannie Mae to relax their underwriting standards and accept mortgage loans that had been made to even higher risk sub-prime borrowers, they soon gave in and began purchasing loans from very high risk individuals. According to a September 30, 1999 article by Steven Holmes in the New York Times "In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders." The article went on to note that "Fannie Mae, the nation's biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings." And, by "hoping to spur banks to make more loans to people with less-than-stellar credit ratings", Fannie Mae was, according to the Times, bowing to "increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits." While politics and greed may have blinded the players in this move into sub-prime lending, even the New York Times felt compelled to add a word of caution saying "In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980s."

In addition to the New York Times voicing a little concern, the Wall Street Journal periodically ran editorials during the past decade describing lax accounting practices, warning of the potential problems posed by the relaxing of credit standards and pointing to the apparent corruption in these two companies in which top management made generous contributions from their mega salaries to the campaign funds of their friends in Congress. While the Bush Administration made repeated attempts beginning in 2001 to try to reign in the activities of Fannie and Freddie, the organization's friends in Congress not only thwarted attempts at investigating the two companies but prominent members like Congressman Barney Frank (Democrat, Massachusetts) and Senator Chuck Schumer (Democrat, New York) praised the actions of the two companies and said they should be increasing the number of high risk loans.

While the abundance of greed, stupidity and corruption involved in the present crisis makes it easy to find targets to blame as well as providing ample fodder for 30 second sound bites in the heat of the current Presidential Campaign, it is critical that we understand that blaming and punishing Wall Street will do nothing to prevent similar financial crisis, like this one, in the future. While the few on Wall Street who committed outright criminal fraud should be tried and punished, we should not use the courts and legal system to punish what was, in effect, stupidity on the part of those involved in the sub-prime debacle. In addition to being unfair and unproductive, the current political and media obsession for witch hunts on Wall Street will not only deflect criminal blame from where it should be directed - which is the abuse of power by Washington policymakers - but will cause us to fix the problem with more of the same regulation which is at the root of the problem in the first place.

Contrary to the ravings of left wing politicians and their allies in the media, the fact is that banks and other financial institutions were not operating in a laissez-faire free market environment. While the current regulatory burden is considerably lighter than the heavy handed socialism of Franklin Roosevelt's New Deal, regulation is still a big factor in the financial industry. First of all, even in a zero regulation environment, financial institutions, especially banks, have always had a fiduciary responsibility to protect their client's money. Since ancient times courts have held them to this standard and when institutions ignore this duty their victims can sue to recover their losses. However, in addition to their fiduciary responsibility, banks with national charters are subject to regulatory oversight and regulation by the U.S. Comptroller of the Currency, while state chartered are subject to the same examination and oversight by their respective state banking commissions. In addition all banks are required to be a member of the Federal Reserve System and are required to follow its rules as well as be a member of the FDIC (Federal Deposit Insurance Corporation) which not only regulates and audits, when it feel its necessary, but also has its own fiduciary responsibility to the public to make sure their money in the banking system is safe. In the case of mortgage lenders, the VA (U.S. Department of Veterans Affairs), FHA (Federal Housing Administration), HUD (Department of Housing and Urban Development) to name but a few, also issue regulations and have the authority to audit and fine banks for violations of their regulations. Of course there is also the SEC (Securities and Exchange Commission) which regulates all corporations, including banks, which sell stocks to the public - all corporations with the notable exception of government sponsored enterprises like Fannie Mae and Freddie Mac which Congress has specifically exempted from such regulation and which are more responsible than anyone for the current crisis. Numerous other state and federal agencies exist to regulate and supervise the activities of insurance companies, securities dealers and other financial institutions.

Given the extensive regulation listed above, a thoughtful person is forced to ask not only how, in the face of such oversight (which American citizens are forced to pay for twice - first with their tax dollars to fund the operations of these agencies and, second, for the increased prices they have to pay for financial services as a result of costs of regulatory compliance being passed on to consumers in the form of higher prices for the services of financial institutions) could we we end up with such a disaster as the current crisis, but also ask how will giving more power and more tax dollars to these regulatory Keystone Cops prevent future financial crisis's?

The answer is that more regulation will do nothing, other than choke economic growth and increase the financial burden on taxpayers, because what we have here is not regulatory failure but regulatory complacency. As the New York Times article cited above noted "[Fannie Mae was under]...increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people". In other words, in the face of political pressure from the Clinton White House, Fannie Mae not only choose to ignore its fiduciary responsibilities but to also encourage the banking system to do the same. And such reckless abandonment of its fiduciary responsibility was easy to rationalize since, not only was the additional risk they were taking extremely profitable, but what better way to maintain its special relationship with the politicians running the show than to accommodate rather than reject the Administration's request? Further, since they were helping the government in this project was it not reasonable to expect that the government would bail them out of the mess if the economy suddenly tanked and these sub-prime loans began defaulting?

And what about the regulators? Why didn't they see and stop the banks from making these obviously risky loans? The fact is, the regulators were a part of the same government as the politicians pushing sub-prime loans and one doesn't advance their career in a bureaucracy by going against the directives of their superiors in Congress who hold the purse strings for next year's appropriation to fund the agency. Besides, a law passed in 1977 known as the Community Reinvestment Act, required banks to make sub-prime loans in low income areas. While it is true that this law probably bears little responsibility for the present crisis as it only applies to banks and not to all lenders, it none the less makes it clear that Congress and the Federal Government place heavy emphasis on sub-prime lending to advance a political agenda leaving it up to banks and rank and file government auditors to figure out what is a proper balance between fiduciary responsibility to depositors and compliance with a law passed by Congress? Further, some agencies, such as HUD often made compliance with the Community Reinvestment Act an audit priority. Finally, while many of the sub-prime loans were originated by mortgage service companies and other unregulated mortgage originators, the loans themselves were ultimately purchased and pooled into mortgage securities by Fannie Mae and Freddie Mac and then sold to regulated banks and other financial institutions for their portfolios which were subject to examination and audit by regulators. It wasn't the failure of these small mortgage service companies which caused this crisis but rather the failure of the regulated banks that caused the present crisis. As for the small, unregulated mortgage service companies they, like the flowers in the desert that appear and bloom when it rains and disappear with the drought, tend to spring up when the the housing industry is expanding and demand for loans growing and then mostly disappear when the market cools down. While 50% or more of the sub-prime loans were originated by these generally unregulated companies (which were also not required to comply with the Community Reinvestment Act), they were willingly purchased by Fannie Mae and found their way into the portfolios of regulated banks as part of a Fannie Mae created mortgage backed security.

The lessons to be learned from this crisis are first that we cannot trust big government to look out for our interests. It should be remembered that the primary function of government is to protect us from foreign invasion, protect our lives and property from real criminals, and to administer justice and solve civil disputes through an independent judiciary. Once government is allowed to grow beyond this limited function we find it transferring resources and wealth from groups they don't favor to those who they do favor and using the power of government to try to forcefully re-design society to fit their and their supporters' vision of what society should be. Second, we must realize that government should not and in most cases cannot protect us against everything, especially our own stupidity. As I have pointed out in replies to comments on my article about lottery scams it is usually physically impossible to catch those behind these scams which is why individuals need to exercise common sense to avoid becoming victims of them. Third, government sponsored enterprises, like Fannie Mae and Freddie Mac must sever all ties with the government and operate under the same rules as any other corporation. Fourth, individuals and business people alike should guard against greed since, whether or not one believes in sin, it is still a fact that greed clouds judgment and causes people to undertake actions which harm themselves and often others as well. Finally, we as a society should never forget the ancient Roman admonition of caveat emptor or buyer beware and exercise careful skepticism when confronted with a buying decision, an investment decision or when deciding who to vote for. And once the decision has been made and the transaction completed each of us should accept responsibility for our decision.