Barack Obama and the Ex-Presidents

B Gail of Il is clearly uninformed as to the underlying cause of the economic situation we're in. Either that or she's just ignorant and has failed do anything except spout off with the old (and getting older) refrain "It's Bush's fault".

This situation has nothing to do with Bush economic policy but has to do with a failure of the financial system to run normal checks and analysis on the loans that they gave out over the last 15 years because of implicit and explicit guarantees mandated by the federal government.

Beginning with Bill Clinton in 1996 and ending with Barney Frank and Chris Dodd last year, Freddie Mac and Fannie Mae were obligated (to an ever increasing number), by the federal government to make more "affordable housing loans" . Now, neither institution actually wrote individual residential mortgages, but they did purchase the loans that had already been made and that had been packaged by other lenders, some of them unscrupulous, because both Freddie and Fannie HAD TO BUY THEM.

Knowing that Fannie and Freddie were obligated to buy so large a number of "affordable housing loans" (i.e. -loans made to non credit-worthy borrowers with no real ability to repay them), emboldened many lenders and allowed them the freedom of approving loans that they would never had made under normal circumstances, because the loans were implicitly guaranteed by the federal government through Fannie and Freddie.

With implicit government backing and so many unqualified borrowers buying houses the competition to write loans became greater and the standards for approving loans diminshed even farther. Money became cheaper and more available which lead to the real estate boon that drove housing prices up throughout the country from 1999-2006.

As housing values appreciated, people assumed that the equity that magically had appeared in their houses was never going to go away and so they borrowed money against their homes in the form of home equity loans and second mortgages. They went out, spent that money carelessly, assuming that their home values would only continue to rise. Unfortunately the bubble began to deflate as actual income failed to rise with increasing household debt and as people began to default on their payments -- credit cards, then home equity loans and then mortgages, the bubble finally burst; housing values began to decrease and suddenly the party was over.

Fannie and Freddie were at the core of the meltdown and led us into even deeper problems when the non-consumer credit markets froze (out of fear and a sudden interest in caution), after the bankruptcy of Lehman Brothers, which the Fed should not have allowed to fail.

So B Gail of Illinois, ths was not Bush's fault as you have naively been led to believe. It is the fault of the government backers/protectors of Fannie and Freddie (Barney Frank, Chris Dodd and Barack Obama), and the basic greed of the general population. Obama cannot spend our way out of this.

chris cole of CA 4:32PM January 09, 2009