I knew it was only a matter of time before the housing bubble burst. Against my better judgment, I bought a condo at the absolute peak of the bubble, May 2006. I now sit on a property that has probably lost 10% of it's value in two years. How did I know the bubble was going to burst? One only needed to listen to the plethora of mortgage company commercials blasting over the radio, TV, and Internet. Everybody was just giving money away. No money down. Interest only loans. Variable interest rates that were bound to go up. The kind of ridiculous deals that anyone with a rudimentary knowledge of personal finance should have stayed clear of. Finance professionals should and probably did know better, but when the government was there subsidizing this idiocy, who can blame them?
Therein lies the root of this crisis: Government. Again. Don't buy into all this capitalism-failed mumbo-jumbo emanating from the mainstream media. Fannie Mae and Freddie Mac, GOVERNMENT sponsored entities, provided the means and the money for loans to be written for people that had no business owning homes (the subject of everyone has to own a home is a topic for a later post). Bill Clinton started this charade back in the 1990s by demanding that banks offer loans to minority borrowers, whether they qualified for them or not. Think of it as affirmative action loaning. And if banks didn't comply, Clinton was going to send in Janet Reno of the FBI and Waco invasion fame after them. If I ran a bank with under that scenario, I'd probably have started throwing the money around too.
The banks, however, didn't have to hold onto these garbage loans for long though. Thanks to some very creative eggheads, loan-backed securities were born. Investors were hungry for something that actually returned more then a CD, and it wasn't going to be in stocks after that bubble burst. Why not bundle all of these mortgages together, with their higher interest rates, into bonds? The fact that these mortgages had a high chance of default never entered into the equation, because the banks wanted them off their hands and Freddie Mac and Fannie Mae were there to back the whole thing up. And since Freddie Mac and Fannie Mae were backed up by the government and housing prices were going to go up forever, nothing could go wrong. Everyone knew Freddie Mac and Fannie Mae were too big to fail. Right?
Well, we now know the answer to that question. Freddie and Fannie failed, epically as the kids say, and managed to take down all of Wall Street with them. Now only the most massive government bailout in the history of mankind will prevent another Great Depression from happening. But it was the government, specifically the policies of Clinton and the Democrats in Congress who benefited from Freddie and Fannie campaign contributions, that made this whole thing possible. Everyone's now looking to Big Government to fix this. But who's going to be around to bail out the U.S. Treasury when it fails?