the LYNCH report

The Power of Clear Insight

How Democrats and Wall Street Made This Mess…

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As we previously wrote, the current crisis in the financial markets could not have happened without Freddie Mac and Fannie Mae: by guaranteeing undocumented, high-risk mortgages, Freddie and Fannie made investments in the mortgages a sure things for Wall Street.

Now, the New York Times has published an excellent background article on how Freddie and Fannie got into the position whereby they were guaranteeing these mortgages, and the fingers point to the usual suspects: with Democrats pushing Freddie and Fannie to insure ever riskier loans, under the guise of “helping” low-income, minority and high-risk applicants on one hand, and Wall Street pushing Freddie and Fannie to do the same, thereby enhancing Wall Street’s profits, the US taxpayer never stood a chance.

This could never have happened in a free market. In such a market, Freddie and Fannie would have been forced to charge insurance premiums commensurate with the risks they were assuming, not on the basis of some sort of “altruistic”, government-induced charity mission. Investors in the mortgage bundles guaranteed by Freddie and Fannie would have likewise been forced to scrutinize Freddie’s and Fannie’s ability to take on such risks. As it was, it was essentially known the government would back up Freddie and Fannie. That removed any risk to investors.

The article cites Democrats such as Barney Frank of Massachusetts and Frank Reed of Rhode Island encouraging Freddie and Fannie to take on ever more risky mortgages to support their ideological goals.

The Bush White House, which has shown itself to be more Democratic than any Democratic White House since Roosevelt (as measured by government interventionism in the economy and growth of government spending), made matters worse, by changing the lending standards applied to Freddie and Fannie, thereby allowing them to take on an additional $40 billion in sub-prime loans.

The lenders, meanwhile, threatened to take their business elsewhere unless Freddie and Fannie took ever more risky mortgages off the lenders’ books.

You can find the excellent New York Times article here.

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