Return to genesis.
This failure of the markets occurred because of the injection of socialist type operations that compromised it. Socialism has exerted control over socieities that has resulted in killings of hundreds of millions of people in pursuit of "the socialist ideal."
This meltdown is another example of social engineering resulting in a debacle.
These events began with a program designed to distribute wealth to the poor on a gratuitous basis. The ideological imperative demanded that "the poor" be provided with the opportunity to "own" housing.
Now since the poor lacked qualifications either in the form of assets or earning capacity, this created a dilemma. How could homes be "given" to the poor, who by traditional standards would not be able to pay for them.
No problem. "The plan" removed any constraints on creating mortgages, which could be "redeemed" by being sold to two quasi-governmental entities. Fannie Mae and Freddie Mac. There was no inquiry as to the ability of the borrowers to service the debt as that requirement for purchase of the debt by Fannie and Freddie, was essentially removed.
The incentives in the system generated activity to create more and more of the unserviceable "paper" as those participating in the process were enriched. The government with its introduction not only of incentives to make bad loans to "the poor," and particularly to "minority poor" without regard to ability to service the debt, but with coercion threatening the operation of companies that did not participate in the madness, is what created the current malaise.
It was "too much regulation" coercing companies to make bad loans to accomplish a socialist goal regardless of the consequences that brought us to this sad plight.
Was "the opportunity" and were "the incentives" that the program created, exploited by sharpies? Indeed they were. Who is basically responsible? Well, the leftist lawmakers and their cooperative legislative buddies, who went along with the game catering to the demands of groups supporting the programs, which also created a specious prosperity.
If you want to follow the history of the diminution of equity in homes purchase with increaing percentages of purrchase providing negative equity or no equity, google Dr. Chris Cagan and read some of the reports in pdf format.
What is the magnitude of the situation? Is there more than 70 trillion dollars at risk in mortgage backed securities. Is this "infusion" of capital less than some one percent of largely unsecured debt?
How will equilibrium be re-established? What will the shakeout do? Well, the entire process is being compromised form the otuset by the "goodies" included in the program for favored parties and groups. Why should tax preaks be given particular earmarked businesses while Joe Lunchbox, is fully taxed? You drive a school bus, are a janitor, work in an assembly plant, are a clerk, or even are a doctor or lawyer, and you are not exempted from taxation, but some others are arbitrarily in this legislation.
Imagine what will happen when the government provides health care to everyone as a mandate, and how the costws of such a program will be absorbed by the society.
Delcarations concerning what it would be good to have, are undoubtedly admirable. But then trying to make reality conform to the goal introduces instability in the system, which then crashes.
