How did we get into this financial crisis?

The current financial crisis started back in the 1970's when the Carter administration passed the Community Reinvestment Act, this was aimed at extending home ownership in low income communities. In the 1990's the government got the GSEs,Fannie Mae and Freddie Mac, (do those names sound familiar?) to accept subprime mortgages. Once this happened the banks could increase lending to unqualified buyers. This resulted (in the name of affordable housing) in banks issuing more and more risky loans since they were backed by Fannie Mae and Freddie Mac.

This risky business was questioned by the Bush administration in 2001 when it warned that this could lead to financial problems if these institutions got into trouble. Fed Chairman Alan Greenspan repeatedly warned that failure of the GSEs placed the entire financial system at risk. But Senator Dodd and Senator Rangel amoung others continued to (and continue) to deny that there were any problems. Meanwhile people saw the value of their homes increasing and either bought bigger more expensive homes or took out home equity loans. These mortgages were repakaged and repakaged into all sorts of securities that were sold all over the world. The price of homes contiued to go up fueled by this easy money and eventually after reaching unrealisticcally high prices, the bubble burst and prices started to come down. When this started to happen, because of legislation that required that assets be repriced at what they could be sold for, the lending institutions had to start marking down the value of these loans, many of which were currently vertually worthless. Also because of all the repakaging no one knew what they really had, all they knew was that they had a security made up many mortgages or even portions of mortgages. This meant that the lending institutions had no money to lend and credit dried up. This is where the government stepped in at the end of last year and started all the bailouts. We have yet to see if the government bailouts will work or what the long term consequences will be.

So this problem has been brewing for many years and started all the way back in the 1970's.