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Who's REALLY to Blame for the Subprime Mess?

By Peter Roff Fellow, Institute for Liberty / Former Senior Political Writer, United Press International

Now that he is back in the United States President Obama will once again, no doubt, turn his attention to the current economic crisis. As he was leaving the country he, more or less, got his way with Congress on his budget.

Yes, his proposal was cut by about $20 billion (virtual pennies out of the $3.55 trillion total) but he got most of what he wanted. There are a few big gaps -- his plan to win universal, government-backed health insurance for every American may now be harder to accomplish and his cap-and-trade scheme to restrain the engine of America's economic growth in the name of reducing carbon emissions is in real trouble. But, on most of the budget, he got his way.

Of course to do that he had to create, or at least exacerbate a climate of fear about the U.S. economy. He came into office surrounded by claims -- and they were false claims -- that the state of the economy was worse than an anytime since The Great Depression. And, while the administration has backed away from that rhetorical extreme they do continue to talk the economy down. Why? Because they can use a bad economy as an excuse to rush proposals through Congress, proposals designed to alleviate the nation's economic suffering by doing something. What they are doing is of little help, in economic terms even if it is providing the Democrats with great political gains.

This includes threats by Treasury Secretary Timothy Geithner to fire corporate CEOs if it is deemed necessary in the interest of the economic recovery. And it includes forcing the banks and financial institutions that took federal bailout money, with strings attached, to keep it -- whether they want to or not..

As the FOX Business Network's Stuart Varney reported in last Friday's News Corp-owned Wall Street Journaland Judge Andrew Napolitano wrote here on the Fox Forum, the Obama administration is forcing at least one bank to keep TARP money in order to keep in effective control of the institution and its lending practices.

According to Varney this one bank "has also been threatened with 'adverse' consequences if its chairman persists" in trying to give back the TARP funds. Reports like this make the White House's dismissal (read FIRING) of General Motors CEO Rick Wagoner all the more ominous. "That's politics talking, not economics," Varney said.

Indeed it is. The focus of blame for the mess we are in remains on the Bush administration, A.I.G., Lehman Brothers and greedy CEOs. Those who are supposed to do the explaining seem to have forgotten, conveniently or perhaps even deliberately, the role Washington politics and pressure played in bringing on the housing crisis that sparked the economic downturn.

So it is important that people be reminded of the facts. And Congress needs to look into the whole sorry mess, and in a way that is designed to get at the truth, not shield the wrongdoers. They could begin by looking at the establishment, in 1994, of the Home Loan Secondary Market Program by a group called the Self-Help Credit Union.

The HLSMP's stated purpose is to help people who don't have enough assets to qualify for traditional mortage financing get a home anyway. This, in and of itself I suppose, is a worthy enough goal. But Self-Help then turned around and sold those mortgages in the securities markets to investors -- which in turn gave banks access to new funds so they could make additional loans.

At the time, Self-Help President Martin Eakes said his program was helping "hardworking, bill paying,low-income and low-wealth people who may not meet conventional mortgage standards but have income sufficient to support monthly home loan payments." But, as we now know, it did so much more.

Self-Help got a $50 million grant from the Ford Foundation and entered into a partnership with Fannie Mae to make a nationwide test of the program -- to the tune of about $400 million in loans from select national and regional banks each year for five years.

The national test led to Fannie buying and securitizing $2 billion in loans that were actually made by Bank of America, Chase Manhattan, Nation's Bank, Banc One, and Norwest but then sold to Self-Help -- so that Self-Help could resell them to Fannie Mae! This gave the original lenders a way to sell and offload the risk for non-conforming loans and other products they could not sell to Fannie directly. And then it was off to the races.

It's confusing -- and it only gets more so as the program continued to expand and bad securities worked their way into investment portfolios all over the United States -- leaving a lot of institutions saddled with bad debt that, in many cases, they never should have been allowed to securitize or possess in the first place. And don't forget the pressure the Department of Housing and Urban Development placed on lenders once the Clinton administration expanded the terms of the Community Reinvestment Act.

All this has been swept under the proverbial rug while busloads of MoveOn.org activists travel through exclusive neighborhoods in Fairfield County, Connecticut looking for people who got bonuses from AIG, bonuses that the Obama administration and the Democrats who control the Congress originally said it was okay for them to get.

But these same buses, or any buses for that matter, aren't pulling up in front of the homes of Freddie and Fannie executives like former Clinton budget director Franklin Raines or former Obama campaign advisor James Johnson, both of whom left Fannie with millions in legally acquired lucre in their own pockets. Nor are these busses showing up in front of the home of Herb and Marion Sandler, who founded the Center for Responsible Lending and who, in advance of the housing bubble's burst, sold their company, Golden West Financial, to Wachovia for more than $2 billion. And, yes, we all know how that turned out.-- Wachovia ended up so badly exposed by the transaction that it had to be acquired by Wells Fargo in order to keep its doors open.

Now it's true that Time magazine did identify the Sandlers as two of the 25 people to blame for the financial crisis -- and Saturday Night Live did make fun of them (until they were forced to edit the Web site version of the skit in which "The Sandlers" played a prominent role - but that's really not the same thing, especially when you've got more than $2 billion to ease the pain.

And so, as the Obama administration and the Democrats in Congress continue to move ahead with their efforts in increase Washington's control of Wall Street, we would all do well to at least ask them to take a good hard look at the way we got in this mess to begin with. It may just be that the last thing we need is more government since it looks like the government had a lot to do with causing this mess in the first place.

Peter Roff is a senior fellow at Frontiers of Freedom, a group promoting consumer choice throughout the marketplace.