Explaining the financial crisis

Here are a few must-reads:

Jim Manzi: "The problem we face is often described as mind-bendingly complex, but in its essentials, it is simple."

Kevin Hassett: "The economic history books will describe this episode in simple and understandable terms: Fannie Mae and Freddie Mac exploded, and many bystanders were injured in the blast, some fatally."

Sen. John McCain's speech delivered on the Senate floor on May 25, 2006:

For years I have been concerned about the regulatory structure that governs Fannie Mae and Freddie Mac--known as Government-sponsored entities or GSEs--and the sheer magnitude of these companies and the role they play in the housing market. OFHEO's report this week does nothing to ease these concerns. In fact, the report does quite the contrary. OFHEO's report solidifies my view that the GSEs need to be reformed without delay.

I join as a cosponsor of the Federal Housing Enterprise Regulatory Reform Act of 2005, S. 190, to underscore my support for quick passage of GSE regulatory reform legislation. If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole.

National Review Online:

One of the reasons so many bad mortgage loans were made in the first place is that Barack Obama’s celebrated community organizers make their careers out of forcing banks to do so. ACORN, for which Obama worked, is one of many left-wing organizations that spent decades pressuring banks and bank regulators to do more to make mortgages available to people without much in the way of income, assets, or credit. These campaigns often were couched in racially inflammatory terms. The result was the Community Reinvestment Act. The CRA empowers the FDIC and other banking regulators to punish those banks which do not lend to the poor and minorities at the level that Obama’s fellow community organizers would like. Among other things, mergers and acquisitions can be blocked if CRA inquisitors are not satisfied that their demands — which are political demands — have been met. There is a name for loans made to people who do not have the credit, assets, income, or down payment to qualify for a normal mortgage: subprime. ...

Along with these bad loans, the underlying problem is that there was a bubble in the price of housing — a bubble caused in no small part by politics, in the form of an easy-money/easy-credit policy from the Fed.

It was politics, too, that created Fannie Mae and Freddie Mac, enabled them to dominate the mortgage market, and implicitly took upon American taxpayers the risks of those business while the rewards were enjoyed, to the tune of hundreds of millions of dollars, by largely Democratic political opportunists, who then gave generously to Democrats, the top recipients of their largesse being: Chris Dodd, Hillary Rodham Clinton, John Kerry, and Barack Obama. And it was politics that unwisely nationalized Fannie and Freddie without resolving the underlying moral hazard — private profit, public risk — that makes those institutions problematic. From this Senator Obama takes away the lesson that there has been a failure of the market, and that what is needed is more politics. In this analysis Obama is as wrong as it is possible to be.