As the federal government launched a massive and unprecedented bailout of bad-debt-ridden financial institutions last week, both presidential candidates offered different interpretations on the origins of the credit crisis.  John McCain blamed the meltdown on Wall Street corruption, while Barack Obama fingered the free market and Republican leadership.

McCain’s interpretation is right and Obama’s is dead wrong.  But there is a lot more to the story.

Financial institutions are buckling under the weight of what Treasury Secretary Henry Paulson has euphemistically called “illiquid assets.” At the root of the illiquidity problem are flawed underwriting standards for mortgage lenders.  During a period of low interest rates and easy access to capital, it seemed that anyone could obtain a mortgage for any amount with little cash down.  Everyone was betting obtusely that housing prices would continue rising indefinitely.  As long as the value of the property used as collateral trended upward, the lender enjoyed adequate security for the loan.  Lenders did not seem to care particularly whether borrowers even had sufficient resources and salaries to pay their mortgages.  These flawed loans, which were fated to fail whenever the housing market stopped its torrid expansion, were “securitized” and sold to big banks.

Was fraud committed?  We think so.  Commissioned brokers for lenders pushed through loans that were simply unsustainable.  Even illegal aliens were able to obtain them. 
Obama refuses to acknowledge that borrower fraud ever occurred.  Yet, according to an analysis by BasePoint Analytics discussed in the February 6, 2008 Wall Street Journal, “roughly 20 percent of mortgage fraud involved ‘occupancy fraud,’ or borrowers falsely claiming they intended to live in a property.” During the period of the housing bubble, lenders usually allowed investors to finance no more than 90 percent of a home’s value.  However, if borrowers identified themselves as intended occupants, they were often allowed to make purchases with no money down.  So there was a substantial incentive for these borrowers to lie.  The Journal estimates that “as many as one in four home buyers in some markets were investors during the boom.” The real estate research firm Applied Analysis found that as many as 60 percent of the foreclosures in Las Vegas last year involved non-owner-occupied homes.  These “hidden speculators” increased the risk of subprime loans and the perils of those who repackaged them on Wall Street as mortgage-backed Collateralized Debt Obligations.

It was not just easy access to capital that caused lenders to lose their bearings.  Liberals imposed policies that encourage home ownership regardless of credit worthiness.  President Jimmy Carter and a Democratic Congress passed the Community Reinvestment Act of 1977.  It requires banks to offer mortgages in low-income areas, irrespective of credit or job histories or the absence of a down payment or other collateral.  Liberals accused lenders unwilling to relax their underwriting standards of “redlining.”

Congress spawned Fannie Mae and Freddie Mac as quasi-governmental banking instruments to pump money into the mortgage market, especially for low-income, high-risk borrowers.  Fannie and Freddie bought billions of dollars of the risky mortgage paper liberal policies engendered.  This ultimately led to their collapse and the accompanying failure of Lehman Brothers.

Who allowed Fannie and Freddie to run amuck?  Again, it was the liberals in Congress—notably Sen. Obama.  They rebuffed every effort to rein in Fannie and Freddie, including Sen. McCain’s attempt to pass the Housing Enterprise Regulatory Reform Act of 2005.  McCain warned at the time that Fannie and Freddie executives had manipulated financial reports in order earn bigger bonuses.  One of the most notorious of those executives, Jim Johnson, headed Obama’s vice-presidential search committee.  For all of his railing about the malign influence of lobbyists, Obama took $126,349 from lobbyists for Freddie and Fannie, more than any member of Congress except Sen. Christopher Dodd, D-Conn., chairman of the Senate Committee on Banking, Housing, and Urban Affairs.

Obama’s solution for the current crisis is more regulation, which has been his stock answer to every economic problem.  But when the book is written on the credit collapse we are now enduring, it will be unsparing in its treatment of Obama and his liberal colleagues.