The banking crisis

I've just found two articles in a row discussing the mortgage/banking/stock market crisis, and both are perfectly willing to assess blame.

Powerline blog writes:

The current crisis, in its various manifestations, can be traced to the subprime mortgage market. A casual observer might wonder why there is such a thing as a subprime mortgage market, since a subprime loan is one that a lender would normally prefer not to make.

There are two answers to that question. The first is that various levels of national and local government pressured mortgage lenders to make risky loans so that they would be classified for regulatory purposes as good corporate citizens, and would be immune from charges of racism. So, like many market failures, this one has its roots in government policy. The second reason for the expansion of the subprime market is that mortgage lenders figured out that they didn't have to take the risks associated with bad loans. They were able to package mortgages together as components of fancy securities that, it turns out, virtually no one fully understood.

All of this worked until borrowers started defaulting and, partly in consequence of those defaults, home prices fell.

Walter Williams points out that:

...The Community Reinvestment Act of 1977 is a federal law that intimidated lenders into offering credit throughout their entire market and discouraged them from restricting their credit services to low-risk markets, a practice sometimes called redlining. The Federal Reserve Bank, keeping interest rates artificially low, gave buyers and builders incentive to buy and build, thereby producing the housing bubble. Lenders were willing to make creative interest-only loans, often high-risk "no doc" and "liar loans," in order to allow people to buy more housing than they could afford. Of course, with the expectation that housing prices will continue to rise, it was no problem for lenders and borrowers but housing prices began to fall, leaving some people with negative home equity and banks in trouble.

The credit crunch and foreclosure problems are failures of government policy. In fact, what we see now is a market correction to foolhardy government policy. Congress' move to bailout lenders and borrowers who made poor decisions will simply create incentives for people to make unwise decisions in the future. English philosopher Herbert Spencer said, "The ultimate result of shielding men from the effects of folly is to fill the world with fools."

Keep this in mind when politicians are railing against "special interests" and "greed".  Greed was certainly a factor, but the underlying problem was politicians greedy for votes.