Who's Fault is this Financial Mess? Everybody's -- Part 2

Continued from Part 1

Is that Bank of America or 7-11?

In addition to legal pressure from the Fed to make loans to people who could not afford them, the US Legislature was in on the act.

In 1977, Congress passed the Community Reinvestment Act. One of the basic principles of the CRA is that "regulated financial institutions are required by law to demonstrate that their deposit facilities serve the convenience and needs of the communities." (Sec. 802.a.1)

The tenets of the CRA gave the government the legal authority to force banks to expand their reach into the lower-income borrower's pool. The CRA went further, requiring banks to find ways to get money to lower-income borrowers. Not only did banks have to loan money to people they would not normally approve, the banks had to seek these people out.

If a bank did not approve "enough" low-income loans, the government could punish the lender through a number of means, including requiring approval for branch openings, preventing branch closures, and blocking banking mergers.

The real power of the act lies in the fact that, according to the Federal Reserve, "Neither the CRA nor its implementing regulation gives specific criteria for rating the performance of depository institutions." Instead, the evaluation process "should accommodate an institution's individual circumstances."

This means that anyone can decide if a bank is complying with the law or not. Community activist groups like the far left-wing "community activist" ACORN expend great energy confronting banks to ensure that the banks subscribe to and meet ACORN's ideas of fairness (paragraph 25).

It is these pressures, in addition to political pressure from myriad politicians lobbying to increase home ownership, like Bill Clinton, George W. Bush, and John Kerry, to name but a few.

To support these initiatives, the government assured lenders that, though it's Freddie Mac and Fannie Mae vehicles, these loans would be bought, principle and interest, if the loans were not repaid (paragraph 8).

Federal Reserve Chairman Ben Bernanke admitted as much during a speech At the Community Affairs Research Conference in August 2007:

"Fannie Mae and Freddie Mac... to devote a percentage of their activities to meeting affordable housing goals (HUD, 2006). "

This system, for better or worse, worked "well" for years, until housing prices exploded in 1998/99, suddenly problems began to emerge.

People who "could afford" to buy the house at the lower cost were priced out of a market that was artifically opened to them.

Enter the subprime mortgage.

To be continued...