- During the Jimmy Carter Administration, something called the Community Reinvestment Act (CRA) was instituted. Basically, this legislation was intended to limit the process of "redlining," which tended to deny loans to economically depressed areas, and thus minority neighborhoods.
- During the Billy Clinton Administration, the CRA was strengthened, and banks were encouraged (blackmailed) to make even more risky loans to risky people.
- The Dot-Com bubble continued to grow, and prosperity seemed endless - Billy Clinton even encouraged investors to keep investing their money, saying that the economy would just keep growing and growing.
- The Dot-Com bubble burst in a spectacular fashion.
- Rather than allow the economy to correct, the Federal Reserve, under the chairmanship of Alan Greenspan, dropped interest rates to encourage the housing sector. Dropping interest rates essentially means printing money - that is, it is cheaper for banks to borrow money from the Federal Reserve, and thus lend money to consumers. This effectively replaced the burst Dot-Com bubble with a new bubble in the housing sector, pushing off the recession into the future.
- Quasi-government companies, Fannie Mae and Freddie Mac, under the guidance of the CRA, began encouraging and backing sup-prime loans - that is, risky loans to people who really couldn't afford them. They did not require any proof of ability to pay.
- 9/11 hit. The Federal Reserve made money even cheaper to dampen the effect of the terrorist attack, again artificially inflating the housing sector and making money cheaper. The President encouraged people to go shopping. Again, this pushed the recession off into the future.
- Because of the cheap money, and the ability of anyone who had a pulse to get a home loan, people spent money like drunken sailors. House prices soared. Flipping houses became booming businesses. With inflated home prices, people took out home-equity loans to buy things, the loans backed by the inflated home values. Basically, the economy was booming but fake - the money being spent did not actually exist, because it was just more debt based on inflated home prices.
- Alan Greenspan encouraged people to take out Adjustable Rate Mortgages, and other mortgage plans (interest-only loans, 2-28 loans, 5-25 loans), assuming home prices would never drop and keep climbing. Basically, these sub-prime loan plans would allow entry into the market at low introductory interest rates, and after a few years would "reset" at higher interest rates - at this time the homeowners would refinance at fixed rates.
- Over this entire time, some 20+ years, not a single new drop of oil was drilled, nor a single refinery built, due to the influence of environmental groups. As China, India, and other countries grew and prospered, this increased their demand for oil. Oil prices skyrocketed, and prices at the pump did as well. High transportation costs, in combination with the effects of corn-based Ethanol production, increased the costs of basic necessities - food, milk, eggs.
- At the same time, high risk sub-prime loans "reset" to higher interest rates. Because of the higher cost of living and inflation due to both the cheap money supply, and the higher cost of gas and basic goods, these high risk people could not make their payments. Initial forclosures occurred.
- The housing market declined, and the artificially inflated home prices dropped. More people abandoned their homes because they were worth less than the mortgages.
- Housing prices kept plunging. The sub-prime mortgage-backed securities that Fannie Mae and Freddie Mac bundled together and sold throughout the financial system did not have a precise value - no one knew what these things were worth, and did not know if they had any real value.
- The balance sheets of all these financial institutions go into the red. Credit seizes up -loans are not being made. Major banks and financial institutions go under.
- To the rescue - the US Government and the Federal Reserve - the cause of the entire crisis!
Essentially, the "fix" being proposed by the US government is to take on all these bad mortgages, remove them from the financial institution's balance sheets, thereby allowing the banks to begin loaning money to people again so they can buy things they don't need! We need to save, not spend!
This is a cultural problem - the people of this country want to buy things when they don't have the money to buy them, and they want it now. The Bailout Plan proposed by the Bush Administration and being debated in Congress once again only pushes the recession/depression further into the future. We cannot keep spending money we don't have! The people of the US do it, just as its government does!
If a Bailout Plan passes, the USA is not the USA anymore. Let's just be honest: It will be the United Socialist States of America, the USSA! The greed and gluttony of this nation brought about this crisis, combined with a feel-good notion of economic fairness and justice. Let the market work as it should - failure is punished, success is rewarded, and the resulting pain refines the moral character of this country.
And above everything, protect the values of freedom and free-markets and capitalism that has made this country the greatest in the history of humankind!
