- The Washington Times - Tuesday, April 13, 2010

For years, the Federal Reserve, Freddie Mac and Fannie Mae caused banks to make high-risk mortgages to borrowers who couldn’t afford them. On Wednesday, in testimony before the Financial Crisis Inquiry Commission, former longtime Federal Reserve Chairman Alan Greenspan finally pinpointed who instigated this risky behavior: Congress.

While Mr. Greenspan’s statements shouldn’t surprise anyone who was paying attention, given the biases in the liberal media, the facts need to be repeated over and over again. Take Rep. Barney Frank, the Massachusetts Democrat who is chairman of the House Financial Services Committee. In 2003, Mr. Frank berated a Bush administration official because he was “worried about the tiny little matter of safety and soundness rather than ‘concern about housing.’”

“While the roots of the crisis were global, it was securitized U.S. subprime mortgages that served as the crisis’ immediate trigger,” Mr. Greenspan explained. “The surge in demand for mortgage-backed securities was heavily driven by Fannie Mae and Freddie Mac, which were pressed by the Department of Housing and Urban Development and the Congress to expand affordable housing commitments.” Unfortunately, Fannie Mae and Freddie Mac weren’t the only government agencies to feel the pressure. Mr. Greenspan also noted, “I sat through meeting after meeting in which the pressures on the Federal Reserve - and on, I might add, all of the other regulatory agencies - to enhance lending were remarkable.”

Some saw this storm coming early. In 1998, Ted Day and Stan Liebowitz, professors at the University of Texas at Dallas, warned about the problems of the last couple of years. Starting during the early 1990s, mortgage-underwriting standards were beginning to be weakened, all in the name of increasing home ownership among poor and minority Americans. Over the years, the new rules involved eliminating verification of income or assets, little assurance of the ability to pay a mortgage, forcing banks to accept welfare payments and unemployment benefits as legitimate sources of income for mortgages, and virtually eliminating down payments.

As long as housing prices rose, not requiring down payments and relaxing other standards did not pose immediate problems. While prices rose, almost no one had to default. If someone was unable to pay a mortgage, the obvious option was to sell the house at a profit. Thus, experts could claim that the new standards did not have an appreciably different default rate than the old standards. Once housing prices started falling, however, it was a totally different matter.

Despite government being responsible for the financial crisis, the Democrats’ new Wall Street “reform bill” will give bureaucrats even greater control over financial decision-making. Politico reported on Sunday that Democrats and unions see new regulations as a “win-win” issue - either government gets even more power or Democrats get a campaign issue for November. If Mr. Greenspan’s full statement had gotten the media coverage it deserved, the government takeover of the financial industry might not be such a winning issue.