I thought this article written last fall was an interesting read
it may be too long to post here in its entirety
so follow the link if you'd like to read the remainder
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The meltdown and the bailout
why, how, and what they mean
By John Silveira
To understand how the recent meltdown and bailout came about, you have to know what brought them on. According to some, there are PhDs who have problems grasping what happened. I don't know if that's true, but I don't think it has to be made that difficult.
If you're unfamiliar with some of the terms and the entities that are spoken of when discussing the issue, let's start here:
subprime — This refers to borrowers with income levels that are too low, or who made extremely small down payments when buying a home (or no down payments at all), or have poor credit histories, or shaky employment (or none at all). They're the kind of borrowers traditional bankers do not want. Hence, they're less than prime.
Fannie Mae — the Federal National Mortgage Association founded in 1938 under FDR, but made a "private" corporation in 1968, under Lyndon Johnson, as a Government Sponsored Enterprise (GSE). What you have to know about Fannie is that it's a quasi-government enterprise and that it doesn't grant mortgages. It buys mortgages from banks and other lending institutions, thereby creating a fluid "mortgage market." This is thought to be important for ensuring the availability of money for mortgages.
Freddie Mac — Federal Home Loan Mortgage Corporation, another GSE. Other institutions couldn't compete with Fannie, so the government "invented" Freddie to compete with it.
Something else you must know about Fannie and Freddie is that they are the only two corporations in the Fortune 500 that, by government "regulation," do not have to make their accounting public to either the public or investors. This would eventually create problems.
You should also understand that in the "old days," when you got a mortgage it was almost always through a local bank. The bank loaned out the depositors' money and charged the mortgager interest. The bank held the "paper" or deed to the property and took the risk. It then used the interest paid against the mortgage to pay the depositors interest on their savings and took a portion of it to run the bank and make a profit. It worked.
But, nowadays, the bank is more likely to sell your mortgage and take the money it receives and loan it out, again. To whom is the mortgage sold? Often, it's Fannie or Freddie.
Under the old arrangement the local bank was responsible and accountable and the type of meltdown we so recently witnessed could not have happened.
Seeds of the meltdown
The seeds of the meltdown and bailout were planted with the Community Reinvestment Act (CRA) of 1977, passed into law under Jimmy Carter. The intent of the CRA was to ensure banks gave housing loans to low-income families. The Act wasn't just to encourage the banks, it actually created penalties with stiff fines for banks that didn't commit to making those loans, even if the bankers were convinced those loans were risky.
On the heels of the Act's passing came activist groups, such as the Association of Community Organizers for Reform Now (ACORN) which began to ensure—and often bully—banks into making nontraditional loans. If banks didn't comply, the activists took them to court contending the loans were denied because of racist policies, not sound financial policies. The result was that banks, to avoid harassment and fines, began to lower credit standards—everywhere. They began granting mortgages to subprime borrowers.
Then, in 1993, under Bill Clinton, Fannie and Freddie were directed to increase the number of subprime loans they were carrying. Though there was initially some resistance, legislation was passed by a Republican-controlled Congress so the loans were ultimately guaranteed by...are you ready...you and me, the taxpayers. With pressure from regulators and the guarantee the taxpayers would bail them out, Fannie and Freddie understandably gave in and bought even more of these mortgages.
Finally, just months before Clinton left office, Fannie and Freddie were told they had to increase the number of subprime loans until they equalled half of what they carried in their portfolios. No prudent lender would have taken these risks, but Clinton felt Fannie and Freddie, both GSEs and both backed by the taxpayer, could "afford" to.
By 2004, many lending institutions realized Fannie and Freddie would buy up these mortgages, so they too could afford to grant these risky loans and "sell" them, along with their risks, to Fannie and Freddie. Hey, it wasn't just legal, it was what the Congress and community activists wanted. In all fairness, although the problem originated with Democratic Party policies, when the Republicans had a chance to correct it...well, they weren't going to be the bad guys who turned off the mortgage spigot.
In 2001, and now in control of both the Congress and the White House, many Republicans pretended that the CRA, Fannie, and Freddie were not problems just as the Democrats had done before them. Part of the reason seems to be that many Republicans, just as were many Democrats, were taking substantial campaign contributions from the two GSEs, and there was also the danger at that time that if you spoke out against the lending practices that today we know were unsound, you would be vilified by the press and castigated by community groups—accused of being anti-poor, racist, or both. It was better to lay low, ignore the problem, and hope it would go away. And if it didn't go away, you hoped at least you wouldn't get blamed. .............
Conclusion
We don't yet know if the bailout is going to work. And it most likely won't. We don't even know if there are going to be more bailouts, though there are already stirrings in Washington that there will not only be more money needed for the subprime mess, but there's already talk abut bailing out the auto industry, student loans, credit card companies, various states, and who knows who else is asking to be "saved."
But this bailout and and future bailouts are clear signals from Washington that it's okay to engage in risky economic behavior because you and I will pick up the tab when they fail. Those who get bailed out are always grateful, while those who pay for the bailout usually don't understand that they're the ones paying for it either directly through their taxes or by having their money eroded by inflation. And the politicians and bureaucrats are grateful for it because there are always strings attached to these bailouts and they aggrandize more power. This bailout is actually more socialization of the banking industry; future bailouts will be for the socialization of America, creating more centralized control of America from Washington.
http://www.backwoodshome.com/articles2/silveira115lw.html 
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