by Ed Dugan

Created on: November 15, 2008   Last Updated: April 09, 2009

Using statistics to explain the current credit crisis and and the bursting of the housing bubble will only tell you how, not why, and by now, even the most unsophisticated investor and clueless home buyer knows the answer to how. What both need to understand, if they are to avoid duplicating this disaster is why.

Starting with the Carter Administration and fully fueled by the Clinton Admistration, Congress managed to turn centuries-old banking principles into feel-good banking policies. The wisdom which passed over their collective heads is that sound prinicples should never change and policies change all the time. It began with an honest attempt to help prevent "redlining", a banking policy that obviously discriminated against people in poor neighborhoods, many of them African-American. In their attempt to gain votes, politicians, primarily Democrats, managed to throw the baby out with the bathwater. First, giving birth to Fannie Mae and Freddie Mac, they forced, not asked, banks to make housing loans to people who had no business buying a home. Lending on character went out the window and lending on collateral swiftly followed. Ask yourself, if someone wants to borrow money from you and they have no collateral, no credit and questionable character, how quickly will you reach for your checkbook?

The first crack in this bridge to universal homeownership began when, by virtue of a rapidly growing population, housing demand outstripped housing availablity. When this happens, with any commodity, demand will force prices upward and upward they went, sometimes at a dizzying rate. People who saw the price of their home double and sometimes trlple in a year rushed to upgrade, almost always increasing their mortgage debt. Greedy developers, selling the theme that this upward spiral would never end, put people in houses with little or no down payment, barely looking at whether or not their income or job history justified the sale. Very little, if any attention was paid by the new homeowners to the fine print on their adjutable rate mortgates.

The next crack appeared when speculators bought houses and condos with the sole purpose of flipping them in a year or two to double their money. Some of these fools bought multiple properties, again with very little or no money down. Properties in desirable areas, such as Florida, were sold before the first unit was built and often flipped before any units were completed. There is a close correlation between greed and craziness and,

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