The probability that politicians will make good decisions is particularly low when done under the pressure of a frightened and economically strapped electorate. When it  is also likely that the truth will not be well received by this electorate the odds are that bad policies will follow. This describes the environment that envelopes our current financial crisis. We have politicians gripped by the fear of telling the truth.

The truth is that the major contributing factors in the mortgage melt down find their roots in government interference (not deregulation) that goes back over 30 years, millions of new and step up home buyers who willingly got caught up in the housing bubble mania and the abandonment of the traditionally conservative criteria that governed lending practices. None of this can be simply rectified by bailing out those in danger of foreclosure.   

To fully asses the roots of this crisis politicians would have to acknowledge their responsibility and that of millions of their constituents. That of course would carry a political price. So Wall Street, unscrupulous banks and lending institutions take most of the heat. No doubt fat fees and greed among many in these institutions played a role in the collapse of credit and humongous losses. But millions of home buyers made less than prudent decisions with no gun to their heads. They counted on the unrealistic growth in home values and often submitted inaccurate or just plain false documentation in order to get their loans. Loan officers, mortgage brokers, and appraisers looked the other way or even encouraged the deceit because of their desire to receive their fees and counted on an unrealistic ever growing increase in property values to hold it all together. The house of cards was erected by millions of reckless contributors. There is plenty of blame to go around.

The roots of the degradation of traditional loan practices goes back decades. Requiring 10% down and loan payments not to exceed 30% of income gave way to the political pressure to expand home ownership and the well meaning but financially irresponsible desire to find ways for unqualified borrowers to buy homes. The government jumped into the act with the Community Redevelopment Act in the mid 1970’s. Ostensibly written to eliminate “redlining” it morphed into affirmative action for unqualified borrowers. Lending institutions were put under tremendous pressure to diversify their portfolios of loans. Traditional standards gave way to the fear of being labeled racist if you didn’t give loans to the designated groups. And of course Presidents from both parties loved to brag about growing “home ownership” numbers under their watch. So the house of cards whose blueprint was crafted some time in the 1970’s  and constructed for almost four decades finally came crashing down in 2008.

It is also very important to remember a group of Americans who no one seems to care much about right now. They are the ones whose values included the traditional rules related to assuming debt.  As much as they wanted to buy their first home or move up to a bigger or newer home they refused to join in the mania. They are the ones who deserve to step in and buy as prices drop to reasonable levels. If bailing out bad and irresponsible loans artificially holds prices at levels that could not be sustained without government interference then thousands of careful Americans might not get their chance to buy the home they have so patiently waited to purchase.

We need to proceed very carefully. If the government removes the prospect of moral hazard from lending practices, the down side of risk, then people will continue to use poor judgement assuming worst case scenario they will get bailed out. Both  Senators Obama and McCain tried to gain traction by demonizing Wall Street while holding borrowers to no standard at all. This is the essence of politics and the reason government should always tread carefully when they act to manipulate markets. Well meaning gestures distort markets and political expediency mitigates against remedies until the crises is massive. 

To their credit Treasury Secretary Snow, Senator McCain and President Bush tried to alert Congress to the looming catastrophe about 2 years ago. The blair of their alarm bells fell on deaf ears. By 2008 the dimensions of the problem were so great that even those early watchdogs could not let blame fall on home owners. After all they are voters.

I am not qualified to propose a workable solution once we are so deep into a problem that has spread throughout the world. But the roots of the problem are actually very clear. When debt is assumed based the rapid appreciation of an asset it is high risk debt.  When debt is issued based on social engineering criteria rather than credit worthiness it is high risk debt. When debt is issued by lenders who carry no risk because they pass the loan to another entity it is high risk debt. Such debt often leads to the inability of the borrower to pay. Foreclosures and losses should be expected. Most importantly borrowers need to be educated in the old fashion notion that they are responsible for the contracts they sign and that borrowing involves a moral hazard. There are two sides to every high risk transaction. If we want to benefit from the soaring up side we better be prepared for the losses on the down side as well.