There are two kinds of intellectual experts: (a) overeducated fools, and (b) experts who agree with me. From category (b), Professor Lawrence H. White explains the financial meltdown:
Those who fault “deregulation,” “unfettered capitalism,” or “greed” would do well to look instead at flawed institutions and misguided policies.
The expansion in risky mortgages to underqualified borrowers was encouraged by the federal government. The growth of “creative” nonprime lending followed Congress’s strengthening of the Community Reinvestment Act, the Federal Housing Administration’s loosening of down-payment standards, and the Department of Housing and Urban Development’s pressuring lenders to extend mortgages to borrowers who previously would not have qualified.
Meanwhile, Freddie Mac and Fannie Mae grew to own or guarantee about half of the United States’ $12 trillion mortgage market. Congressional leaders pointedly refused to moderate the moral hazard problem of implicit guarantees or otherwise rein in their hyperexpansion, instead pushing them to promote “affordable housing” through expanded purchases of nonprime loans to low income applicants.
The credit that fueled these risky mortgages was provided by the cheap money policy of the Federal Reserve. Following the 2001 recession, Fed chairman Alan Greenspan slashed the federal funds rate from 6.25 to 1.75 percent. It was reduced further in 2002 and 2003, reaching a record low of 1 percent in mid-2003 – where it stayed for a year. This set off what economist Steve Hanke called “the mother of all liquidity cycles and yet another massive demand bubble.”
His full Cato Institute briefing paper is online in PDF format.