There are those who advocate there weren’t enough regulations (read Barney Frank) to prevent the financial meltdown in 2008.   My contention is that the crisis began with numerous government regulations that encouraged home ownership for people who couldn’t afford homes. The regulators decided encouraging wasn’t a strong enough approach and began demanding that lenders make loans to people who couldn’t afford to repay them.  Greedy speculators noticed opportunities for profits by creating packages of  “subprime” (read “risky”) loans and selling them to other speculators.  The real estate bubble grew because of the artificial increase in demand. The collapse probably began when the first home couldn’t sell for the original purchase price.

The march to the crisis began when the Community Reinvestment Act (CRA) was signed by President Carter in 1977.  That Act was the beginning of numerous actions by the government to encourage, or force, home loan agencies to make loans to borrowers in low income neighborhoods.  The intent was to open up the American Dream of home ownership to people who couldn’t previously convince their bankers they could repay the loans.  The Act was reinforced during the Clinton era by imposing penalties on loan agencies that didn’t meet requirements for loans in inner cities.  The CATO Institute warned in 1993 that the changes would be costly to the economy, and the warning was studiously ignored.

The push to make home ownership available to everyone continued into 2000.  The Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac were directed to devote a significant percentage of their lending to support “affordable housing.” Fannie Mae announced in 2001 it had a goal to finance $500 billion in CRA loans by 2010.  The Federal Reserve joined the party by lowering interest rates, which encouraged new borrowers to initiate loans and others to refinance their loans and use the proceeds to buy new luxury items.

There have been charges that racism is involved in deciding who is given home loans.  A Princeton study confirms the validity of that charge.  African-Americans were more likely to be offered subprime loans compared to whites who had similar financial backgrounds.