Its like asking a heroin addict to control himself in a drug den. Basically half our congress is progressive-left. Their path to power and control is passing out government benefits and favors, which they control. Over the past decades in fact, with our ability to support massive government debt, they have simply grown this system of patronage and power to where there is no other choice. Even so-called "conservatives" can't resist this.
Let's look at our recent mortgage crisis as an example. Starting with Jimmy Carter, and ramping up under Clinton/Cuomo, for purely ideological and political reasons, they pushed banks to lower lending standards (the CRA) and even created an apparatus to incentivize and permit Wall Street to sell the government crap mortgages (Fannie/Freddie). Even private insurers bought into this system and were guaranteeing such bonds (AIG, etc..). When this crashed in 2008, what happened? One 2nd tier bank was sacrificed (Lehman) while the others were bailed out by TARP - and especially the Federal Reserve, with pure fiat money. The Federal Reserve bought, and now sits on, something like $1.8 Trillion of MBS. They simply preserved the existing system in amber. No reform, no lessons learned. A Clinton is still running for President. Andrew Cuomo still sits as a popular governor of NY State. Fannie and Freddie still exist. Under that same model, Obama has even had Fed.gov take over all student loans as well. Government has simply used that crisis to grow in its scope and power and we have simply taught Americans that "yes, there is a free lunch after all."
I understand.
But that does not exonerate the Congress.
The CRA affected only deposit taking firms, ie commercial banks and savings and loans. It never touched pure mortgage lenders, investment banks, hedge funds, the entire lending sector known as the shadow banking system. The majority of mortgages written during the bubble were written by shadow banking firms, which the CRA had no power to regulate.
The CRA, for all its faults, didn’t force banks to lower their lending standards. Loans to subprime borrowers continued to be conforming loans if banks chose to follow traditional lending standards. All loans handled by Fannie and Freddie had to be conforming paper, and they held up the best during the crisis.
The worst performing mortgages were the NINJA, Option ARM, No Down, No proof of income non-conforming paper that was cranked out by the billions by Fannie and Freddie’s private sector competitors. Some of these began blowing up before the second payment was due. There’s reason to suspect that this was intended in some cases due to a peculiarity in the credit default swaps market.
AIG was the dominant writer of credit default swaps. CDS were unregulated. You could buy insurance on mortgages owned by other investors. You could buy as many CDS against a pool of mortgages as you wanted to. And if you happened to know that the mortgage pool was made up of $800,000 loans to illegal alien strawberry pickers you stood to make a fortune when the CDOs blew up and your credit default swaps paid off.