Roots of crisis

House Speaker Nancy Pelosi (D-Calif.), Sen. Barack Obama (D-Ill.) and Democrats in general have blamed the housing, banking and insurance crises on President Bush. The root of these crises, however, started more than 90 years ago with the progressive movement, then-President Woodrow Wilson and other Democrats. Wilson was responsible for signing into law the federal income tax, permitted by the 16th Amendment to the Constitution and the Federal Reserve Act.

The Federal Reserve Act created a fiat currency, which allows money to be created out of thin air by selling bonds. Throughout most of the 1800s, there was little or no inflation. The large deficit spending we currently have is a direct result of having a Federal Reserve.

The federal income tax was pushed by the "progressives" (Democrats), leading to Wilson's election to the presidency in 1912 and ratified by the states in 1913. During the early years of Wilson's administration, he created a progressive income tax with certain deductions that were the start of the income tax as a tool for politicians to play with to buy votes and appeal to certain constituencies. This laid the groundwork for the massive and complicated income tax laws of today.

In the early years of the income tax, deductions were permitted for all kinds of consumer interest. In 1986, the Tax Reform Act limited the interest deduction to home mortgage interest. The existence of this deduction is one of the causes of the housing boom between 1997 and 2005.

In 1938, the Federal National Mortgage Association (Fannie Mae) was created by then-President Franklin D. Roosevelt (another Democrat) as a privately owned, government-sponsored enterprise. Its purpose was to provide local banks with federal money to finance mortgages in order to raise levels of home ownership.

In 1977, then-President Jimmy Carter signed into law the Community Reinvestment Act to pressure banks to create more affordable housing. The bill encouraged mortgage lenders such as Fannie Mae to give out home loans. In 1995, the Clinton administration instituted radical changes requiring strictly mathematical assessments to get a CRA rating using federal home-loan data, broken down by neighborhood, income and race. The law encouraged community groups to complain when banks were not loaning enough to specified groups. In other words, the Democrats put pressure on banks to loan money to high-risk borrowers.

Then, in 2002, former Federal Reserve Chairman Alan Greenspan, appointed by former president Ronald Reagan, lowered the federal funds interest rate to 1 percent and kept it there for a year. Many borrowers took out adjustable rate mortgages based upon very low "teaser" rates. Because of the artificially low interest rates, investors were eager to get better returns. So, mortgage lenders packaged their mortgages and sold them to investment banks such as Bear Stearns, who sold these securities to investors.

The perfect storm was brewing. In 2002, a real boom in housing began because of these three factors: the Federal Reserve's easy money policy, Fannie Mae's policy of encouraging high-risk loans and the Community Reinvestment Act forcing banks to issue high-risk loans. These events set the stage for the financial meltdown for the housing, insurance and banking sectors that we are experiencing today.

Republicans are certainly not blameless. Bush and a Republican Congress, between 2000 and 2006, started an unnecessary war in Iraq and increased discretionary spending by 27 percent. However, for the most part, this financial crisis has its origins in policies initiated by Wilson and escalated by Roosevelt, Carter and Clinton.

Alan E. Kleist is a senior philosophy major. He can be reached at aek1055@yahoo.com.

Good overview. Particularly coming out of a student newspaper!

(And, no, I don't agree with the "unnecessary war" bit, but other than that...)

This clear and well organized presentation of the roots of the financial crisis from a philosophy major? Maybe some students are learning how to think in college, or maybe in spite of it.

Wilson had nothing to do with escalating loans to those that don't qualify. The party of Barrie Obama and Barnie Fwank had much to do with it.

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