The shovel for many holes is the good intentions of the digger.
Way back in 1977, the United States Congress enacted a new law called the Community Reinvestment Act (CRA). The purpose for this new law was for the Federal Government to monitor and ensure that local banks were making loans to home buyers in low and moderate income areas. Then in 1992, congress passed the Federal Housing Enterprises Financial Safety and Soundness Act which allowed Freddie Mae and Freddie Mac to assume responsibility for home loans made to low income buyers.
FHEFSSA established risk-based and minimum capital standards for Fannie Mae and Freddie Mac. And, it established HUD-imposed housing goals for financing of affordable housing and housing in central cities and other rural and underserved areas.
Low income buyers are not at all responsible for the current financial mess, but as low income buyers were approved for home loans that did not meet traditional credit standards, the demand for houses and the asking price for houses increased [basic economics]. As prices increased, fewer buyers qualified for traditional home loans which meant that more and more home buyers needed sub-prime loans backed by the Government Sponsored Enterprises (GSE’s) Fannie Mae and Freddie Mac. As more and more low and middle income buyers took advantage of sub-prime loans, more and more middle and high income buyers took advantage of lax lending standards to purchase new homes. Many of these buyers were investors and speculators. This Ponzi scheme finally reached a point where many buyers, not even able to pay their interest only loans, walked away from their property and mortgage with nothing to lose but their credit rating. Prices plummeted, banks ended up with more debt than equity, and new lending stopped.
The solution to the problems caused by easy credit seems to be more easy, perhaps even easier, credit for banks and businesses.
At some point we will have to suffer the consequences of easy credit. Perhaps it is time to stop digging.