Lesson 16:  Anatomy of a Recession Part 1: The Seeds
    The story of the current recession is one that involves 6 presidencies, cronies in
government and Wall Street, the American people and one bad U.S. Treasurer.  It is a story
of big greed, little greed, overregulation and underregulation.  It starts during the Great
Depression, in 1938.  Banks weren't lending and so President Roosevelt started a
government agency to provide cheap mortgage money to banks.  It was called the Federal
National Mortgage Association, or FNMA, also known as Fannie Mae; and for 30 years it
was a monopoly.  In 1968, President Johnson attempted to save money by privatizing
FNMA.  

    Actually, he partly privatized it. It became a private corporation, but any losses were
protected by guaranteed government bail-out.  It was crony capitalism at its finest:
monopoly, unlimited profit and no risk.  Two years later, President Nixon saw the problem
and created a second, similar enterprise so there would be some competition.  It was called
Freddie Mac.

     Seven years later in 1977, President Carter signed a law called the Community
Reinvestment Act (CRA).  It sounded fair and logical: People
should get loans based on
how much they can pay, not based on where they live.  The law said banks
should provide
loan service within a certain range of the branch, not black-list entire, poor neighborhoods
as they commonly did.  I say "should" because the law didn't really have much teeth.  
Banks that complied with the requirements were simply given some extra credit if they  
applied to the government for something such as a merger or acquisition.

     However, by the 1990's,  deregulation had led to mergers becoming a central part of the
growth prospects of any bank.  President Clinton passed several regulations which made the
CRA stricter and more important to any merger application.  He also required Fannie Mae
and Freddie Mac to increase their portion of loans devoted to low-income, affordable
housing.  In 1999, he also signed the bipartisan Gramm-Leach-Bliley Act, which allowed
banks, investment firms and insurance companies to mingle and merge.  Such mixed
banking had been outlawed for decades before.  This act paved the way for many new,
creative, investment products that would flourish in the next decade.

Next Lesson:  Anatomy of a Recession Part 2, The Housing Bubble


References:
Rob Alford, History News Network
Terry Easton, Human Events.com