Want to understand what happened?

Ace has a very terse and cogent explanation:

If the federal government were guaranteeing a trillion new dollars for no-money down car purchases with no credit checks or proof of employment or income, what do you think would happen to the price of cars?

They'd triple. For a while.

Housing market turns into dangerously overinflated bubble. Which is what always happens when a trillion fresh, cheap, easy dollars flow into a sector and begin chasing the same limited pool of goods.

Millions of credit-poor homebuyers -- with erratic and unverified incomes -- now have mortgages with payements well out of their range. But at least the homes are still worth their selling price... so if they default on a $350,000 house, no sweat, the bank now owns the $350,000 house, which can be sold for $350,000 to someone else.

But finally the bubble bursts -- and now all those credit-poor, erratic income homeowners now have mortgages for $350,000 on houses actually worth $150,000.

So what do they do? They walk away or stop paying. Which makes perfect economic sense.

Leaving Fannie and Freddie guaranteeing a trillion in bad mortgages. Which means you're guaranteeing them.

The bank made a $350,000 payment to the home-seller -- but now has only a $150,000 home to show for it. Uh-oh.

You the taxpayer just went on the hook for that $200,000 loss.

Wall Street's contribution? They stupidly bought up derivatives based on these junk mortgages, thus putting themselves, and the entire financial system, at dire risk.

As to what caused the push for no-money down home sales with no credit checks or proof of employment or income, it's easy. I've lost track of the number of posts I've written about it.

Ace singles out Barney Frank for especially harsh treatment, and while Frank is an insufferable fool, he's as replaceable as a piston ring. (As are "Chris Dodd, ACORN, Franklin Raines, Penny Pritzker, Jim Johnson, and of course Barack Hussein Obama.")

The problem is the relentless push for socialism (a word few will use), which has done enormous damage to the economy by the simple misuse of a two word phrase:

"Disparate impact."

This is the legal doctrine behind much of the abandonment of standards in the name of "fair lending," but it is not limited to banking. It has come to permeate almost every aspect of business culture, and it is explained here:

These [disparate impact] claims do not allege, and need not prove, that individuals were treated differently because of their race. Instead, it is enough to show that a neutral practice has a disproportionate effect -- that is, a disparate impact -- on some racial group.

For instance, if a landlord refuses to rent to people who are unemployed, and it turns out that this excludes a higher percentage of whites than Asians, then a white would-be renter could sue. It would not matter that the reason for the landlord's policy was race-neutral and had nothing to do with hostility to whites. The landlord would be liable, unless he could show some "necessity" for the policy....

There are lots of other examples of race-neutral policies that can be challenged because of the disparate impact they have in the housing market. Suppose a lender refuses to make home loans to felons -- or simply to people with poor credit ratings. Those practices also will have a disparate impact. The same is likely true if a city makes a particular zoning decision (the underlying controversy in Cuyahoga Falls) or has per-house or per-apartment occupancy limits (an increasing area of controversy in many communities).

Sound unfair? You bet. But this same basic operating principle lies at the heart of the heart of the crisis.

In an earlier post in which I discussed the abandonment of banking standards, an angry commenter came right back at me:

Sorry, but that's a rather desparate attempt to blame this Republican generated disaster on minorities and liberals. Phil Gramm is the perp here, loosening the rules for the benefit of the financial sector, not so minorities could get loans. The worse part is that you know it and can't admit it.

My complaint is with the elimination of standards. (No one has refuted the claim that "if Freddie and Fannie had stuck to low-risk lending they would today not be needing any government bailout.")

Standards were eliminated for everyone. Many of the bad loans were not made to minorities, who were used as pawns and suffered more than the fat cats. The claim that I blamed "minorities" when I did not is simply an attempt to impugn my motivation and make the claim that I do not really think what I think.

Saying "you know it and can't admit it" is a classic example of discounting my opinion by asserting that I actually think something else but am too dishonest to admit it. That is not an argument on the merits, and it's about as reasonable as saying that I'm bitter and cling to religion and guns.

Once again, I maintain that it was a mistake to eliminate lending standards. You can disagree with me, but accusing me of bigotry or saying I actually think something else (when I don't) does not refute my claim.

It is a lie. A lie grounded in labeling as "discrimination" things which are not. A lie promulgated and perpetuated by those who want to control the business sector. A lie which is always driven by the dishonest accusation that someone is guilty of discrimination. A lie backed by an ever present witch hunt mentality.

I realize, though, that "lie" might have too inflammatory a ring to it for some readers. But I think most reasonable people can agree that "disparate impact" is at least an error in logic.

I think it's a huge, tragic error. One for which we are all paying a very dear price.