Solving a problem requires first to understand its nature

The politicians would do well to take a breath before they prescribe how to get us out of a mess that they, in large part, created. Many of the problems we face come not from de-regulation but from increases in governmental involvement in the mortgage market. As the WSJ pointed out this morning, after the accounting scandals of Fannie and Freddie, the two Government Sponsored Enterprises sought to curry favor with policy makers by creating more "affordable housing." In reality that led a more than doubling of subprime mortgages and at the same time to the increasing use of mortgage instruments (with variable rates and teasers) that would make it harder for lower quality borrowers to maintain their loans.

As mentioned in an earlier post, I think a major part of the discussion about how to get us out of this problem is not to increase government activity but to reduce it, especially in the long term support for Fannie and Freddie. The private sector should and could establish a much better approach to guaranteeing mortgages without the window to federal funds. The clear example from this set of problems, is that in the long term privatizing gains and socializing risks leads to $700 billion pigs in pokes.