But they left out the politics

The editorial board of the New York Times talks about the subprime crisis and tells us how it happened and who's to blame but leaves out why it happened.
A Crisis Long Foretold

An article in The Times on Tuesday by Edmund L. Andrews leaves no doubt that the twin crises of the subprime lending mess — mass foreclosures at one end of the economic scale and a credit squeeze afflicting the financial system — are rooted in the willful failure of federal regulators to heed numerous warnings.

The Federal Reserve is especially blameworthy. Starting as early as 2000, former Fed Chairman Alan Greenspan brushed aside warnings from another Fed governor, Edward M. Gramlich, about subprime lenders who were luring borrowers into risky loans. Mr. Greenspan’s insistence, to this day, that the Fed did not have the power to rein in such lending is nonsense.

In 1994, Congress passed a law requiring the Fed to regulate all mortgage lending. The language is crystal clear: the Fed “by regulation or order, shall prohibit acts or practices in connection with A) mortgage loans that the board finds to be unfair, deceptive, or designed to evade the provisions of this section; and B) refinancing of mortgage loans that the board finds to be associated with abusive lending practices, or that are otherwise not in the interest of the borrower.”

Yet, the Fed did nothing as junk lending proliferated — including loans that were unsustainable unless house prices rose in perpetuity, riddled with hidden fees and made to borrowers who could not repay. Mr. Greenspan has said that the law was too vague about the meaning of “unfair” and “deceptive” to warrant action.

OK as far as it goes but why did Greenspan choose to do nothing? The answer is politics - the desire to keep the myth of a good economy going to keep the Bush administration and the Republicans in power. As I discussed in Booms are always followed by busts! the so called Bush recovery was never sustainable. Now Alan Greenspan is many things but stupid is not one of them and he had to know that. But he had to keep Bush and the Republicans in power for as long as possible to get the maximize the tax cuts for the wealthy elite. The best way to do that was to keep pumping air into the housing bubble and that's just what he did.