The ideological basis of the meltdown began during the New Deal, when the government decided that the American Dream could only be achieved through housing ownership – not renting but owning. As time went on, every conceivable mechanism was pulled into order to realize this dream.
What if borrowing rates are too high for people to afford? We'll beat them down with the sledgehammer of government policy. What if the financial risk is still too high? Who cares, we'll subsidize it. What if there is no credit history or savings on which to justify taking the risk? We'll guarantee it. With what? With newly created money. What if mortgage lenders still aren't convinced that they will get paid? We'll make them lend money no matter what, and even threaten them with lawsuits if they don't.
So on it went for seventy years, until one day the entire hoax was exposed by the ultimate reality test: the market economy. Bad credit risks didn't pan out. Those who lent without regard for underlying fundamentals are suddenly seeing red all over the place. Bankruptcy ensues. Those who purchased repackaged mortgages on the open market find themselves with a hot potato and no one to toss it to.
So what does the government do then? It runs to the basement and turns on the printing presses. It creates $37 billion on the spot and buys up the bad loans and calls them assets. The government says that this is to create confidence. But confidence can't be created by making up reality. That path only leads to more illusion and error.
~ Lew Rockwell, "Reality vs. the State," LewRockwell.com, August 14, 2007