Government Intervention in Mortgage Lending and the Panic of 1907....

The current crisis is a financial banking crisis whose roots are found in reckless mortgage lending over the past several year. But why did all of these banks participate and get caught owning all of these bad assets. Well, the reason being is that the government told them to do so. Sub-prime lending was encouraged by government and banks were told to hold the paper in order to merge.

One of the few journalists to see where this would lead was Jeff Jacoby, of the Boston Globe. Last week he reminded his readers what he had written in 1995: "Our banks are knowingly approving risky loans to get the feds and the activists off their backs... When the coming wave of foreclosures rolls through the inner city, which of today's self-congratulating bankers, politicians and regulators plans to take the credit?". Jacoby adds now: "Barney Frank doesn't. But his fingerprints are all over this fiasco."

Its interesting that the Panic of 1907 had its roots in Wall Street excesses where institutions lent to stock speculators that ultimately led to the collapse of several institutions. This caused a serious tightening of credit and a severe economic contraction in the ensuing 12 months. Back then there was no Federal Reserve and the US Government had no funds to bailout the banking industry. So, JP Morgan came to the rescue and US Steel Corporation came to the rescue to buy one of the troubled institution.

I expect that the economy may be experiencing a contraction like that of 1907-08 where industrial production fell dramatically. But it rebounded fairly quickly and the panic led to the creation of the Federal Reserve.