The Ponzi Scheme That Is Capitalism

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"The banks relied on these investments to raise money for the next wave of loans. The system worked so long as lenders could keep selling their mortgages, and so long as someone would guarantee most of the debts."

Portion below; whole thing here:
http://www.nytimes.com/reuters/business/business-fannie-freddie.html

The government is trying to support plummeting housing prices and spare strapped homeowners from the wrath of the market: last week, the Senate adopted a bill authorizing the Federal Housing Administration to insure up to $300 billion in refinanced mortgages, enabling borrowers saddled with unaffordable loans to get better terms.

How the government came to dominate these two crucial areas of American lending is — depending on one’s ideological bent — a narrative of regulatory and market failure, or a cautionary tale about bureaucratic meddling in commerce. Perhaps it is both.

To those prone to blame lax regulation, the mortgage fiasco was the inevitable result of a quarter-century in which American policy makers prayed at the altar of market fundamentalism, letting entrepreneurs succeed or fail on their own.

This was the spirit in which Alan Greenspan, the longtime chairman of the Federal Reserve, allowed banks to engineer unfathomably complicated webs of mortgage-based investments that, through the first half of this decade, sent real estate prices soaring and expanded homeownership.

The banks relied on these investments to raise money for the next wave of loans. The system worked so long as lenders could keep selling their mortgages, and so long as someone would guarantee most of the debts. Fannie and Freddie took care of both tasks. Together, they now guarantee or own roughly half of the nation’s $12 trillion mortgage market.

Belief in Fannie and Freddie gave banks a sense of certainty as they plowed more of their capital into residential mortgages. That easy financing, in turn, brought more and more people into the market for homes, generating a belief that American real estate prices could keep rising forever.

And that contributed to the banks’ ultimately making extraordinarily risky loans, which defaulted first when home prices started falling. As lending became conservative, the whole speculative bubble burst.