Campaigning in Colorado yesterday Barack Obama blamed the financial crisis on “a culture of deregulation.” No, we don’t know what this means either. Pressed for specifics, some on the left manage to identify the 1999 Gramm-Leach-Bliley law as the deregulation source for all our problems. But as we have detailed before, Gramm-Leach-Bliley is not to blame for the current crisis. In fact, it has actually been key in helping the federal government manage financial institution failures.

The financial crisis we are experiencing today is not the cause of too little government interference in markets. It is the cause of too much. The simple fact is that for the past 30 years or so, the United States has not had a free market in residential real estate. Instead, a massive government duopoly, made up of the government entities Freddie Mac and Fannie Mae, control more than half of home loans in the United States. For almost two decades, conservatives have been warning about the systemic risk Fannie and Freddie pose to the U.S. financial system. But conservative efforts to cut Fannie and Freddie off from their government advantages have always been stymied by the left.

To this day, the left’s leaders in Congress still deny the integral role Freddie Mac and Fannie Mae played in the housing bubble and the resulting financial crisis. The facts say otherwise. Since 1995, Fannie and Freddie have been buying subprime securities to help meet government-directed affordable housing goals. At first they started out slow, but by 2004 Fannie and Freddie bought 44% of the entire subprime market. Their biggest customer was Countrywide Financial, which is now infamous for failing to perform due diligence before issuing the loans that their subprime securities were based on. Even when states like Georgia tried to tighten mortgage lending standards, Fannie Mae and Freddie Mac threatened to stop doing business in the state and turn Georgia into “a financial pariah.”

As the extent of the housing bubble damage first came to light, the left showed it had learned nothing from Fannie and Freddie’s failure. Earlier this year, Democrats were even seeking to increase Freddie and Fannie’s role in the market as a solution to the problem. Speaker Nancy Pelosi (D-CA) demanded Fannie and Freddie do their best to keep the housing bubble afloat for her wealthy constituents, pushing for the limit on loans Fannie and Freddie can insure from $417,000 to $700,000.

Freddie and Fannie’s failure should come as no surprise. Our country has a long history of government intervention in markets exploding in hugely horrific and costly ways. Since the mid-1980s, massive losses have occurred in the federal Farm Credit System, the Federal Deposit Insurance Corp., and the Federal Savings and Loan Insurance Corp. Worse, the heavily regu­lated and supposedly closely supervised savings-and-loan industry collapsed two decades ago, and repairing the residual damage cost the U.S. taxpayers $130 billion. After the immediate crisis has passed, we will need to update our financial regulatory framework. The past should teach us that a firm but light government touch is the best policy.

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