Free market won't regulate itself, need common-sense reform

I can think of no problem that is more important for us to understand than the root cause of the financial meltdown. I have read many Fence Post submissions, including a recent one by Dave Forster, that assert the singular cause was "forcing" lenders to grant loans to "people with insufficient resources."

The vast majority of the loans that fueled the meltdown were subprime mortgages with origination dates before early 2007. Before that, Republicans controlling both Houses of Congress saw fit to ignore any warning signs that artificially low interest rates, lousy underwriting practices and subprime terms were creating a bubble in the housing market.

The loans to lower-income people made during that time and earlier not only represent a tiny portion of the overall capital put at risk during this housing boom, they were in large measure not subprime mortgages.

Subprime mortgages and specifically the high-risk derivatives called Credit Default Swaps or Collateralized Debt Obligations used to capitalize lenders is what caused the meltdown. Now, many people lay blame for all of this at the feet of Freddie Mac and Fannie Mae. The FMs did not err by giving mortgages to lousy candidates, they erred because they bought these toxic derivatives in the early part of the decade in order to supply loan capital to the Merrill Lynches and Citibanks of the world.

Don't let anyone convince you that the 2001-2006 Congress, the White House, or the SEC had any problem with this; they didn't. The result is the bitter fruit we have harvested today. We desperately need common-sense financial reform to regulate the derivatives market. If we want to maintain a healthy free enterprise system, we cannot delude ourselves with the notion that it is purely self-regulating. It isn't.

John Riley

Arlington Heights