February 4, 2008 - European Union leaders are publicly calling for more government oversight of credit rating agencies in order to prevent a repeat of the economic woes faced by the global economy. While the call is full of "good intentions", it is misguided because the very agencies that were supposed to regulate the US economy simply refused to do their jobs for years. In what can only be termed an act of economic treason, these government agencies, including the White House, Congress, the FED, FannieMae and FreddieMac all succumbed to lobbying dollars from the financial industry and betrayed American tax payers. It may be the largest breach of public trust in the government in US history.

Even if you don't watch the news, it would be virtually impossible not to know that the economy is very close to entering a recession. Many economists believe that we are already in one; with good cause. Last year alone, there were 403,000 foreclosures in the United States, and home values dropped on a year over year basis. It's the first time since the Great Depression that that has happened.

But this particular economic downturn is different from any other in our history. What makes it different is that the government regulators that were supposed to protect the economic interests of the United States were actually active participants in tearing those interests apart. When the Great Depression occurred, it was not because regulators failed to do their jobs. And when the Savings and Loan industry fell apart due to bad loans, the S&Ls brought about their own woes. Once the government became aware of industry problems, it stepped in to shore up the industry and to prosecute those who broke the law.

This time, the agencies assigned the job of regulating the economy knew what was going on and they did nothing. The Federal Reserve Board (FED) was overseeing the largest expansion of the American economy in history and they didn't want it to stop. Neither did Congress, the White House or any other federal agency. Most of this expansion was driven by rising home prices. As prices increased, homeowners took out home equity loans and purchased more goods and services; driving the economy to expand even more.

At the same time, interest rates were low. This allowed many people to become homeowners. As the prices of homes continued to grow, these new homeowners took out more home equity loans, and drove the economy to expand once again. Houses were being used like ATMs.

Unfortunately, the price of housing was growing much faster than wages. In a normal market, this would mean that one of two things would happen. Either prices would level off until wages caught up, or prices would begin to fall. This is a normal economic cycle. But that is not what happened this time.

This time, lenders became creative. They took existing loan products, such as Option ARM loans, that were targeted at well-to-do borrowers with cyclical incomes and they offered them to everyone. If you didn't have the money for a down payment, that wasn't a problem. 100% financing was available. Bad credit? Again, not a problem. They would just charge you a slightly higher interest rate. And while lenders were doing this, the FED, Congress and the White House didn't just look the other way. They actually encouraged lenders to step up their lending activity. They were assisted in these efforts by FannieMae and FreddieMac; the two government backed companies that provide financial backing for home loans. Loans backed by these companies can easily be resold on the secondary market.