Donald Lambro

Frank's Democratic ally, Rep. Melvin Watt, saw the Bush regulation as a sinister move to tighten control of the lending giants. "I don't see much other than a shell game going on here, moving something from one agency to another and in the process weakening the bargaining power of poorer families and their ability to get affordable housing," Watt said at the time.

So the situation festered, despite repeated warnings that the two mortgage businesses were a catastrophe in the making.

In 2005, Federal Reserve Chairman Alan Greenspan told Congress that if Fannie and Freddie "continue to grow, continue to have the low capital that they have, continue to engage in the dynamic hedging of their portfolios, which they need to do for interest-rate aversion, they potentially create ever-growing potential systemic risk down the road.

"We are placing the total financial system of the future at substantial risk," Greenspan testified.

Around that time, a regulatory reform bill came out of the Senate Banking Committee that would have cracked down on the two agencies and forced them to jettison their riskiest investments. But that bill, opposed by Connecticut Sen. Chris Dodd and New York Sen. Hillary Clinton, among others, never became law, because Democrats rallied in lock step against it and prevented it from coming up for a floor vote.

In layman's terms, Hassett explains that, if Fannie and Freddie had been disbanded or at least had been forced to submit to needed oversight and regulation, "this whole mess could never have happened."

This is not to say that there weren't other factors involved in a subprime scandal.

"This is the result of a witches' brew of bad government policies and programs -- from the Community Reinvestment Act, which required banks to provide homeownership loans to people who couldn't afford to repay them, to Fannie Mae and Freddie Mac, which started the financial contagion by encouraging 'subprime' loans, to the Fed's easy monetary policies that helped produce the housing bubble," said Cesar Conda, former chief domestic policy adviser to Vice President Dick Cheney.

But Fannie and Freddie are at the core of this financial calamity. "There shouldn't have been a Fannie and Freddie. They are the perfect example that power corrupts," free-market economist Arthur B. Laffer told me last week.

They are also another reason why government should not be running commercial enterprises and why Treasury Secretary Hank Paulson should dismantle and sell both businesses as soon as it is feasible to do so.

Donald Lambro

Donald Lambro is chief political correspondent for The Washington Times.