It was Democrats who closed ranks to insulate their pet projects -- Fannie Mae and Freddie Mac -- from proper oversight and regulation. A New York Times article from 2003 described the opposition to a Bush administration proposal to enhance oversight: "Among the groups denouncing the proposal today were the National Association of Home Builders and Congressional Democrats who fear that tighter regulation of the companies could sharply reduce their commitment to financing low-income and affordable housing." Rep. Barney Frank (D-Mass.) claimed of the thrifts, "These two entities are not facing any kind of financial crisis. The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing." Representative Mel Watt (D-N.C.) added, "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."
As for the regulations that were adopted, some, like the "mark to market" accounting rule, have taken a serious situation and transformed it into a disaster. An estimated 6 to 7 percent of home mortgages are in default (compared to 40 percent in the 1930s). Under the old cost accounting system, investment banks would have been able to manage the losses with patience and time. But the mark to market rule (imposed by many including the Securities and Exchange Commission in response to the S and L debacle and the Enron scandal) requires that banks value their assets based on what they can fetch at any given moment in the open market. Well, because the housing market was in a temporary dither, banks were forced to wildly write down their portfolios, spreading the contagion of panic even further.
The secret good news beneath today's terror is that 93 or 94 percent of America's mortgages are sound. Once the liquidity crisis is blunted and the bad loans sorted out, taxpayers should see most if not all of their $700 billion back. But the moral of the story must be understood -- it wasn't lack of regulation that got us here, it was bad regulation.