There’s a YouTube video making a buzz right now called Burning Down The House: What Caused Our Economic Crisis that purports to explain the current financial crisis and it lays all the blame on Democrats.

While it appears to be a convincing case, for those who follow its logic, here’s my response:

First of all, in recent years I know lenders have been offering “stated income loans”, aka a “no-docs loans”, “liar’s loans” to anyone. They knew they could resell the loans on the resale market so they were happy to write them and get the loan origination fee as long as the borrower claimed some phoney income level. These were offered to white collar workers too so you didnt have to be in the CRA demographic.

Second, nothing in the video explains wall street’s appetite for the bad mortgages and the seizing up of the private credit markets that it led to. Here’s my understanding for the demand side. The interdependence between the housing market and the global financial markets didn’t previously exist. Mortgage backed securities (particularly Collateralized debt obligations (CDOs)) have allowed wall street to get into an area they had wanted to for a long time…home mortgages. CDOs have grown from 0 in 1987 to $2 trillion today. The bundling and marketing of them has generated considerable fee income. When you can borrow money over night at 5% and use the money to buy a MBS (with a AAA credit rating) that is expected to pay a yield of 5.75%, demand was high. It even looks like something you might want to leverage….why not leverage to 30-1 times your capital. hedge funds and investment banks and some other institutions escape normal banking regulations (and leverage limits) since they don’t take deposits from the public. The problem is, as we’re seeing, since our economy is so tightly dependent on the private credit markets this shouldn’t have been allowed to happen. Once real estate prices fell, it became evident that AAA, they weren’t. Most in the debate agree our financial markets need updating of regulations so this can’t happen again.