Greedy or stupid policiticans, probably… 

Prime Minister Kevin Rudd gets one thing right in his 7,000 word reiteration of the destructive Whitlam era philosophy that big government, big spending and high taxes are good. The thing he gets right is this: ‘Soft or hard, protectionism is a sure-fire way of turning recession into depression, as it exacerbates the collapse in global demand.’

Virtually everything else in the essay is wrong, and can be shown to be wrong. Rudd blames ‘extreme capitalism and unrestrained greed’ for the present crisis. This is utterly counter-factual.

The cause of the present crisis was do-gooding intervention in domestic home loan markets by successive US Democrat administrations.

In essence, starting with Jimmy Carter, those administrations offered incentives to lenders to give home loans to people who would not have qualified under normal lending criteria (or penalties to lenders who did not). This is the ‘sub-prime’ mortgage market, which consisted of giving loans to people who could not afford to repay them.

If you assume (as seems likely) a complete lack of understanding of basic economics in those who formulated this policy, you can allow that it may have been well-intentioned. In fact it should have been obvious to anyone with half a brain that it would leave those to whom the loans were given worse off in the long run, because they were likely not only to lose their homes, but any money they put into them, and their credit rating.

It should also have been obvious to anyone with half a brain that such a system could not be maintained. You cannot continue indefinitely to lend billions of dollars to people who have no chance of repaying it without eventually having a serious impact on the whole economic system.

In 2001 the Bush administration tried to get real answers from the Government Sponsored Enterprises (Fannie May and Freddie Mac) which underwrote those loans, and to ensure proper lending criteria were in place. These efforts were defeated by a consortium of Democrat representatives and senators, many of whom were in receipt of large donations from those bodies.

John Pilla on has more details.