Secretary Paulson today:

The underlying weakness in our financial system today is the illiquid mortgage assets that have lost value as the housing correction has proceeded. These illiquid assets are choking off the flow of credit that is so vitally important to our economy. When the financial system works as it should, money and capital flow to and from households and businesses to pay for home loans, school loans and investments that create jobs. As illiquid mortgage assets block the system, the clogging of our financial markets has the potential to have significant effects on our financial system and our economy.

As we all know, lax lending practices earlier this decade led to irresponsible lending and irresponsible borrowing. This simply put too many families into mortgages they could not afford. We are seeing the impact on homeowners and neighborhoods, with 5 million homeowners now delinquent or in foreclosure. What began as a sub-prime lending problem has spread to other, less-risky mortgages, and contributed to excess home inventories that have pushed down home prices for responsible homeowners. [Ed: Emphasis mine]

Though it lacks specificity, Paulson correctly identifies the root of the problem. And how is it we got to lax lending practices, irresponsible lending, and irresponsible borrowing?

Neal Boortz, today as well, explains:

Twenty years ago the buzz-word in the media was "redlining." Newspapers across the country were filled with hard-hitting investigative reports about evil and racist mortgage lenders refusing to make real estate loans to various minorities and to applicants who lived in lower-income neighborhoods. There I was closing these loans in the afternoons, and in the mornings offering a counter-argument on the radio to these absurd "redlining" claims. Frankly, the claims that evil mortgage lenders were systematically denying loans to blacks and other minorities were a lot sexier on the radio than my claims that when credit histories, job stability, loan-to-value ratios and income levels were considered there was no evident racial discrimination.

Political correctness won the day. Washington made it clear to banks and other lending institutions that if they did not do something .. and fast .. to bring more minorities and low-income Americans into the world of home ownership there would be a heavy price to pay. Congress set up processes (Research the Community Redevelopment Act) whereby community activist groups and organizers could effectively stop a bank's efforts to grow if that bank didn't make loans to unqualified borrowers. Enter, stage left, the "subprime" mortgage. These lenders knew that a very high percentage of these loans would turn to garbage - but it was a price that had to be paid if the bank was to expand and grow. We should note that among the community groups browbeating banks into making these bad loans was an outfit called ACORN. There is one certain presidential candidate that did a lot of community organizing for ACORN. I won't mention his name so as to avoid politicizing this column.

These garbage loans to unqualified borrowers were then bundled up and sold. The expectation was that the loans would be eventually paid off when rising home values led some borrowers to access their equity through re-financing and others to sell and move on up the ladder. Oops.

Right now this crisis is being sold to the American public by the left as evidence the failure of the free market and capitalism. Not so. What we're seeing is the inevitable result of political interference in free market economics. Acme bank didn't want to loan money to Joe Homebuyer because Joe had a spotty job history, owed too much money on his credit cards, and wasn't all that good at making payments on time. The politicians told Acme Bank to figure out a way to make that loan, because, after all, Joe is a bona-fide minority-American, or forget about opening that new branch office on the Southside. The loan was made under politicial pressure; the loan, with millions like it, failed - and now we are left to enjoy today's headlines.[Ed. Emphasis mine]

But there's more to it than the home ownership for minorities angle. Just in July, Paul Gigot provided a good history of Fannie and Freddie (may require subscription), confirming what Neal elucidates today, and which, among being a primer for the personages involved, also shows just how craven and graft filled the process became:

Fan and Fred also couldn't prosper for as long as they have without the support of the political left, both in Congress and the intellectual class. This includes Mr. Frank and Sen. Chuck Schumer (D., N.Y.) on Capitol Hill, as well as Mr. Krugman and the Washington Post's Steven Pearlstein in the press. Their claim is that the companies are essential for homeownership.

Yet as studies have shown, about half of the implicit taxpayer subsidy for Fan and Fred is pocketed by shareholders and management. According to the Federal Reserve, the half that goes to homeowners adds up to a mere seven basis points on mortgages. In return for this, Fannie was able to pay no fewer than 21 of its executives more than $1 million in 2002, and in 2003 Mr. Raines pocketed more than $20 million. Fannie's left-wing defenders are underwriters of crony capitalism, not affordable housing.

...The abiding lesson here is what happens when you combine private profit with government power. You create political monsters that are protected both by journalists on the left and pseudo-capitalists on Wall Street, by liberal Democrats and country-club Republicans. Even now, after all of their dishonesty and failure, Fannie and Freddie could emerge from this taxpayer rescue more powerful than ever. [Ed. Emphasis mine]

Now, to counteract the poor lending and borrowing practices in the name of the welfare state and to clean up the craven graft directly related to government participation in the financial markets what is taking place?

...in the past two weeks, the U.S. government, keeper of the flame of free markets and private enterprise, has:

-- nationalized the two engines of the U.S. mortgage industry, Fannie Mae and Freddie Mac, and flooded the mortgage market with taxpayer funds to keep it going;

-- crafted a deal to seize the nation's largest insurer, American International Group Inc., fired its chief executive and moved to sell it off in pieces.

-- extended government insurance beyond bank deposits to $3.4 trillion in money-market mutual funds for a year;

-- banned, for 799 financial stocks, a practice at the heart of stock trading, the short-selling in which investors seek to profit from falling stock prices.

-- allowed or encouraged the collapse or sale of two of the four remaining, free-standing investment banks, Lehman Brothers and Merrill Lynch;

-- asked Congress by next week to agree to stick taxpayers with hundreds of billions of dollars of illiquid assets from financial institutions so those institutions can raise capital and resume lending.

But this isn't the end of it. John Hildenrath et al also in the WSJ today:

Few financial crises have been sorted out in modern times without massive government intervention. Increasingly, officials are coming to the conclusion that even more might be needed. A big problem: The Fed can and has provided short-term money to sound, but struggling, institutions that are out of favor. It can, and has, reduced the interest rates it influences to attempt to reduce borrowing costs through the economy and encourage investment and spending.

But it is ill-equipped to provide the capital that financial institutions now desperately need to shore up their finances and expand lending. [Ed. Emphasis mine]

This morning, Mr. Paulson said:

"I am convinced that this bold approach will cost American families far less than the alternative -- a continuing series of financial-institution failures and frozen credit markets unable to fund economic expansion," Mr. Paulson said at a morning press conference.

I have a few more bold approaches, with the reminder that American citizens should be mindful of the consent of the governed:

1. Get rid of everyone associated with this debacle. Anyone serving in the House and Senate that has been party to this (that includes Mr. Obama by the way) - throw them out! Participants in the government inspired meddling in the name of affordable housing - fired and banned from participation in the market place.

2. Let this be the final nail in the coffin of the welfare state. Haven't we finally come to the point - since the Great Society has not only utterly destroyed urban minority America - but now threatens every one of us - to eliminate the entitlement system that is literally breaking our backs?

3. To balance the extraordinary actions being taken by the Fed and the Congress, which places all taxpayers collectively at risk, make the bold approach of voting HR 25 and S 1025 (Collectively the FairTax legislation) into law so that we have some possibility of saving our country from financial ruin. I'm completely serious. Where's the capital going to come from ultimately to facilitate institutional strength? Hint: It's not government printing presses. Ultimately it has to be on the back of the saving public. To transform our economy from a consumer debt economy to a savings economy remove the stifling federal tax system and replace it with this revenue neutral consumption plan and encourage savings. Remove the mind boggling costs of tax compliance and inject trillions of dollars into the economy over the next decade as a result. Achieve additional revenues by capturing consumption from the huge underground economy, stimulate the economy by making American goods more competitive overseas, and attract the trillions of 'ex-pat' dollars that are offshore back into the market place.

Please read up on the FairTax initiative. Ask questions. Call your Congressperson. Remind them that they serve at your pleasure. Remind them that there is a financial meteor that has already impacted NYC and that our only hope is to free America from the back breaking tax system and replace it with an economy stimulating consumption model.

Our very lives, our sacred honor depend on it.