What is the real cause of the collapse?
Right now, people are doing a lot of finger pointing about the cause of the economic collapse. The real cause of this calamity was government interference in the market. Don't believe me? Lets take a look:
1. Gov. creates FHA. It starts as a noble program that allows homeowners to borrow money to buy homes. Like all gov social programs, it starts out great and home ownership explodes. Like all gov social programs, smart people will eventually figure out how to make money off it (they will take advantage of the forthcoming credit bubble).
2. Fannie Mae, VA loan programs, Ginnie Mae, and Freddie Mac are created to induce more home ownership by creating a secondary market for primary lenders to borrow from. Like all gov social programs, it starts out great and primary lenders have some insurance against defaults. 30 year fixed rate mortgages are the gold standard. Like all gov social programs, smart people will eventually figure out how to make money off it (financial "innovations" will create jumbo mortgages and other crap the average consumer is too stupid to understand).
3. S&L crisis in the 80's caused by, you guessed it, gov intervention in the free market. S&L institutions make risky loans, knowing that the gov will intervene and bail them out. In the aftermath, gov regulations are enacted to prevent this from happening again. The enforcement of these regulations would, ironically, help to create the sub-prime crisis by expanding the influence of the secondary market.
4. The gov enacts a home ownership program to help poor people buy homes. Eventually, it turns out to be a program that gives poor people homes they can't afford. Smart people profit.
5. Sub-prime mortgage crisis hits. Poor, dumb people lose. Smart, rich people end up ok. Poor, dumb people angry. Smart, rich people still looking for next credit bubble (government sponsored school loans . . ?)
Every time the gov intervenes in the free market, even on the grounds of virtue, bad things will happen. We need to be wary when politicians try to do things on our behalf.