Now, we've seen this before in the savings and loan debacle, and we know that this kind of fraud can only originate from the lenders, and that no honest lender would ever inflate the appraisal, because it's the great protection against loss.

We had incredibly early warnings of it, and it was absolutely unambiguous that no honest lender would make loans in this fashion.

In response to that, the industry first started calling these loans liar's loans, which lacks a certain subtlety, and second, massively increased them, and no government regulator ever required or encouraged any lender to make a liar's loan or anyone to purchase a liar's loan, and that explicitly includes Fannie and Freddie.

Congress, it may strike you as impossible, but actually did something intelligent in 1994, and passed the Home Ownership and Equity Protection Act that gave the Fed, and only the Federal Reserve, the explicit, statutory authority to ban liar's loans by every lender, whether or not they had federal deposit insurance.

Twenty or 30 years ago, if a bank in North America lent too much money to some people who couldn't afford to pay it back and the bank went bust, that was bad for the lender and bad for the borrower, but we didn't imagine it would bring the global economic system to its knees for nearly a decade.

For example, the classical prohibition on usury was softened from a ban on charging interest on all loans to a ban on charging interest on loans for which the lender had no alternative use, i.e., for charging interest on “hoards” or cash balances.

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