Predatory lending was the fuel the fed the fire of the meltdown. The ability to securitize and pass along predatory loans to buyers who were insulated from responsibility for issuing the predatory loans fanned the flames. Think of it is being able to knowingly buy stolen property with no fear of being charged with a crime. It would lead to a whole lot more stolen property wouldn't it?
An overlooked aspect to this whole meltdown is the role ofthe Bush Administration regarding predatory mortgage lending. They didn't merely fail to notice or do anything about, they aided and abetted it. They actively stopped the states back in 2003 and 2004 who were trying to do something about it and tied their hands. The Feds actually sued the states to stop them from policing predatory mortgage lending.
Federalists, my patoot.
Eliott Spitzer was airing the dirty laudry in the Washington Post when the took him down.
Not only did the Bush administration do nothing to protect consumers, it embarked on an aggressive and unprecedented campaign to prevent states from protecting their residents from the very problems to which the federal government was turning a blind eye.
For another great story about what was going on while the press was looking up Spitzer's skirt (h/t hisvorpal), see this from Slate How the Feds Stopped the States From Averting This Mess
As the federal government scurries to prevent the subprime mortgage crisis from sending the economy into a deep recession, many of us are asking why it waited so long to intervene. As it turns out, the government wasn't exactly sitting on its hands. Instead, for reasons that now appear hopelessly shortsighted, an obscure federal agency torpedoed legislation from a handful of states that would have made institutional investors far charier of buying mortgage loans that were likely to go belly-up. If the legislation had been permitted to go into effect, the crisis we now face would probably look a lot less grim. The right question, then, is not why the feds did so little. It's why they did so much.