Housing: For years, a self–described "bank terrorist" blackmailed banks into making bad home loans in our inner cities. Now those loans are defaulting by the millions, and he's blaming banks.

Bruce Marks, founder of the leftist Neighborhood Assistance Corp. of America, makes a good living shaking down banks for loans to deadbeat borrowers that he thinks are entitled to homes.

For anyone taking stock of 2008, Barack Obama is the inevitable choice as Person of the Year. But he's not the only American whose story suggests that this thrilling, dramatic, unforgettable year will be seen as a demarcation of grand historical eras, a bright line between yesterday and tomorrow. My choice for runner–up is Bernard Madoff.

In a sense, we're all Bernie Madoff. We've been running our economy in accordance with his accounting principles for a generation — and now we face a most unpleasant reckoning.

As everyone knows by now, Madoff — once one of the most respected financiers on Wall Street — stands accused of being perhaps the biggest swindler in history. Before his arrest earlier this month, he reportedly told his sons that he had defrauded investors of up to $50 billion. He allegedly followed the playbook written more than eight decades ago by the elegant grifter Charles Ponzi, who used money from new investors to pay juicy returns to old investors. That works fine for a while, but every Ponzi scheme eventually collapses in ruin.

Managing your financial affairs in this season of political transition is like being in a poker game when a stranger shows up. It's hard to know how to play a hand until you get a sense of the new guy's strategy.

President–elect Barack Obama is now at the table, and he's got a mountain of chips.

Homeowners may think the most obvious bet right now is to take advantage of falling interest rates and refinance their mortgages. The average national mortgage rate as of Dec. 24 was 5.14 percent for a 30–year loan, a 37–year low, according to Freddie Mac.

Should you place your wager now or hold off, hoping rates keep declining after Obama's economic team acts to stimulate the economy?

WaMu should be the case study for students who want to understand what can go wrong during a housing bubble. The New York Times reported this weekend that the value of WaMu's bad loans reached $11.5 billion midyear, nearly tripling from $4.2 billion a year earlier.

But it's not the big numbers that caught our attention; it's how business was transacted.

WaMu's "Power of Yes" was a metaphor for its loan approval process. The advertising campaign promoted a new kind of branch network –– stores, not banks –– growing rapidly across the country. Each store was designed to increase real estate lending, with little regard for the ability of a customer to pay the loan back. The Times said: "Customers were often left with the impression that low payments would continue long–term, according to former WaMu sales agents." And to move the process faster, WaMu "turned real estate agents into a pipeline for loan application" paying "referral fees" when clients became borrowers. Similar fees were paid to loan brokerage firms; the more, the better. The New York Times called this: "WaMu's boiler room culture."

Pick any recent crisis — man–made, natural, you name it — and before the dust has even settled people are choosing losers and winners, those with much to learn and those with much to teach.

The finger–pointing is not constructive. But the lessons to be learned from those who survive crisis — even thrive, in some cases — are.

So what is it about the Government National Mortgage Association, known by the more–familiar Ginnie Mae, that has made it thrive while all around it housing–related businesses are struggling?

In July of this year, despite the weakening economy, Ginnie Mae more than tripled the securities it guaranteed vs. the previous July, making more than $26 billion available for affordable home mortgages.

In October of this year, Ginnie Mae issued guarantees for more than $29 billion in mortgage–backed securities, or MBS, the most in its history — all while keeping our expenses–to–revenue ratio well below others' in the industry.

In this season of spiritual introspection, there are true believers suffering a real crisis of faith. They have been worshipping at the Church of the Free Market, and their doubts run deeper than stock brokers not answering prayers, or returning calls.

For decades, their prophets have preached economic markets function best when left to themselves, unfettered by government regulation or oversight.

Businesses, investors and traditional market forces would self–regulate, self–correct and self–enforce. Oops.

The collapse of the housing and stock markets trace their way back to decisions and choices made at the highest levels of government and commerce. The rest of us get swept along for the ride, both up and down, and suffer the consequences of hubris, incompetence and criminality.

WASHINGTON –– The nation's great migration south and west is slowing, thanks to a housing crisis that is making it hard for many to move.

Media Bias: The paper of record blames the "mortgage bonfire" on President Bush and his "laissez–faire" housing policies. But to get there, the Times completely ignored history prior to 2002.

That's when Bush gave a speech in Atlanta and announced a goal to increase minority homeowners by 5.5 million. According to the Times, this was the event that started the mortgage meltdown.

"He pushed hard to expand homeownership, especially among minorities," its lengthy front–page piece asserts. "But his housing policies encouraged lax lending standards."

If the Times had said the same thing about Bush's predecessor, its story might have a kernel of truth to it.

The national wave of home foreclosures, many concentrated in lower–income and minority neighborhoods, has created a strong temptation to find the villains responsible. Among the nominees are the major credit rating agencies like Moody’s and Fitch, which certified that the securities backed by subprime loans were a good investment.

There’s little doubt that the rating agencies helped inflate the housing bubble. But when we round up all the culprits, we shouldn’t ignore the regulators and affordable–housing advocates who pushed lenders to make loans in low–income neighborhoods for reasons other than the only one that makes sense: likely repayment.

The mortgage–securitization system, in which the rating agencies were central, and the bank and housing finance regulatory systems, through community–reinvestment rules and affordable housing goals, shared a common flaw: both provided incentives to make imprudent loans. The American public will be ill served if either is allowed to continue unchanged.

A video excerpt showing those making warnings and those brushing off the warnings on Freddie and Fannie.

Media: If, as they say, it's journalists who write history's first draft, then future texts will be riddled with errors about the origins of the subprime disaster, teaching future leaders the wrong lessons.

Just how did Americans come to lose $10 trillion in real estate and stock wealth? And why are our children and grandchildren on the hook for as much as $8 trillion in federal bailout money? These are some of the most important questions of our time. Yet the mainstream media, plagued by monopartisan bias, are not providing the public honest answers.

Take, for instance, a recent front–page article in the Washington Post, under the headline, "How HUD Mortgage Policy Fed the Crisis." The piece correctly fingers HUD for helping fuel risky lending at Fannie Mae and Freddie Mac. But the newspaper starts its analysis in 2004 (in fact, the first sentence begins, "In 2004 . . . "), making it seem as if the Bush administration crafted "affordable housing" policy and created the subprime market.

What does $350 billion buy these days? The hope was it would be enough money to spur an economic recovery (especially with another $350 billion available to tap).

The only glitch: We don't know if the federal government's economic recovery plan is working. "There is little evidence of what effect these billions of dollars are having on us," says Elizabeth Warren, a Harvard University law professor, who is heading a U.S. Senate panel looking into the effectiveness of the $700 billion recovery plan.

We don't know where the money is going –– or how it's being used.

MORTGAGE giant Fannie Mae offers a smart and compassionate plan to keep renters of foreclosed properties in their homes.

Other lending institutions would be wise to follow suit, this time with a plan to allow renters living in foreclosed properties — who can pay their rent — to stay in their homes.

Sibling company Freddie Mac has a similar effort in the works. The two own or guarantee about half of the $11.5 trillion in outstanding U.S. home–loan debt, adding heft to their rescue efforts. An estimated 2.2 million Americans are vulnerable to foreclosures because they took out subprime–mortgage loans. Hidden within the numbers are thousands of renters who stand to lose homes despite paying their rent.

THE national wave of home foreclosures, many concentrated in lower–income and minority neighborhoods, has created a strong temptation to find the villains responsible. Among the nominees are the major credit rating agencies like Moody’s and Fitch, which certified that the securities backed by subprime loans were a good investment.

There’s little doubt that the rating agencies helped inflate the housing bubble. But when we round up all the culprits, we shouldn’t ignore the regulators and affordable–housing advocates who pushed lenders to make loans in low–income neighborhoods for reasons other than the only one that makes sense: likely repayment.

The mortgage–securitization system, in which the rating agencies were central, and the bank and housing finance regulatory systems, through community–reinvestment rules and affordable housing goals, shared a common flaw: both provided incentives to make imprudent loans. The American public will be ill served if either is allowed to continue unchanged.

The federal government has announced a series of actions in the past few weeks ostensibly designed to make consumer credit more available and invigorate the economy. Obviously, the country is in recession and the recession is likely to get deeper. But will these actions reduce the depth and duration of the recession? Or, in the long run, will they make matters even worse?

Last month the Federal Reserve and the Treasury announced that the government would buy $500 billion in mortgages guaranteed by Fannie Mae and Freddie Mac. They also announced they would lend $200 billion against securities backed by car loans, student loans, credit–card debt, and small business loans. The purpose of both moves is to create lending capacity across key elements of the consumer sector.

Most recently, the government announced that it would subsidize new home mortgages by one percentage point, effectively lowering monthly payments on a 30–year loan by about 10 percent. The stated reason was to help the housing market, which is crucial to an economic recovery. . . .

Foreclosures: A new federal report shows that most bailed–out borrowers slip back into default within six months. Will Washington now throw more good (taxpayer) money after bad?

It seems agreed on all sides that bad home loans got us into our economic crisis. So, goes one argument, wouldn't it make sense to modify those loans into good ones — that is, loans not in default? That would seem to get at the root cause of the trouble. Besides, help for struggling homeowners is good politics. Sounds like a plan.

And it is a plan being pushed by Sheila Bair, chairman of the Federal Deposit Insurance Corp., with the support of leading Democrats in Congress. Bair wants to modify some 2 million high–risk loans by giving lenders financial incentives to cut borrowers' interest rates and payments. The cost to taxpayers would be roughly $24 billion. If everything goes as planned — with two–thirds of the targeted homeowners successfully making payments — the FDIC expects to prevent 1.5 million foreclosures next year.

Mortgage Meltdown: Democrats first circled the wagons around the Community Reinvestment Act, aided by their friends in the media. Now regulators have joined them. It's called CYA.

Four federal agencies enforce the CRA, a banking regulation whose original purpose of encouraging homeownership among the poor was well–intended. Abused by the Clinton administration, however, the act triggered the subprime crisis by relaxing lending standards across both the primary and secondary mortgage markets.

These agencies, which over the years have become entrenched in pushing the act, include the FDIC, Office of Thrift Supervision, the Comptroller of the Currency and the Federal Reserve. Top agency officials each took a turn Monday defending the CRA during a C–SPAN–covered panel discussion on the housing crisis.

OTS director John Reich insisted it "had absolutely nothing to do with the mortgage crisis." FDIC chief Sheila Bair said it was a "myth," adding that "it's really unfortunate that this is out there." "It's simply not true," she asserted. Next up was Comptroller of the Currency John Dugan, who agreed the CRA "certainly was not the cause of the subprime crisis."

Though they offered little evidence to support their assertions, a Fed governor released findings of a study the Fed did with the Brookings Institution to quash the idea the CRA encouraged high–risk subprime lending to uncreditworthy borrowers.

Have you ever heard of the Community Reinvestment Act (CRA)? If not, you should have. It is among the factors responsible for the worst housing crisis in America since 1932. CRA was enacted during the Jimmy Carter Presidency. It neither was repealed nor enforced during the Ronald W. Reagan and George H. W. Bush Administrations. President William J. Clinton enforced the law vigorously. CRA forced banks to make loans to people who had little or no ability to liquidate them. This created the subprime market which in turn created the housing bubble. That bubble burst, as all bubbles do, leaving us with a terrible housing crisis. If something similar were to occur in the private sector the wrath of Congress soon would be felt.

Roughly 12 million American homeowners are delinquent in their mortgages or in some stage of foreclosure. The damage wrought by this crisis is deep and wide, extending well beyond the borrowers who assumed toxic mortgages and the banks that packaged them. When a property is foreclosed upon, a family loses its home, and the monetary value of that home diminishes immediately. As it stands vacant, it becomes a magnet for crime and vandalism, further reducing its value. When (and if) it is sold, it will sell for pennies on the dollar of its original value.

In turn, these forces drive down the value of neighboring properties, not only because the vacant property becomes an eyesore and dangerous, but also because appraisal values drop across–the–board, as sale prices for foreclosed homes are taken into account when assessing the value of neighboring properties. A study of the impact of foreclosures in Chicago showed that every home within one eighth of a mile of a foreclosed home dropped in value by 1 percent, and some foreclosed properties resulted in a total drop in neighboring property values of well over one quarter of a million dollars.

Although the media are full of talk that we face a "crisis of capitalism," the underlying cause of the financial meltdown is something much more mundane and practical––the housing, tax, and bank regulatory policies of the U.S. government. The Community Reinvestment Act (CRA), Fannie Mae and Freddie Mac, penalty–free refinancing of home loans, tax preferences granted to home equity borrowing, and reduced capital requirements for banks that hold mortgages and mortgage–backed securities (MBS) have all weakened the standards for granting mortgages and the housing finance system itself. Blaming greedy bankers, incompetent rating agencies, or other actors in this unprecedented drama misses the point––perhaps intentionally––that government policies created the incentives for both a housing bubble and a reduction in the bank capital and home equity that could have mitigated its effects. To prevent a recurrence of this disaster, it would be far better to change the destructive government housing policies that brought us to this point than to enact a new regulatory regime that will hinder a quick recovery and obstruct future economic growth.

President Bush was on TV last week, talking wistfully about the tumultuous events of an administration in its final days. The economy was of course a topic for Charles Gibson of ABC News to address in a two–part interview that fell a few seams short of a fastball. Oh, Mr. Bush feels bad enough about the dismal economy and rising unemployment. But, no, this mess wasn't exactly his fault.

"I think when the history of this period is written, people will realize a lot of the decisions that were made on Wall Street took place over a decade or so, before I arrived," he says.