The Democrats have done a masterful job of setting a bomb that blew up the Republicans. It appears now that they succeeded in blowing up the economy of the whole country. How was it done? First there was the Community Reinvestment Act (CRA). Democrats of course deny it, but government regulators forced banks and other financial institutions to loan money to minorities to buy homes according to a quota. It turned out that there were not enough minorities who were good credit risks who wanted to buy a home to meet the quota. So loans were made to minorities who were unlikely to be able to make the payments. It turned out that there was a lot of greed in mortgage brokers so they enthusiastically sold homes that they knew the borrower could not afford to increase their fees. At the same time, some former Clinton officials and buddies of Barney Frank showed the financial institutions how they could package the bad loans with good ones and then sell the entire package to unwary investors. The investment packages were "insured" by AIG without having any actual assets backing up the insurance. (One banker wrote an email that has surfaced in which he said that the mortgage packages were crap, but as long as they could get stupid Europeans buy them, everything was OK) Then geniuses like Robert Rubin dropped out of the Clinton Administration and got paid millions of dollars ($110 million in Rubin's case) for advice to financial institutions to increase their leverage to 30 to 1, and in the case of Fannie Mae and Freddy Mac, to 70 to 1. After the Enron fiasco, rules were changed so that financial institutions had to value their assets at the market price, IE. 'mark to market.' This is a logical requirement for a trading company, but makes no sense for financial institutions that has mortgage loans. Clever traders then realized that if everyone stopped bidding on the packages of mortgage loans, they would be worthless. The banks and investment companies would have to reduce their assets, and fortunes could be made by shorting the stock of those financial institutions. This was going to work so well that some of the clever traders created mortgages out of thin air and got them insured. They basically sold short the mortgages, and shorted the financial institutions that bought them. As the value of the mortgages fell, the market for them collapsed, and the heavily leveraged mortgage companies quickly became insolvent. The insurer, AIG, immediately became insolvent. One way to slow the crisis would be to get rid of mark to market for financial institutions and change back to the process used in the 1980's. Of course traders like the mark to market rule since it makes it easy for them to manipulate the market. I don't know if there was a Democrat planner who actually set this up, but I am certain that if something like this had benefited Republicans, it would have been blamed on Karl Rove.

Here is an article with any perspective on this issue.

http://www.usnews.com/blogs/capital-commerce/2009/2/10/geithner-from-indispensable-to-indecipherable.html