Should Government Fix Problems it Creates?

I'm not a financial expert by any means so to some degree I need to rely on the news to explain to me how the problems with banking crisis we currently are hearing about the news but one thing I fail to see mentioned is what is the cause of this.  Sure they toss out blanket statements saying it's all Bush's fault or simply credit it back to the banks giving out loans to all these people who can't afford them.  But they don't really explain the root of the cause.  If it is Bush's fault, what exactly did he do to cause it?  Or if it is in fact due to banks giving out all these crazy loans people can't afford, the question is why?  Clearly it's not good business practice to give money away knowing it wont be coming back.

So I started digging around looking for the root causes.  One such root I uncovered was the Fair Housing Act passed under President Bill Clinton, which essentually forced banks to give loans equally based on race, sex, religion etc regardless of ones ability to pay. This set the ball rolling.  I'm sure there were other acts put in place prior that likewise contributed but this I see as one of the key culprits.

Clinton back in 1995 praised the idea of giving more loans in one of his speeches:

The Small Business Administration has reduced its budget by 40 percent, doubled its loan outputs, dramatically increased the number of loans to women and minority small business people, without reducing the number of loans to white business owners who happen to be male, and without changing the loan standards for a single, solitary application.* Quality and diversity can go hand in hand, and they must.

That same article linked above with the text from Clinton's speech also points out the problem with this above statement:

"The President reports an increase in loans to two groups, no decrease in loans to a third group, and no change in standards. His summary implies the absence of any preferential treatment with its concomitant sacrifice of quality. But he omits the paramount fact that the Small Business Administration is required by law "to promote the competitive viability of [socially and economically disadvantaged] firms by providing such available contract, financial, technical, and management assistance as may be necessary." Small businesses owned and operated by black, Hispanic, Native, and Asian Pacific Americans and women are presumed to be "socially disadvantaged." [15 U.S.C § 631(e); P.L. 103-355, 108 Stat. 3243, 3374, § 7106 (1994)] The law thus specifies a difference in eligibility, based on race, ethnicity or sex. This may explain why the loans to women and minorities increased, while the loans to white males apparently did not."

In other words he lowered the standards for people who were at a higher risk of not being able to pay back their loan and forced banks to ablige by these lower standards.

But Clinton alone isn't to blame.  The Federal Reserve setting artificially low interest rates created a situation that created the appetite to borrow.  Without checks in place to prevent banks from picking and choosing whom they loan to, banks were now forced to give even more loans.

Ron Paul had predicted this would happen years ago and had put up a number of bills attempting to prevent it by getting government out of the market.

Instead of backing away from the problems the government itself created, it instead is being pushed to intervene even more.  This is what lead us to the Great Depression.  Murray Rothbard concluded in his book "America's Great Depression" that the governments attempts to prop up the market after the 1929 crash succeeded only in delaying the market's self correction and helped create the problems we saw.

Of course, socialists will refuse to see it this way.  After all it was socialistic practices and manipulation of the markets that created the problems and admitting to this would admit to the evidence that socialism itself fails everywhere it has ever been tried.  It is the exact opposite of a free market.  Instead of admisions to the problems, you continue to hear railing that this is failures of capitalism and the failures are in lack of regulations over the markets.

Where will it end?  Jay Severin questioned this on his radio show yesterday asking how far into socialism must we dive before we no longer exist as a free country.  First auto makers come in with tin cups and we bail them out.  Then airlines come in with tin cups and we bail them out.  Now mortgage banking and insurance companies are out with their cups begging to be paid back the money they lost due to the governments force over them.  Jimmy Carter's creation of the Department of Education lead to the continual decline of public education in this country.

And just think, if Obama is elected we'll have government hands all over the health care industry as well.