So how the heck did we get in a position where taxpayers could be forced to pay off $1 trillion or more in bad mortgage debt? Well first off, don’t let anyone tell you it’s the fault of one party or the other. There’s plenty of blame to go around.

If there’s one group to be singled out, it’s the Washington lobbyists and political insiders who spent billions to manipulate laws, regulations and lending standards that allowed bad loans to be treated like good loans. What’s really annoying is that some of the worst offenders of these bad banking practices are precisely the people and institutions who are now getting bailed out by taxpayers.

Some date the start of all this to the breakdown of a law enacted during the Great Depression -- Glass-Steagall -- a law that separated commercial banking from the go-go world of Wall Street financing. The 1929 stock-market crash wiped out much of this country’s banking industry because Wall Street firms used solid banking instruments like savings accounts and mortgage funds as gambling chips. When Wall Street bets went bad, whole banks were wiped out, and their depositors with them.

After the crash, mortgages and savings deposits were considered too sacred to be risked for the quick bets of Wall Street, and new laws were enacted to keep commercial banks separate from investment houses.

But by the 1990s, banks felt they were losing out to foreign banks that didn’t have the same restrictions that we did. U.S. banks spent billions lobbying Congress to change the rules. Prophetically, outgoing Federal Reserve Chairman Paul Volcker warned against getting rid of the old law, saying it would lead to another financial crisis. But his replacement, Alan Greenspan, didn’t agree. And in 1999, President Clinton signed into law a bill -- the Gramm-Leach-Bliley Act -- that officially allowed commercial and financial banks to combine forces once again.

That’s just about the time when the housing boom began. As Alan Greenspan lowered interest rates dramatically, money got very cheap to borrow, and lenders of money got very greedy. They became less interested in how capable a borrower was of paying off a mortgage, particularly since mortgage brokers like Countrywide Financial could immediately sell that mortgage to Wall Street. When you don’t have to hold a mortgage, you don’t care if it’s paid off down the line.

The huge mortgage giants Fannie Mae and Freddie Mac would buy the mortgages from the broker and then sell them to Wall Street brokers, who would package them and sell them around the world as securities. Many of the bad loans were often being packaged and sold as though they were good loans because the agencies rating these securities were paid by the companies issuing the securities. These packages of bad loans were then used as collateral to borrow more money -- a lot more money. And all this was allowed to happen because banks and mortgage companies spent billions convincing politicians that all was well. 

That’s how we got to where we are today, and that’s what’s likely to cost more than a trillion dollars to fix.