I am going to say something that will surprise some readers, but the Democrats are right about the current financial crisis. Or at least partly right. The Democrats have made two claims that are, to some degree, correct. They have claimed that Bush is responsible for the state of the economy and that the Community Reinvestment Act, threats of EHOC lawsuits , community activists, and similar fores are not to blame for the subprime crisis. And, to a degree they are correct. However, they are wrong in the conclusions they draw. They are also completely wrong in blaming "predatory lenders" and "Wall Street greed" for any of the problems.

Allow me to explain.

I wrote before about the Community Reinvestment act and EHOC threats, and pointed to both as major contributors in the troubles we face. I also wrote that our attempts to maintain a 4% interest rate and the idea of granting tax breaks for home buyers would only recreate the housing bubble and cause worse problems. And I stand by that analysis. However, I have to clarify my position a bit. You see, the Community Reinvestment Act, ACORN suits, EHOC suits, and the like were part of the problem, but they are not wholly to blame. In fact, were there no CRA or EHOC, we would still have seen the current collapse. It may have come later, and likely would have taken a slightly different form, but, in a limited sense, the Democrats, while wrong in denying these acts share any of the blame, are right that government meddling in the housing market is not the sole cause.

Sop, what else caused our problems? That is where the second claim, that Bush is at fault, come into the picture. Bush, as with the last item, the Democrat claim is not the whole picture. You see, Bush is to blame, but so is Clinton, and Carter, and Nixon, and Wilson. The problem, you see, is our "managed" currency, and the government tendency to finance its deficit through monetary inflation. A practice which, since the creation of the Federal Reserve System, leads to massive, nationwide economic distortions. In this case, thanks to the contributing factors of the CRA, the deflationary crash hit the housing market and financial institutions, in the 90's it hit the tech market, at least until Clinton inflated even more and postponed the inevitable crash. Why? Because the tech market was where the extra money went, bidding up stocks to absurd heights. (VA Linux shot up from $3 to $300 per share in a short period, only to crash to under a dollar and vanish.)

So, why did the current crisis strike the housing and lending markets? And what role did inflation play apart from the CRA in causing the boom and crash?

Because, even without the Community Reinvestment Act or EHOC, inflation alone would cause unsound investments to be made. In the early stages of inflation, when prices do not yet rise as fast as the money supply increases, we end up with, effectively, a surplus of money. This leads to the many economic distortions that people mistake for the "benefits" of increasing the money supply. With excess money on hand, people tend to invest and save more, and so the banks find themselves with a surplus of funds to lend. This causes both things we saw in the recent past, an overall decrease in interest rates and a tendency to grant riskier loans than would previously have been made. In fact, as the surplus of money seeking a home increases more and more risky loans will be made, as the surplus of funds will have long ago exhausted all viable loans to traditional borrows, leaving only riskier loans as possible investments of the bank's funds.

And that alone could have caused all the ills we see around us, without even a hint of "predatory lending" and other nonsense, and even had we never enacted the CRA. Of course, the many government interventions into the housing market did not help. Their choice to subsidize home loans through Fannie and Freddie helped to create the crisis, as did the artificially low interest rates they maintained both through inflation and through policy. The CRA only served to make things worse by causing investors to grant even more subprime loans than the inflationary climate would have caused. But without any of those influences, inflation alone would have caused the same problem.

And so, to a degree the Democrats are right, though not in the way they think. Bush is to blame, for his attempts to inflate his way out of a problem. But so are Clinton and Carter and Nixon. In fact, the only post-Fed president I can think of who wasn't to blame is Reagan, who insisted on borrowing in the capital markets rather than inflating to finance any budget shortfalls. So the Democrats may not want to crow quite so much about how Bush is to blame. They still did back Fannie, Freddie and the CRA long after the problems became obvious to everyone, and they inflated every bit as much as Republicans. And when it comes to the underlying reason for most of our inflation, deficit spending, I don't think either party can claim clean hands.

But certainly the party proposing two or three trillion dollars in "economic stimulus" is going to have a hard time calling the other party big spenders.

UPDATE: I originally posted this without the intended links. I have since added the links I had hoped to include in the original.

POSTSCRIPT

As I have had to hunt through my links for many of these, here is a list of all my posts on the topic:

And you got rich?
A Quick Thought On The Housing "Crisis"
Two Perspectives
Inventing a Crisis
Inventing a Crisis II
Inventing a Crisis III
And Here It Comes Again
To Correct Debra Saunders
Another Thought on the Housing "Crisis"
Hooray For Phil Gramm!
Confirmation
I Hate Election Years
If We Took Them Seriously...
The Crisis Ratchet
Hooray For Debra Saunders!
Maybe It Isn't a Crisis After All
Quick Economic Update
An Unfortunate Consequence
Bringing Some Good Out of Our Financial Problems
Direct Your Anger Properly
Some Brief Thoughts on the Bailout
Living Beyond Their Means
A Question
Face The Music, Don't Try to Buy Votes
A Final Comment on the Futility of a Bailout
A Question For Republican Politicians
$700 Billion?
Asking Yet Again
Clarification of My Opposition to the Bailout
Greed
A Little More On CEO Salaries
Greed Part 2
A Bit Disappointed
Laughable Talk About the Bailout
A Short Question
The Excuse Making Begins
More Bad Excuses
More Bad Excuses II
Well, It Was Bound to Happen...
Repeating the Errors of FDR
One More Senseless Defense
Doing Nothing
A Question
Economic Question
It Is Ending Already 
How Does That Work?
It Is Nice To Get Confirmation
Are You Serious?
I Think I Finally Got It, and... Eh
And the Excuses Begin
Things You Won't Hear on the News Until Wednesday
Our Financial Problems
Critique of Krauthammer
I Must Keep Asking
Monetary Issues Made Simple Part I
Et Tu, Town Hall?
Thanks For Saving My Stocks
More Confirmation
Perception and Reality
Crisis?
And Still More Confirmation
Monetary Issues Made Simple Part II
Silly Panic
Apparently I Was Not Alone
Hair of the Dog?
More Bailout Silliness
Playing Cassandra
John Stossel Imitates Me
Brief Comment
Remember I Predicted It
Microloans and the Community Investment Act
Walter Williams Imitates Me
Impatience
Experts and Unintended Consequences
An Analogy
Economic Illiteracy
Excuse Me?
The Reagan Lesson
Congressional Madness
One More Disturbing Quote
CNN's Keynesian Nonsense
Nationalization Rumors
A Question of Numbers
A New Solution?
Why?
I Should Not Watch Financial News
Can We Stop Now?
Beware When Politicians Agree
Government as Indulgent Parent
The Real Reason for the Bailout
An Unnamed Source in Doug MacKinnon's Piece Imitates Me and I am NOT Flattered
Revisiting Old Thoughts on Our Economic Situation
Well, Some Get It
I Wonder
An Analogy From Past Inflation
Perception and Inflation
How To Continue the Economic Problems
Another Bad Idea
Pointless or Destructive
John Stossel Imitates Me Again
Thomas Sowell Imitates Me
Making Lemonade
Continuing to Repeat Errors
Why"Negative" Economic Indicators Are A Good Thing
Recipe For Disaster

I may have missed one or two (and skipped most articles on protectionism, even if they were related to this financial situation), but I think I got all the highlights.