just received an e-mail from a friend which starts by asking if I recognize the date: January 3, 2007?  I do of course. It was the date on which the people woke up, recognized what a disaster the previous six years had been, and elected a Democratic Congress for the first time in almost 20 years.

It was too late to prevent the worst economic collapse since the depression. It was however in time to prevent that collapse from destroying ours and the worlds economy.

The person who wrote the e-mail then claims that the recession was the fault of the democrats in Congress.. He doesn’t need to read history to know that this isn’t true. I am sure he, like most of us, lived through it.

I would ask him if he remembers January, 2000? That is the date when the Republicans took control of both house of Congress and the White House. In that year and for even a few years before the seeds of economic disaster were being sown.

Not many people recognized this, although many economist and investors began to warn of our impending peril.  Federal Reserve chairman Allan Greenspan did not recognize the danger. He did testify that there were a lot of little bubbles. In 2007 he finally recognized that the bubble reached its breaking point in 2005.

Real estate prices rose at different rates in different parts of the country and some parts saw no or little increase. For example while the rate of appreciation in Los Angeles began in the late 1990’s the bubble did not begin in Las Vegas until 2003. Housing prices rose steeply beginning in 1996 and peaking in 2005.

In mid 2005 Greenspan testified that “it is hard not to see that there are a lot of local bubbles”. Even President Bush noted in early 2006 that “if houses get too expensive people will stop buying them.

In May 2006 (only four months after the Democrats got control of Congress) Forbes Magazine wrote that “the great housing bubble has started to deflate”. 2006 market data shows that lower sales, rising inventories, falling median prices, and increased foreclosure rates show that the correction in the US housing market began in late 2005 and continued through 2006 resulting in the recession that all economist agree began in Dec 2007 and ended in June 2009.

The causes of the real-estate bubble (with the benefit of hindsight) were the low interest rates fixed by the fed, the easy credit, the increased  number of sub prime and no doc loans and the increased number of adjustable rate mortgages.

The tremendous increase in home prices from 1997 to 2005 had other effects on the economy. In 2005 1,283,000 new homes were built compared to 600,000 in the early 90’s. Mortgage equity withdrawals grew considerably. In 2005 homeowners extracted 750 billion dollars of equity from their homes up from 106 billion in 1995.

The United States housing market correction

* Comparison of the percentage change in the Case-Shiller Home Price Index for the housing corrections in the periods beginning in 2005 (red) and the 1980s–1990s (blue), comparing monthly CSI values with the peak values immediately prior to the first month of decline all the way through the downturn and the full recovery of home prices.

NAR chief economist David Lereah's explanation, "What Happened", from the 2006 NAR Leadership Conference[78] Boom ended in August 2005 Mortgage rates rose almost one point Affordability conditions deteriorated Speculative investors pulled out Homebuyer confidence plunged Resort buyers went to sidelines Trade-up buyers went to sidelines First-time buyers priced out of market

All of the economic problems that led to the recession were in place by 2005, before the democrats gained control of Congress. Fortunately they were there ready to work with President Bush when he finally began dealing with the problem in 2007. The Emergency Economic Stabilization Act (TARP) was enacted with 172 Democrats and 91 Republicans voting yes. 108 Republicans voted against their President and his Secretary of the Treasury. Does any one remember Hank Paulson on his knees begging the Congress to pass this bill?

It is fortunate that the Democrats didn’t stonewall President Bush the way the Republicans are now stonewalling President Obama. If this act had not passed every major US bank would have had to dissolve,  the FDIC would have been wiped out and ours and the worlds economy would have been destroyed.

I don’t think the recession can be blamed on Democrats or Republicans. Very few people in either party, and very few in the country, saw what was about to happen. The major banks, the investment houses, Fanny Mae and Freddy  Mac, the mortgage originators, AIG, Moody’s, Standard and Poor and the people taking out mortgages they could not repay, all contributed.

Perhaps better government regulation and the Federal Reserve might have been able to prevent it. It is always easier to see things in hindsight.