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Apparently, with the $700 billion-plus “bailout,” the government is our savior. But, while the required bailout is possible only with government backing, such action is in reality necessary because of the government. Over the last decade, it has fired enough torpedoes to critically damage the ship and now comes to the rescue of the passengers.

To be sure, the current crisis results from the lower lending standards of banks searching for more mortgages and greater profits. But expansion was not possible without three governmental supports -- cheap money, risk transference and political complicity.

Early this decade, the anti-recession Federal Reserve reduced interest rates to historical lows and kept them there for too long. Borrowing cheaply, home buyers and investors fostered the demand that kept U.S. home prices steadily rising. Low rates also allowed banks to offer minimum cost introductory structures thus attracting even more buyers (sub prime borrowers).

Supporting this growth was the “securitization” process. Mortgages combined into securities were sold to institutional investors seeking higher, but still safe yields. The theory behind securitization is that while gauging the default probability on one mortgage is difficult, defaults in a large number of mortgages is statistically estimable; thus, pricing is possible. Government approved agencies gave these securities high ratings (low risk).

Finally, quasi-government institutions such as Fannie Mae, offering sub prime mortgage structures to the masses, were wholeheartedly supported by powerful politicians. No regulatory authority at any level questioned the risk. Indeed, some regulations even mandated mortgages to sub prime borrowers. Politicians of all stripes took credit for expanding home ownership

When Fed policy changed to higher interest rates to counter inflation, it triggered adjustments to all low introductory mortgages, causing defaults, foreclosures and home price deflation. The same agencies that gave high ratings to the mortgage backed securities now lowered the ratings of institutional owners of these securities. Government supported “mark to market” accounting rules forced firms to further reduce the value of these illiquid securities. The politicians, of course, blame Wall Street greed, call for more regulation and never admit to one iota of culpability.

Eventually, the bailout will help clean up bank balance sheets and restore health to the financial system. But don’t thank the government and beware of torpedoes.