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The Real Victim of the Great Credit Crunch

NEW YORK ( TheStreet) -- The Federal Reserve's survey on wealth, released earlier in the week, is real evidence that the "Great Credit Crunch" caused pain on Main Street while Wall Street was bailed out.

In my opinion, Federal Reserve policy influenced this great divide.

The Federal Reserve survey on wealth shows that the median net worth of an average American family plunged by $49,100, or 39%, from $126,400 to $77,300 between 2007 and 2010.

This takes the wealth of the average U.S. family to its lowest level since 1992. The "Great Credit Crunch" thus destroyed 18 years of gains in net worth. Leading this dramatic decline was the housing market. There was a 42.3% loss of equity in Americans' homes.

Wall Street and the larger regional banks helped create the euphoria that owning a home was easy and affordable. The greed on Wall Street resulted in the creation of mortgage-back derivative securities, because the sum of the parts, from a basket of mortgages that were sliced and diced, is worth more in trading profits than the whole of the original mortgages.

Community banks were not involved in these mortgages that turned toxic, but they did participate in the bubble by lending way too much money to homebuilders and developers creating a glut in new communities and new homes.

There are thousands of incomplete communities around the country.

As I have shown in previous stories, community banks extended construction and development loans, and other commercial real estate loans in excess of regulatory guidelines.

Instead of monitoring this risk, banking regulators ignored it as the banking system was booming with profits.

Then the housing bubble popped, mortgage securities became toxic and the credit markets froze over. The "Great Credit Crunch" shocked the U.S. Treasury, the Federal Reserve and the Federal Deposit Insurance Corp. Toxic assets were clogging the arteries of the banking system.

The solution, according former Treasury Secretary Hank Paulson, was the $700 billion Troubled Asset Relief Fund, which was supposed to buy the troubled assets from Wall Street and regional banks.

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