Everything you thought you knew about the 2008 financial crisis is wrong
If you’re a reasonably well-informed American—a reader of the main stream media—you probably
think that the 2008 financial crisis was caused by insufficient regulation of the financial
system and greed on Wall Street.
Pelosi: “…the ramifications of the risk taking and the greed of these financial institutions.”
In the second presidential debate in 2008, Obama said that the financial crisis was caused
by deregulation.
Obama: “The main problem in this whole process was the deregulation of the financial system.”
And McCain blamed the government’s housing policy.
Obama won the election, and his narrative about the crisis prevailed.
There was never any serious debate, as the media immediately accepted the idea that lack
of regulation and greed on Wall Street were the reason for the financial crisis.
Chris Matthews: “What is going on in New York?
Do they just not give a rat’s ass about what the American people think?”
The financial crisis was actually caused by the government’s housing policy, principally
the adoption of the Affordable Housing Goals in 1992.
These required Fannie Mae and Freddie Mac—two large government-backed mortgage companies
that dominated the mortgage market—to meet a quota when they bought mortgages from banks.
At first, the quota was 30 percent.
When Fannie and Freddie bought mortgages from banks, 30 percent of the mortgages had to
be made to borrowers below the median income where they lived.
But the Department of Housing and Urban Development, HUD, was given the authority by Congress to
raise the quota, and in gradual increments HUD raised the quota to 50 percent by 2000
and to 56 percent in 2008.
In order to meet this quota, Fannie and Freddie had to reduce their underwriting standards,
because it was not possible to find enough prime mortgages among borrowers below the
median income.
By 1995, Fannie and Freddie were accepting mortgages with 3 percent downpayments, and
by 2000 mortgages with no downpayments at all.
Because Fannie and Freddie were the dominant players in the housing finance, those reduced
standards spread to the general market.
By 2008, 56 percent of all mortgages outstanding in the United States were subprime or otherwise
risky.
And of these, 76 percent were on the books of government agencies, principally Fannie
and Freddie.
This shows, beyond question, that it was the government that created the demand for these
mortgages.
If we don’t understand what caused the financial crisis, we will stumble into another one.