Schooling the OWS School Children

UPDATE: below

Conn Carroll in the November 10th Washington Examiner observes the Occupy Wall Street protesters don't know history, as demonstrated by (hyperlinks added):

the uproar New York Mayor Michael Bloomberg caused last week when he criticized Occupy Wall Street's view of the financial crisis.

Bloomberg said:

it was not the banks that created the mortgage crisis. It was, plain and simple, Congress, who forced everybody to go and give mortgages to people who were on the cusp. ... They were the ones who pushed Fannie and Freddie to make a bunch of loans that were imprudent, if you will.

The usual suspects on the left went crazy. The New York Times Paul Krugman called Bloomberg an "ignoramous," citing liberal blogger Mike Konczal's Fannie defense:

"The first thing to point out is that the both the subprime mortgage boom and the subsequent crash are very much concentrated in the private market ... [Fannie and Freddie] were not behind them," Konczal said.

Is Konczal right? Are Fannie and Freddie innocent of causing the mortgage crisis?

This we do know: Thanks to the widespread belief that the federal government would bail them out, Fannie and Freddie were able to borrow money at below-market interest rates.

This gave them a significant competitive advantage over private-sector firms which, by 1992, the two government-backed corporate entities had turned into an almost 70 percent share in the mortgage securitization market. [NOfP note: in the summer of 2010, more than nine of every ten new mortgages were backed by Fannie, Freddie or other GSEs.]

That same year, at the direction of the Congress, the Department of Housing and Urban Development began setting "affordable" mortgage goals for the agencies. . .

From 1992 through the height of the housing bubble, Fannie Mae and Freddie Mac used their monopoly position in the mortgage securitization industry to reward firms like Countrywide for making bad bets in the housing market. Countrywide's success was a signal to other market participants to lower their standards as well.

Wall Street banks are not blameless for the financial crisis. But they were only responding to the incentives set up by the federal government. Ignoring this history will help no one.

Agreed--if anywhere, the OWS crowd should be hectoring Capitol Hill.

MORE:

The Wall Street Journal says "The Housing Lobby Strikes Again":

It took a $142 billion taxpayer bailout to convince the Obama Administration to pledge in February to wind down Fannie Mae and Freddie Mac, rein in the Federal Housing Administration and encourage the revival of a private mortgage market. So it's distressing to see Congress move in exactly the opposite direction less than a year later, with the quiet approval of the White House.

While cable TV is chasing the trivia of Fannie and Freddie bonuses, the real news is that late Monday a bipartisan Congressional committee announced an agreement to increase FHA's maximum mortgage limits to $729,750 from $625,500 through Dec. 31, 2013. The bill is linked to a continuing resolution to fund Congress past Saturday, increasing the likelihood that this backroom deal will become law. The House is scheduled to vote on the bill today without debating these changes, in what ought to be an embarrassment to Speaker John Boehner and Majority Leader Eric Cantor.

The National Association of Realtors is lauding this idea as great for housing "stability," by which it means that the taxpayer subsidies for its industry will keep coming, even for fancy homes.

See also Rep. Darrell Issa's House Oversight Committee report (Executive Summary at 1):

When the bubble burst in 2007, Fannie and Freddie began to lose billions of dollars of investments in mortgage-backed securities (MBS) guarantees. In September 2008, the Federal Housing Finance Agency (FHFA) took Fannie and Freddie into conservatorship as a result of mounting losses stemming from the financial crisis.The Enterprises became de facto government entities, funded by preferred stock purchase agreements from the Department of the Treasury (Treasury). Today, the Enterprises remain a multi-billion-dollar drag on the federal government’s finances. Since they entered conservatorship, Treasury has provided $169 billion to Fannie and Freddie - and the payouts are scheduled to continue with no end in sight. According to recent FHFA projections, by the end of 2014, Treasury assistance to the Enterprises will total $220 billion to $311 billion.

MORE & MORE:

Peter Wallison in the November 23rd USA Today:

In 1992, Congress adopted legislation that imposed "affordable housing" requirements on the GSEs. These required that 30% of all mortgages they bought from lenders had to be made to low- and moderate-income home buyers — borrowers who were at or below the median income in their communities.

Over the next 15 years, the federal Department of Housing and Urban Development -- pushed by Congress -- tightened and expanded this quota so that, by 2007, 55% of all mortgages the GSEs acquired had to be made to low- and moderate-income borrowers, including 27% to those below 80%.

The GSEs could find good mortgages at the 30% quota, but when it went higher they had to reduce their underwriting standards. By 2002, to meet the quotas, they had bought at least $1.2 trillion in subprime and other weak loans.

By 2008, just before they became insolvent, they and other government-controlled institutions held or had guaranteed 19.2 million loans, over 70% of the 27 million outstanding. In other words, the government's housing policies created the demand for these destructive loans.

What was banks' role? It wasn't until 2002 that Wall Street issued over $100 billion in securities backed by subprime or other weak loans. Recall that by this date, the GSEs had bought over a $1 trillion. The banks' number grew so that, by 2008, there were 7.8 million low quality mortgages backing bank-issued securities — less than 30% of the 27 million.

Given these numbers, it's obvious that blaming the banks for the financial crisis is simply a way to cover up a huge government error.