As you know it's very fashionable to lay the blame for the financial crisis on greedy Wall Streeters (especially if you are a politician or work in Hollywood or spend your days occupying something) but as I've pointed out in the past the government is largely to blame for the mortgage crisis. It just never made sense to me how banks could profit from making bad loans or how allowing people to live in better homes than they could afford and then letting them live there for years without making their mortgage payments was somehow predatory. This kind of tomfoolery could only originate with the government.
Now a new book has come out that makes this same case: Fannie Mae and Freddie Mac: Turning the American Dream into a Nightmare. In this week's Barron's Gene Epstein wrote an interesting review of Oonagh McDonald's book in which he highlights some of the book's key points and extracts these great quotes:
A large slice of the blame must go to Fannie Mae and Freddie Mac...But above all it was the distortion of the banking sector to achieve political ends that ultimately caused the crisis...Politicians, with their unthinking political stances, must…take the lion's share of the responsibility. The vast subprime market…was the child of the affordable-housing ideology.
When it all went wrong, politicians both in the U.S. and elsewhere sought to deflect attention from their own actions by...attacking and blaming the banks. Of course, many of the banks played their part as well, but the prime responsibility is a political one of seeking to increase homeownership at any price.
The author lays the blame on both the Clinton and Bush administrations so there are no partisan politics at work here.
Gene Epstein goes on to point out that, starting in 1996, the Department of Housing and Urban Development required Fannie and Freddie to buy specific percentages of low and moderate income family mortgages, starting at 40% and rising to 57% in 2008. According to Epstein, "Over a 16-year period, the U.S. government promoted subprime and other nontraditional mortgages, degraded mortgage-underwriting standards, and caused both the mortgage meltdown and the global financial crisis that resulted from it."
I also ran across this interesting overview of Fannie Mae's and Freddie Mac's role in the financial crisis in Investopedia. It's certainly worth skimming at least but they pretty much make the same case as Oonagh McDonald and Gene Epstein.
If you follow the money I think it will lead you to where the stink is for this crisis. Doesn't it make sense that the center of the universe for this mortgage crisis would have the biggest black money hole, still echoing the sound of the big bang? Well, the taxpayers have pretty much recovered all their bailout money from all the financial institutions, including AIG, but the two institutions that are still in the hole and owe the taxpayers $142 Billion dollars are.....guess who.