Occupy Wall Street and the lie that powers it

Are you as dumbfounded as I am at the incredible lack of knowledge of Occupy Wall Street people?? Here's a reminder of what I mean.

They have bought into the same false story about the causes of the financial crisis. According to this story, the financial crisis and the following deep recession was caused by a reckless private sector driven by greed and insufficiently regulated. Now, of course, having bought into this fairy tale, the people are angry at Wall Street and bankers rather than at the government.

Their anger should be directed at those who developed and supported the federal government's housing policies that were responsible for the financial crisis. Here's the history behind it, according to The Wall Street Journal.

Beginning in 1992, the government required Fannie Mae and Freddie Mac to direct a substantial portion of their mortgage financing to borrowers who were at or below the median income in their communities. Once again, the heart triumphed over the head. A noble sentiment--to help the poor get better housing. The original legislative quota was 30%. But the Department of Housing and Urban Development was given authority to adjust it, and through the Bill Clinton and George W. Bush administrations HUD raised the quota to 50% by 2000 and 55% by 2007.

When more than half of the mortgages Fannie and Freddie were required to buy were dealing with people in shaky financial shape, these two government-sponsored enterprises had to significantly reduce their underwriting standards. You can tell where this was going to end up.

Fannie and Freddie were not the only government-backed or government-controlled organizations that were enlisted in this process by the government. The Federal Housing Administration was competing with Fannie and Freddie for the same mortgages. And thanks to rules adopted in 1995 under the Community Reinvestment Act, regulated banks as well as savings and loan associations had to make a certain number of loans to borrowers who were at or below 80% of the median income in the areas they served. The government's heavy hand was at work.

Research by Edward Pinto, a former chief credit officer of Fannie Mae (now a colleague of mine at the American Enterprise Institute) has shown that 27 million loans—half of all mortgages in the U.S.—were subprime or otherwise weak by 2008. That is, the loans were made to borrowers with blemished credit, or were loans with no or low down payments, no documentation, or required only interest payments. Wow, a disaster in the making.

Of these, over 70% were held or guaranteed by Fannie and Freddie or some other government agency or government-regulated institution. Thus it is clear where the demand for these deficient mortgages came from--our own government, not private banking or Wall Street.

The private financial sector must certainly share some blame for the financial crisis when it got involved, but it cannot fairly be accused of causing that crisis when only a small minority of subprime and other risky mortgages outstanding in 2008 were the result of that private activity.

The fairy story that came out of these events—largely propagated by government officials and accepted by a credulous media (are any of you surprised by that?)—was that the private sector's greed and risk-taking caused the financial crisis and the government's policies were not responsible. This tale led to the current situation-- the occupation of Wall Street. Now Obama and his ilk cheer on these protestors in the hopes the American people can be duped once again to blame the wrong source of their problems.