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  • Everything you thought you knew about the 2008 financial crisis is wrong.

  • If youre a reasonably well-informed American—a reader of the main stream mediayou 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 biggest 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 ***

  • 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 very 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

  • 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.

Everything you thought you knew about the 2008 financial crisis is wrong.

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