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 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.