Author: Anthony Labarga
For some time now, we have been witnessing a wave of protest and civil disobedience, which has come to be known as the Occupy movement. Our friends with the signs and tents are protesting what they perceive to be the root of the financial crisis: corporate greed. Unfortunately, this conclusion stems from a misunderstanding of the housing bubble. It was the government, not the banks, which initiated the emergency.
The central premise of the Occupy movement is that banks investing in mortgage backed securities caused the recent panic. The activists claim that due to their financial clout, the banks are able to prevent the government from stopping the banks’ “reckless” behavior. There seems to be disagreement over where the panic came from, with some members of the movement saying that the banks lost control of the financial system in their quest for profit, and others saying that they intentionally created the panic to reduce civil liberties. In terms of a solution, the protesters take a populist stance. The world, they say, is under the control of a few financial aristocrats, against whom the masses must rebel. They are occupying Wall Street to show that they will no longer tolerate economic elitism in America. They hope to effect some form of re-organizational revolution, which will change the fabric of the global economy.
The protesters are misguided because the panic didn’t happen that way.
The panic can be traced to the 1990s, when Fannie Mae and Freddie Mac were directed by the Department of Housing and Urban Development (HUD) to make at least 50% of all their borrowers individuals who could only qualify for subprime mortgage rates. Subprime mortgages are those which are not granted the “prime,” or lowest, interest rates. These mortgages are more volatile than prime-rate mortgages because the lower a borrower’s income, their payments are more susceptible to disruption. These mortgages are riskier to grant on average, and banks charge a higher interest rate to compensate for this risk.
The purpose of HUD’s action was to increase home ownership, which many have come to believe to be a right of an American citizen. In reality, this behavior was pushing the housing market far out of line with the financing to support it. This rapid expansion of housing credit to subprime borrowers caused the housing bubble.
Mortgage backed securities came from the need to reduce the riskiness of these subprime mortgages. By packaging them with prime mortgages and selling them to investors who otherwise refused to buy the subprime mortgages, banks could make the mortgage groupings more stable, since the subprime mortgages typically composed a minority of the associated securities. While in hindsight this was certainly ill-advised, it should be noted that the banks did this to reduce the riskiness of owning these securities, not as part of an evil plan to bring down the global financial system.
The government’s attempt to boost housing ownership succeeded in raising ownership by a few percent, but it also created a whole class of people who were living in homes that they couldn’t afford. When these people began to default, they did so much faster and in much greater quantities than was expected by the bankers who assembled the mortgage backed securities, which became unstable. The crash followed.
Therefore, the banks did make a series of poor decisions but it’s crucial to understand that they didn’t start the fire. The root of the problem which is being is actually Uncle Sam himself, and his myopic policy. The economy metes out goods based on income and willingness to pay, and attempts to fool it with subsidies and directives are hubristic. You can outrun the market for a little while, but the market will always catch up. We will always see a bubble and a crash whenever we decide that everybody should have access to something. This moral of the panic is this: the economy is not a bellboy.
Don’t occupy Wall Street, occupy Pennsylvania Avenue. Bureaucrats and politicians foolishly intervened in the otherwise functional housing market, and they must be held accountable. The banks took the economy for a wild ride, but the potholed road was built by the government. More regulation, which is what the Occupiers say is the solution, would achieve nothing because the banks weren’t the primum movens anyway.
There is 1% of the population deciding what happens to you. They hold the power, and they can confiscate your future with the stroke of a pen. They sit in their offices, ignorant to what effects their decisions will have on you. They are your bureaucracy. They are your government agencies, wholly unelected cronies insulated by their pensions from your problems. Let them hear you.
Anthony LaBarga is a junior Economics major. He can be reached at labarga@oxy.edu.
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