How Government Stoked the Mania

The fall in housing prices did lead to a sudden increase in defaults that reduced the value of mortgage-backed securities. What's missing is the role politicians and policy makers played in creating artificially high housing prices, and artificially reducing the danger of extremely risky assets.

Beginning in 1992, Congress pushed Fannie Mae and Freddie Mac to increase their purchases of mortgages going to low and moderate income borrowers. For 1996, the Department of Housing and Urban Development (HUD) gave Fannie and Freddie an explicit target -- 42% of their mortgage financing had to go to borrowers with income below the median in their area. The target increased to 50% in 2000 and 52% in 2005.

We've been saying all along that Congress, not the free market, is the root cause of the subprime mortgage mess. Russell Roberts agrees and explains how the politicians regulated the banks, using Fannie and Freddie as fulcrums, into the abyss. Politicians are loathe to admit it, however, and prefer to blame "greedy" Wall Street and the "unregulated" free market.