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Charles Gray rightly bemoans the influence of the “recency effect” in describing the Occupy Wall Street phenomenon. Unfortunately, his simplistic explanation of the housing collapse falls victim to what one might call the “Mencken corollary,” which states that “for every problem there is an explanation which is simple, clean … and wrong.”

Fannie Mae and Freddie Mac did indeed play a role in the explosion of housing values. However, the utter collapse of the world financial economy (the collapse currently squeezing employment prospects) resulted not from anything Freddie and Fannie may have done but from a combination of utter corporate greed and a failure of government authority.

Initially, the government influenced some lenders to be less stringent on loan requirements. dHowever, in very short order, unaffected lenders and newly created mortgage companies began lending money to anybody that could fog up a mirror with their breath. Companies like Countrywide did this not because the loans were guaranteed by the government (most weren’t), but because they knew they could make a fortune charging fees and then sell the loan to someone else within a matter of few weeks. High return … no risk. Eventually, mortgagors were selling loans minutes after they were finalized. But who would buy a loan knowing it might not be paid off?

That would be another company that wanted to pocket some fees and then sell the loan to yet another party. Risky loans were sold numerous times, with financial institutions raking in fees off the top then selling the loan to avoid risk. But surely this daisy chain had to end somewhere? Eventually each loan was cut up into tiny pieces, packaged with other pieces of other loans and sold to various investors as a mortgage-backed security. Rating institutions were either incompetent or bought off, because they rated such securities as good investments, even though they were hopeless form the start.

The final piece of the scam came from companies like AIG. Even the dumbest investors wanted insurance on these shoddy investments. But financial regulations required the insurance companies to hold a certain amount of money to pay claims if necessary. To avoid that very reasonable regulation, companies invented something called a credit default swap. A CDS was a form of insurance, but because it had a different name, it could be sold without having any capital in reserve. When the house of cards fell, insurance companies had no money to cover the CDS, and millions of people across the world lost everything they had. Didn’t you ever wonder why American taxpayers gave hundreds of billions to AIG, which is basically an insurance company?

The housing bubble and collapse may have been partly influenced by too much government involvement. The economic crisis is different and the two should not be confused. The economic collapse was caused by corporations that took too much risk, created junk securities, invented phony insurance coverage and knowingly sold a shoddy investment to people and institutions around the world. It was a result of business and finance gurus who measured profit against ethics and decided money was much more fun.

When it comes to Occupy Wall Street, do not be deceived by Gray’s simplistic and self-serving explanation. This crisis is not a result of too much government influence. It is a result of too little and largely ineffective oversight by government. Government failed to secure the interests of the people because many like Gray have worked hard to convince Americans that government regulation is a problem rather than a safeguard. His closing comment could not possibly be more ludicrous.

He suggests we ignore Occupy Wall Street in favor of a message touting the “values of individual responsibility and virtue that made our country great”? What a joke. If American corporate interests had shown any kind of responsibility or virtue, we wouldn’t be in this mess.

John LaVoy
Educational Opportunity Center

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