The Occupy Wall Street movement has gotten plenty of press and I've sometimes wondered what I can add to the conversation. But I've decided that it is worth echoing that they are pointing in the right direction regarding how we got into the economic mess we're in. To hear many conservatives tell it, the 2008 financial crisis was caused by the Community Reinvestment Act (CRA), Fannie Mae, Freddie Mac, and ACORN. There is a huge analytical problem with this narrative, though: the financial crisis was a change in outcome, and these supposed wrongdoers had all been around for decades. If the cause doesn't change, it can't be the cause of a changed outcome. We have to look somewhere else for what changed.
The CRA was passed in 1977. Fannie Mae was founded in 1938. Freddie Mac was founded in 1970. The ACORN Housing Corporation, now known as Affordable Housing Centers of America, was founded in 1986. Their existence cannot be what caused a financial crisis 22 years after the last of them (and 70 years after the first of them) was founded. Something had to change.
What changed, of course, was bank regulation and securitization. Laws keeping banks from taking on excessive risk, like the Glass-Steagall Act, were targeted by financial firms and eventually repealed. During the housing boom, private loan originators chopped up mortgages into mortgage-backed securities (MBS), and these mortgages had much greater delinquency and default rates than the ones Fannie and Freddie issued. (F&F did buy some of these securities, but they were not the main player even in that role.) As David Min shows (h/t Paul Krugman), even the riskiest of F&F loans had "serious delinquency" rates in the 2nd quarter of 2010 of under 10.5%, whereas subprime mortgages had a serious delinquency rate over 28%. Private actors got the rules changed in their favor, and dramatically increased their risk-taking to earn huge personal incomes, and the taxpayer bailed them out when it all went bust.
This brings us back to Occupy Wall Street. In the group's "Declaration of the Occupation of New York City," we see that OWS identifies the problem as corporations running government and subverting democracy. As Robert Creamer points out, for OWS politicians are only the problem insofar as corporations (especially on Wall Street) control them. The repeal of bank regulation came about through a decades-long campaign based on political contributions and influence by Wall Street firms. This process is what the Occupy Wall Street manifesto highlights. Occupy Wall Street puts the spotlight on private sector power and greed and demands a change. OWS's manifesto also points out the efforts of corporations to take away employee rights and to use outsourcing to reduce pay and benefits. In a future post, I will discuss the decline of real income in much more detail. It has led to a greater need for two-income families, and then an increase in family debt, in order to maintain a standard of living that was possible on one middle-class income in the 1970s.
I'll close for now with some words from one of my favorite books, Charles Lindblom's Politics and Markets (1977). They could easily have been in the Occupy Wall Street manifesto: "The large corporation fits oddly into democratic theory and vision. Indeed, it does not fit."