From TruthOut
By Dean Baker

For the last month, most of the world has been watching the Wall Street gang drowning in their own greed as they threaten to pull the rest of us down with them. However, while we have been distracted, the Flat Earth Society has developed its narrative to explain the crisis.

In the Flat Earth version, the real villains in the story were the public/private mortgage giants Fannie Mae and Freddie Mac. Prominent Congressional Democrats like Senators Charles Schumer and Chris Dodd, and Representative Barney Frank, are cited as accomplices. According to the Flat-Earthers, the problem wasn’t sleaze bag bankers pulling down tens of millions a year pushing predatory loans to people who didn’t understand them; the real problem was Congressional Democrats, who wanted the government to help the poor and minorities buy homes.

Before addressing the Flat Earth argument, I should be very clear that I have long been a harsh critic of Fannie and Freddie. They committed a colossal mistake by failing to recognize the housing bubble. It is understandable that you could miss an $8 trillion housing bubble if you drive a bus or sell shoes for a living. It’s a little harder to accept this sort of mistake from companies that own or guarantee trillions of dollars of mortgage debt.

I first warned that the collapse of the housing bubble would lead to serious problems for Fannie and Freddie in the fall of 2002 , before they began to move into the risky mortgages that were the immediate cause of their collapse. When almost all you own is mortgage debt, and the mortgage default rate rises to several times its normal level, it is virtually guaranteed that you’re going to face serious problems. Obviously, Fannie and Freddie’s venture into more risky mortgages in the years 2005 to 2007 worsened the problem.

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