There is much buzz out there about how Wall Street greed is to blame for the economic mess we find ourselves in right now.  I don’t happen to think that is accurate.  About the only thing Wall Street is guilty of is perfectly following the rules they were given to make a profit.  And isn’t making a profit what they are actually supposed to be doing?  If placing blame is the objective, you might have to look a little deeper.

Speaking of rules, maybe that is a good place to start.  Many years ago our government leaders decided that it would be a good idea if “everybody” could own a home.  At that time, most everybody who could afford to own a home already had one because they realized the long term benefits of home ownership and they could afford to pay a mortgage.  They had to use some creativity to achieve their goal.

These government leaders made a fundamentally flawed decision to begin a process of forcing banks and lending companies to lower the standards that had to be met to qualify for a loan in order to expand the pool of homeowners.  Pretty soon after doing this they realized that private investors were not too excited about creating mortgage instruments that supported such a high risk borrower.

So, these government leaders decided to use their rule making power to further interfere with the mortgage markets and they turned to Fannie Mae and Freddie Mac to back these high risk mortgages that they had forced lenders to make.  Now our government had the complete package in place and we had begun our journey to the place we find ourselves today.

The fact that lenders were forced to meet quotas for high risk loans was startling enough.  But it really got crazy when Fannie Mae and Freddie Mac were given special accounting rules and the ability to borrow money from the treasury at discounted rates.  This created an unstoppable machine that put billions of dollars of government backed mortgages in the hands of people who had no capacity to pay it back.  Our journey was now well under way.

What was Wall Street’s involvement?  Well they certainly didn’t create this bad loan machine.  But they were needed by Fannie and Freddie to buy the exotic mortgage instruments that they had been empowered to create.  Without investors to buy their sliced and diced mortgage backed securities, Fannie and Freddie could not complete the mission.

A rate of return was established for these mortgage backed securities that was high enough that Wall Street, and the rest of the global investment world for that matter, took a seat at the table and loaded up with these seemingly lucrative deals.

Then, about two years ago, the trouble began.  People began to default on some of these loans. Fast forward to today and we have discovered that any private company who drank from the Fannie and Freddie cup of mortgage backed securities is getting very sick.  Some have ceased to exist.  Others had been rescued in an attempt to stop the spread of panic that could do extensive damage to an already weakened economy.

The problem with this whole mess is that the idea of market based risk and reward was replaced with government backed risk and market driven reward. No one should be too surprised with the notion that people will seek much higher reward when risk is implicitly assumed by someone else.

The problem is those who assumed the risk are you and me.  We didn’t agree to assume it.  At least not directly.  Those who we elected to lead our country assumed the risk in our name.

We will have our opportunity to have a voice in what happens next on November 4th.  A good question for the candidates you support might be what is their position on markets free from government manipulation.

Think about where we might be today if our elected leaders had not seen fit to manipulate the mortgage market.  I might have been able to get by without mentioning politics on a business blog dedicated to the local real estate scene and our economy might be a whole lot better right now.