The Occupy Wall Street “protests” have been ongoing for at least a week now. Truthfully, I have no idea when they started, I haven’t really been paying attention to them (I’ll get to why later).

Reaction has been split. Seems there are people who completely agree with them, there are people who agree with the general “message” but aren’t so sure about the rushing the police barcades and 700 arrests in one night thing, and there are people who do not agree at all and enjoy poking fun at the protesters, “Hey Occupy Wall Street why don’t you Occupy a Job” is one of my personal favorites. I also think they should start occupying a shower soon, sitting around in a park in New York makes you smelly.

I find it tough because I don’t necessarily disagree that Wall Street is greedy, but I also think there’s another body of people that have more power and more to do with this problem that are also greedy and convene 230 miles southwest of New York, happens to be the federal government.

If the government wasn’t so unnecessarily large and powerful, Wall Street and other industries wouldn’t want to lobby them as hard. I personally think politicians are knee deep in greed and pay offs from various industries, but that’s only because they wield a lot of power. Take that power away, and suddenly buying them off doesn’t serve much of a purpose.

Occupy Wall Street seems to think that eliminating Wall Street greed will solve all of our problems. Unfortunately it isn’t that simple, in fact that movement, if you want to call it that, as a whole seems rather ignorant of our economic issues. It vaguely reminds me of hippies and the anti-war/peace movement of the 60′s and 70′s. Hippies weren’t really advocating for peace, I’m sure they cared about peace, but that really wasn’t the reason they existed. They just wanted to get together and smoke pot. It was a rebellious subculture, that just happened to pick anti-war because it was a prominent and contentious issue at the time.

This “Occupy” movement is no different. The most active members appear to be younger people, and they also appear to be oblivious to real life, much like the Hippies of a half-century ago. The Hippies were not accepted by the majority of people not because they smelled horrendous, although I’m sure that didn’t help, but because they were viewed as stuck up middle class or affluent brats that simply wanted to be “different.” The movement wasn’t taken seriously because it wasn’t a group of serious people.

Same applies here. I cannot tell you how many photos I’ve seen from this Occupy Wall Street get together that include protesters in $100 sunglasses and taking photos with their iPads. Not to mention they’re streaming content over a wireless network, not exactly an activity associated with the disenfranchised. Either these people are faking their disenfranchisement, or the only person they have to blame is themselves because they frivolously purchased expensive accessories and iPads.

Put simply, it is hard to take people complaining about “greed” seriously when their clothes are worth more than a minimum wage worker’s paycheck and they’re carrying around an iPad. Same way it was difficult to take the Hippies seriously when all they seemed to do was smoke pot, attend concerts, and complain about “the establishment.”

Just like the Hippies didn’t really have any clear goals about peace and war, the Occupy people don’t seem to have any clear objective with their demonstrations. As a matter of fact, I’m not even entirely sure what they’re complaining about.

To the best of my knowledge they are upset with the bank’s aggressive lending of sub-prime mortgages, which is ironic on two counts:
1.) These same people that complain about over-lending then, complain now that banks aren’t free enough with credit, and are being too prudent when determining who to lend money to.
2.) Those same pesky people in Washington I discussed earlier, have a little something to do with all those sub-prime mortgages.

Between 1996 and 2004 only 9% of all mortgages were sub-prime mortgages. From 2004-2006 21% of all mortgages were sub-prime, that’s a huge difference. Keep those numbers in mind, you’ll need them later.

So what’s the government have to do with this?

Well, in 1997 the government wasn’t so happy with bank’s lending practices. They called it “redlining,” which is a term that was coined years before, but basically means that banks and other service providers would unfairly lend or unfairly increase the price of services for people living in a certain area. This could be based on any factor they pleased, but the government argued that banks weren’t giving out mortgages to low-income people (go figure).

Banks were operating under the traditional model of a mortgage. Family A wants to buy a house, so they go to Bank A. The bank assesses Family A to determine if they are too risky to lend to, or if the bank can have certainty that they’ll be financially able to meet the obligations. Bank A makes the decision that Family A is a reputable bunch (think The Brady Bunch) and decides to give them money. Then Family A pays back the loaned amount over a agreed upon time span.

This was a great way to go about business but the government thought it was too restrictive. For starters, Bank A could only lend money from the pool of deposits they received from their customers, meaning they couldn’t loan to any Tom, Dick, and Harry that wanted a house. Furthermore, because the bank took on the entire risk of the loan, they were very hesitant to loan to people that might not be able to pay the money back. How dare they!

Outraged, the government decided to do something about this. So they passed the Community Reinvestment Act (CRA). With such a fancy and populist name it had to have done good things, right?

Wrong.

It was a massive regulation. I’m not even going to scratch the surface of explaining it all, but in a nutshell it pressured, or as the government said “encouraged,” banks to lend to lower income people. AKA, people who had no business buying a home or taking out a mortgage. This way all would be fair.

So what does this have to do with sub-prime mortgages. A lot actually.

Sub-prime mortgages do two things for banks:
1.) Allow more funding for lending
2.) Shift the risk to someone else – or at least a good chunk of the risk

Well would you look at that, the two factors stopping banks for lending to everyone and their dog could now be taken away. So banks started relying more heavily on sub-prime mortgages.

A sub-prime mortgage is rather complicated, at least when compared to a traditional mortgage. Family A knows they have bad credit, and they know they have a very small chance of being approved for a traditional mortgage, so they seek out a mortgage broker (or in some instances the broker seeks them out). The broker goes to Bank A and says Family A would like a loan. Awesome, says Bank A, let’s go appraise the house.

A home appraiser comes in, appraises the house, and Family A gets their loan! Yippie! Well, that’s yippie until they see their interest rate and other fine print (which they should have read before signing their names on the dotted line). Sub-prime mortgages have a higher interest rate because it’s a riskier loan, so the bank wants a bigger payoff. Rule of thumb: the riskier the loan, the higher the interest rate (there are many other factors including time frame to pay off, but you get the idea).

Before this all happens, Bank A sells mortgage bonds to an entity, like Freddie Mac (remember that name), and then makes bond payments to that entity. Meaning technically speaking, the money for that mortgage hasn’t come from the bank’s coffers, but rather the person who purchases the mortgage bond. And that entity might not even technically be responsible because they could have sold off their obligation to someone else and so one and so forth.

It should be known, banks don’t like to do this, they would rather operate conservatively and prudently by only loaning to people they know can repay. However, the government, and other outside organizations, pressured them to lend to people who simply had no business getting a home loan, and therefore banks relied on the sub-prime model to meet those obligations.

Remember those numbers from earlier? The percentage of loans that were sub-prime, and how they shot up in 2004? Well, there’s a reason for that as well:

Eager to put more low-income and minority families into their own homes, the agency required that two government-chartered mortgage finance firms purchase far more “affordable” loans made to these borrowers. HUD stuck with an outdated policy that allowed Freddie Mac and Fannie Mae to count billions of dollars they invested in subprime loans as a public good that would foster affordable housing.

The Housing and Urban Development Department decided in 2004 that affordable housing was such a big issue, that it asked Freddie Mac and Fannie Mae to take on more risky obligations, which would in turn spur more sub-prime lending:

The agency neglected to examine whether borrowers could make the payments on the loans that Freddie and Fannie classified as affordable. From 2004 to 2006, the two purchased $434 billion in securities backed by subprime loans, creating a market for more such lending. Subprime loans are targeted toward borrowers with poor credit, and they generally carry higher interest rates than conventional loans.

Now that Freddie Mac and Fannie Mae had the green light to buy more of these mortgage bonds, there was greater demand for them, and thus banks lent more to low-income people and sub-prime borrowers. Good idea? Probably not, but it was enabled by the government’s decision to artificially change the market.

Just a general warning, I’m not a financial expert, this is a very crude description of this process and problem. But it is intended to be. It’s a very complicated issue, so I think explaining it in simple terms makes it much easier to understand and digest. But the take away is this: certainly Wall Street and banks must shoulder some of the blame for our economic collapse, but to say their “greed” is the root of the entire problem is simply ignorant.

The government pressured them to loan money to people who should not have been taking out a loan. And furthermore those people that took out the loans didn’t read and understand their mortgage well enough to plan for the high interest rates that were two years or more down the road (most sub-prime mortgages are only fixed rates for a few years).

This issue is so much more complicated then myself or a few hundred people sitting in a park in New York can understand. I don’t profess to pile the blame on one group, they do. So I’m more inclined to believe this whole “Occupy” movement is more about a rebellious subculture than it is about helping those in need by standing up to big banks.

If that was really the objective why are they freely using McDonald’s restrooms (big corporation funded by a big bank), Verizon’s wireless network (big corporation funded by a big bank), Apple’s technology (big corporation funded by a big bank), and being praised by MSNBC (Comcast, big corporation funded by a big bank). Everything they are using was somehow funded by one of these big banks they’re protesting, so it is difficult to take them seriously.

And I think for that reason this “movement” will fizzle out in the next two weeks. It’s a subculture, so it might stick around for a little while, but I think in 14 days time most of these people will be standing side-by-side millions of other Americans…

…occupying the unemployment line.

–jb

Sources
BBC News: US Sub-Prime The Downturn in Facts and Figures
The Sub-Prime Meltdown: An Explanation
Washington Post: How HUD Mortgage Policy Fed the Crisis