Addressing UM graduates at the Big House in Ann Arbor, Obama tells big fibs

In a brazen assault on history, reality and truth, President Barack Obama on Saturday attributed the collapse of the American economy in 2008 to too little government.

"We know that too much government can stifle competition and deprive us of choice and burden us with debt," he said. "But we've also clearly seen the dangers of too little government - like when a lack of accountability on Wall Street nearly leads to the collapse of our entire economy."

Let's start at the beginning.

Under President Jimmy Carter, a Democrat who never before had been accused of too little government, the Democrat Congress enacted the Community Revinvestment Act in 1977. That act, designed to overcome redlining, specified that mortgage lenders had to do some lending in low-income, high-risk neighborhoods.

Over time, Fannie Mae and Freddie Mac, both quasi-governmental entities established by Congress, played an important role by buying more and more mortgages from local lenders. This allowed local mortgage lenders to contract for more and more high-risk mortgages because they could quickly unload those mortgages to Fannie and Freddie, shedding the risk. Over time, Fannie and Freddie became the pillars of the subprime mortgage market.

As the mortgage market sizzled, Wall Street stepped in to grab its piece by bundling mortgages of widely varying risk levels as securities. Albert Einstein would have had difficulty assessing the actual risk of those securities, but the Securities and Exchange Commission, whose mission is to protect securities buyers, did not intervene. Government did not fulfill its assigned duty. The government role was there, but government failed to perform it.

The Federal Reserve Bank, which is, laughably, said to be independent of the government, contributed to the mortgage orgy by keeping interest rates very low for very long periods of time, allowing more and more low-income people to buy homes. The Fed's chairman is appointed by the president. If he keeps the president happy, his chances of reappointment are good. President George Bush repeatedly reaffirmed that his goal was to increase home ownership.

The government can't even claim credit for belatedly winding down the subprime mortgage market.

Instead, that was accomplished by the market system, which functioned as envisaged by the founders. Henry Paulson, a hedge fund operator, wanted to bet against the subprime housing market but had no way of doing that. Convinced that the mortgage market was over-heated, Paulson asked Goldman to devise an instrument that would allow him to short the market, so he could  profit if the market declined or collapsed.

Goldman obliged, Paulson shorted the market big time. As the overall economy tailed off, and high-risk home owners defaulted on their loans, the bundled mortgage investments lost value.  The process quickly picked up steam as the dimensions of the problem became clear.

As the economy declined, the only player making money on subprime mortgages was Paulson, who had sold high and now bought low, closisng out his transactions. He is reported to have earned $1 billion on his short sales.

Obama got it wrong. Governement blundered repeatedly as Democrat and Republican politicians applauded the social engineering project launched by Jimmy Carter.

The market system might have softened the collapse had Paulson, or other short sellers, entered the game earlier.

In keeping with the Obama administration's twisted view of how the United States economy is supposed to work, the SEC is now suing Goldman Sachs for giving Paulson the means by which he shorted the market.

This is one more sign that the Obama administration dislikes the market system and capitalism, and would not mind if both vanished, leaving the decision making to Obama and his sidekicks. Short selling, after all, is the free market's remedy for overheating.

In this case, the politicians created and applauded a 33-year social engineering project that did not make a place for short selling until it was too late to preserve the market, or the economy.