New York Mayor Michael Bloomberg incited the wrath of liberals when he told a business breakfast in midtown, “It was not the banks that created the mortgage crisis. It was, plain and simple, Congress, who forced everybody to go and give mortgages to people who were on the cusp. … They were the ones who pushed Fannie and Freddie to make a bunch of loans that were imprudent, if you will. They were the ones that pushed the banks to loan to everybody.”

The New York Times Paul Krugman awarded Bloomberg the title “ignoramous” for the statement, although he largely deferred to the liberal blogger Mike Konczal to explain why Fannie and Freddie are innocent of causing the housing bubble. Konczal wrote: “The first thing to point out is that the both the subprime mortgage boom and the subsequent crash are very much concentrated in the private market… That whole fly-by-night lending boom, slicing and dicing mortgage bonds, derivatives and CDOs, and all the other shadiness of the 2000s mortgage market was a Wall Street creation, and that is what drove all those risky mortgages.” Konczal seems to be forgetting a lot of history.

While Fannie Mae was created by President Franklin Roosevelt in 1938, it really didn’t begin picking up market share in the mortgage industry until the Savings and Loan industry collapsed in the 1980s. Once the S&Ls were out of the game, Fannie Mae and Freddie Mac leveraged the widespread belief that the federal government would bail them out, into below-market interest rates on borrowed funds. They then used those funds to buy mortgages that paid market interest rates. The spread was worth billions a year and, by 1992, Fannie and Freddie turned that government-created competitive advantage into a monopoly in the mortgage securitization market.

That same year, at the direction of Congress, the Department of Housing and Urban Development began setting “affordable” mortgage goals for Fannie and Freddie. In order to help meet these goals, Fannie inked a $8 billion deal with a little know firm called Countrywide Financial that had a growing, but still small, business in granting mortgages to borrowers with suspect credit ratings. When Countrywide first partnered with Fannie they had only $92 million in revenues. By 1996 Countrywide revenues rose to $860 billion, by 2000 they were at $2 billion and by 2004 Countrywide became the nation’s largest mortgage lender.

The secret to Countrywide’s success was no mystery. When the Fannie Mae Foundation honored Countrywide in 2000 with an “Outstanding Achievement” award, Fannie’s annual report explained: “Because Fannie Mae and Freddie Mac tend to give their best lenders access to the most flexible underwriting criteria, Countrywide benefits from its status as one of the largest originators of mortgage loans and one of the largest participants in the GSE programs. … When necessary—in cases where applicants have no established credit history, for example—Countrywide uses nontraditional credit, a practice now accepted by the GSEs.”

Countrywide continued to be the biggest supplier of loans to Fannie Mae all the way through the height of the housing boom.

And Fannie wasn’t just buying bad Countrywide loans. They were also buying securities that Countrywide and other subprime lenders were bundling and selling themselves. In 1995, HUD allowed Fannie and Freddie to count subprime security purchases towards their “affordable” mortgage goals. At the height of the housing boom, from 2004 to 2006, Fannie and Freddie purchased $434 billion in subprime securities, a significant portion of the market.

From 1992 through the height of the housing bubble, Fannie Mae and Freddie Mac used their monopoly position in the mortgage securitization industry to create an institutional framework that rewarded firms like Countrywide for abandoning past lending standards and making bad bets in the housing market. Countrywide’s success in this new framework was a signal to other market participants to lower their standards and make even bigger and riskier bets.

Wall Street banks are not blameless for the mortgage crisis. But they were only responding to the incentives set up by the federal government’s monopoly position in the mortgage securitization industry. Bloomberg is right not to ignore this history.