No Single Reason for Recent Financial Failures

We simple-minded humans often like to boil things down to a simple cause/effect (ie; reductionism). It makes it easier for us to understand complex issues. The recent financial crisis is a case in point. Liberals and Democrats are predisposed to blame greedy Wall Street and are calling for more regulation. (And some have added this to the list of "things that are Bush's fault"---think again). Some Republicans are also calling for more regulation, while others, including many conservatives, are blaming government intervention and regulation for setting the tone for the current problems. In short, predictable ideological lines have been drawn. The truth is that the blame lay at the feet of "all of the above," including average American consumers.

First,

...it was the Clinton administration...[that] originally helped create the market for the high-risk subprime loans now infecting like a retrovirus the balance sheets of many of Wall Street's most revered institutions.

Tough new regulations forced lenders into high-risk areas where they had no choice but to lower lending standards to make the loans that sound business practices had previously guarded against making. It was either that or face stiff government penalties.

The untold story in this whole national crisis is that President Clinton put on steroids the Community Redevelopment Act, a well-intended Carter-era law designed to encourage minority homeownership. And in so doing, he helped create the market for the risky subprime loans that he and Democrats now decry as not only greedy but "predatory."

Yes, the market was fueled by greed and overleveraging in the secondary market for subprimes, vis-a-vis mortgaged-backed securities traded on Wall Street. But the seed was planted in the '90s by Clinton and his social engineers. They were the political catalyst behind this slow-motion financial train wreck.

But we shouldn't gloss over this last. There was greed on the part of some coupled with honest-to-goodness risk aversion on the part of others that combined to create the "mortgaged-backed securities" through "financial engineering" that lay at the root of the failures. Meanwhile, the people who ran Fannie Mae and Freddy Mac were clever in doling out political contributions and keeping the prying eyes away.

And there were warning signs a-plenty. Heck, in 2004 many were recognized but not heeded by government, business and consumer groups alike. We also should hold individuals responsible for making poor financial choices. By now, we're all familiar with stories of people who began to consider their home-equity as an endless font of wealth, aren't we? Or people who took "interest only" loans or 5-and-1 ARMs to buy houses that were WAY outside of what they could afford.

What we had, then, was well-intentioned (isn't it always...) government intervention into the housing markets that led to the market-share explosion of public/private partnerships (Fanny and Freddy) with little aversion to risk. At the same time, risk-averse private institutions created multi-layered, risk-hiding investment "opportunities" to simultaneously profit and pass on as much risk as possible to "the other guy." All of this was built on houses of cards purchased by fiscally naive consumers. Yes, there is plenty of blame to go around.

UPDATE: And someone saw this coming in 2000.

UPDATE II: Not to absolve business, but the more we look into it, the more we see the role that government had in screwing things up. Neil Boortz has a ground level view. James Pethokoukis gives a summary:

The more you look at the history of the housing-spawned credit crisis, the more you notice Uncle Sam popping up, Zelig-like, in every scene. Fannie Mae and Freddie Mac were government-birthed entities that decided to buy securities tied to subprime loans. And it was government officials on Capitol Hill, the recipients of millions in campaign donations from the F&F lobby, who decided not to rein in those entities. You had the government ' s Community Reinvestment Act nudging banks to make unsound loans. Government banker Alan Greenspan pushed interest rates too low for too long earlier this decade, creating an extreme financial situation that made the crazy Wall Street strategies look temporarily reasonable. And for decades, government has pushed higher homeownership as a national goal, via F&F as well as through the tax code, siphoning off resources that might have been better devoted to other economic sectors.