As a society and as individuals we are loth to take responsibility for our actions. We much prefer finding scapegoats or blaming circumstances. I was recently asked who was to blame for this crisis.

Like in Agatha Christie’s Murder on the Orient Express, we all did it!

The culprits include:

  • The American Dream: Guilty of having changed from being the opportunity of becoming successful through arduous effort, perseverance and determination regardless of your starting circumstances to the pursuit of home ownership.
  • Politicians: Guilty of pushing home ownership as an end in itself and of distorting the tax code accordingly thus encouraging individuals to pile on debt.
  • Fannie Mae and Freddie Mac: Guilty of using the fact that no politician felt he could publicly oppose home ownership to lobby for and succeed in expanding the number of mortgages they cover. Doubly guilty for piling so much risk given its structure that “privatized the profits, but socialized the losses”.
  • The Fed: Guilty of keeping interest rates too low for too long, inflating both the credit and real estate bubbles. Guilty of deciding that its role is not to deal with asset bubbles arguing it cannot tell whether there is a bubble even though many experts and most indicators were showing that real estate ownership and prices had increased unsustainably.
  • Alan Greenspan: Guilty of publicly advocating variable rate mortgages even though rates where at an all time low – a suggestion made even worse by that fact that he then promptly increased rates.
  • George Bush: Guilty of cutting taxes while massively increasing spending on frivolous projects like agricultural subsidies and similar pork-laden projects during a boom period leaving the US in a precarious financial position entering the downturn.
  • Banks: Guilty of relaxing lending standards to expand origination profits.
  • Investment Banks: Guilty of creating complex derivative products whose riskiness they did not understand.
  • Investment Bank CEOs: Guilty of not looking at the riskiness of the derivative products their banks were creating because of the profits coming from those operations.
  • Investors (all of us though our 401ks): Guilty of expecting 10% annual returns and ignoring risk in order to chase yield.
  • Home Buyers: Guilty of buying homes they could not afford believing they had nothing to lose because house prices would always rise.
  • Consumers: Guilty of spending everything we earn and more by borrowing through home equity loans and credit cards to buy things we don’t really need, instead of saving a reasonable percentage of what we earn.

The judgment is in: we are all guilty!

The penalty: Increased taxes and slower economic growth for many years as we return to a sustainable economic environment.

  • I TOTALLY agree with you! I’m not sure if you meant to rank them in order, but I think the notion of the American Dream – and how it got so twisted – is one of the most to blame among them all. If anything, I hope this crisis starts a national discourse about who we are as a nation, as individuals, our values…

  • The “culprits” you list are clearly not equally deserving in blame. Formulating them in such a fashion is the equivalent of moral relativism. It is a sloppy intellectual practice born of an emotional desire to unify rather than being developed through reason. Wall street is not a scapegoat in this. Their failure as investors played an enormous role in this crisis, and they deserve all of the blame they are receiving and more. Their actions turned a run of the mill real estate bubble into a global financial crisis.

  • Tough to generalize like that:

    There are consumers who saw through all that was happening, levered just “enough” to take advantage of the dislocation, saved enough cash and invested that on the side, earning more than the loan rates in the interim. They did not spend excessively. They also exited those investments and loans right on time so they did not lose anything 😉

    Why should such people like me be penalized with slow growth and higher taxes?

  • Sanem:

    You are undoubtedly referring to yourself 🙂 There are a few innocents who rented and did not borrow too much. Unfortunately, they will be caught in the crossfire.

    I don’t have a great solution for you. Non American citizens can move to London to avoid higher taxes, but you will still be affected by slower growth. American citizens would have to give up their citizenship for such a move to work.

    On the bright side wherever you reside, the value of cash will increase dramatically so if you have some money saved you should be in a great position.

  • I agree. I would add another guilty subject… central banks and investors of the rest of the world… lending the US at a clip of 800 billion a year, thinking that the US will never fall no matter what (even if they had an unsustainable massive fiscal and commercial deficit for years)

  • Fabrice,

    See below – it’s an amazing article from 1999 – it looks like the biggest share of responsibility rests with the politicians and Fannie Mae

    September 30, 1999

    Fannie Mae Eases Credit To Aid Mortgage Lending


    In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

    The action, which will begin as a pilot program involving 24 banks in 15 markets — including the New York metropolitan region — will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

    Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

    In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates — anywhere from three to four percentage points higher than conventional loans.

    ”Fannie Mae has expanded home ownership for millions of families in the 1990’s by reducing down payment requirements,” said Franklin D. Raines, Fannie Mae’s chairman and chief executive officer. ”Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.”

    Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.

    In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980’s.

    ”From the perspective of many people, including me, this is another thrift industry growing up around us,” said Peter Wallison a resident fellow at the American Enterprise Institute. ”If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.”

    Under Fannie Mae’s pilot program, consumers who qualify can secure a mortgage with an interest rate one percentage point above that of a conventional, 30-year fixed rate mortgage of less than $240,000 — a rate that currently averages about 7.76 per cent. If the borrower makes his or her monthly payments on time for two years, the one percentage point premium is dropped.

    Fannie Mae, the nation’s biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.

    Fannie Mae officials stress that the new mortgages will be extended to all potential borrowers who can qualify for a mortgage. But they add that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings than non-Hispanic whites.

    Home ownership has, in fact, exploded among minorities during the economic boom of the 1990’s. The number of mortgages extended to Hispanic applicants jumped by 87.2 per cent from 1993 to 1998, according to Harvard University’s Joint Center for Housing Studies. During that same period the number of African Americans who got mortgages to buy a home increased by 71.9 per cent and the number of Asian Americans by 46.3 per cent.

    In contrast, the number of non-Hispanic whites who received loans for homes increased by 31.2 per cent.

    Despite these gains, home ownership rates for minorities continue to lag behind non-Hispanic whites, in part because blacks and Hispanics in particular tend to have on average worse credit ratings.

    In July, the Department of Housing and Urban Development proposed that by the year 2001, 50 percent of Fannie Mae’s and Freddie Mac’s portfolio be made up of loans to low and moderate-income borrowers. Last year, 44 percent of the loans Fannie Mae purchased were from these groups.

    The change in policy also comes at the same time that HUD is investigating allegations of racial discrimination in the automated underwriting systems used by Fannie Mae and Freddie Mac to determine the credit-worthiness of credit applicants.

  • Amazing article! No politician could denounce them for fear of being accused of being against low income housing.

    The American Entreprise Institute’s fears were proven right 9 years later. However, I doubt many remember them.

  • I think the media as well as others need to clarify the difference between who bought homes in the last few years. Investors bought homes believing they could make a fast buck, however any family with common sense clearly would not buy a home they couldn’t afford. A family with $50,000 yearly gross income, wouldn’t go buy a $400,000 house or even a $150,000 house if they “knew” they had more income going out than in, I would believe it if they could’ve some how managed to put it on a credit card, which for some odd reason people tend to believe as make believe magic money and have no problem racking up THOUSANDS of dollars in debt. But when you constantly have a 3 month window of non payment before eviction, sometimes even less. That’s just to risky for a family to make that type of gamble. Also if you ever watched any of the “flip these houses” shows on TV or looked in a local MLS book, many houses “were” being bought, but if you notice carefully alot of the homes being bought were being done buy armature investors, hoping to reap the rewards of the investors they were reading about in magazines and watching on television. It just makes me mad that people try to paint American families as idiots whose bellies were bigger than their wallets..anyway love the blog Fabrice.

  • Is it really fair to blame investors for this? I would guess most people had no idea how much risk these companies were taking, so how can you even make an informed decision on which companies (funds) to invest in. I would agree with you if you intentionally picked high risk/high reward funds, but i picked moderate risk funds and just expected the crooks managing them would do what they are paid ridiculous amounts of money to do, which is to make a decent return.As far as the homeowners go, i'm not convinced you can blame most of them either. If you are dirt poor living in a mud hut and all of a sudden are given the opportunity to live in a house, wouldnt you take opportunity also? As for the investors who were just flipping, i have much less sympathy for them.I would have liked to see you assign much more responsibility to politicians, particularly the bleeding heart liberals like barney frank who pushed for this bullshit utopian idea that everyone can own a home and whose job it is to prevent this kind of crap from happening.

  • Jerome –

    I think that unfortunately you are very wrong about who bought houses they couldn’t afford. I remember back in 2002-2003, almost all of my friends and colleagues in Washington, D.C. (most of whom had bachelor’s degrees, if not MBAs and JDs from top-tier universities) were buying houses way out of their price range. They were only looking at monthly payments, and since they had low floating rates, the payments were only slightly higher than the rent they were paying on their apartments. They claimed it was silly to pay rent and get nothing in return when you could be getting equity in an asset you could later sell. And even if their rates went up, the argument went, home prices were appreciating so quickly that they could just take out an equity line of credit on the increase in home value to help them make the larger payments. Unfortunately, both retail mortgage brokers and real estate agents work on commission, and therefore both parties were going to propogate this story for as long as they could. With people coming into work boasting about how the house they bought six months ago had already gained 50K in value, it was hard for others to avoid the allure of jumping onto the home ownership bandwagon. After all, prices were going up, and always would go up, so what’s the harm in buying something you could always resell? It’s an easy trap for even very smart people to get sucked into, and the average American seeing his neighbor making money just by sitting is his house creates an almost irresistable need to have that too. And a lot of them are in trouble now, stuck in houses they don’t really want paying mortgages they can’t afford.

  • The equation is very simple: increase money supply and make credit available to all then people will use it. The credit will be used to fund needed things, required things and good to have things…
    Once money starts flowing very freely, inflation sets in. A house valued at 150K now becomes priced at double that. You can buy it and flip it as long as there is a fool willing to buy it and many have done.
    Now that the music has stopped and money has dried up. everything collapses at a faster rate than it was built.
    The current downturn is only just beginning and will last for years, many years. When you look at what governments around the world are doing to sort out this mess, you will see that they have printed many more billions to pump in their markets. This is dressed as “quantitative easing” and is basically a fancy name for printing more money. Notice that the trouble started will the availability of cheap money. Now to solve the issue, they are increasing the money supply so that people borrow and keep spending, as if people are fools. What this will do to your finances is render them worth less that what they were and with unemployment on the up, people are not going to spend anyway.
    How to solve this: let recession run its course. If a bank screwed up, let it go to the wall. shareholders take risks. When they make money they do not share it with the rest of us so why should tax-payers bail out the banks. The idea that banks, mortgage banks… are nationalised in countries that claim free markets is misguided and will only result in the huge (trillions of $, at least 6 in America) losses to be passed on to the next generations to pay for in terms of taxes.
    With regards to unemployment, the people who will get us out of this are the entrepreneurs who create businesses and jobs so we must make their life easy and help them achieve this and providing they have sound plans for sound businesses, capital is never far away even in these tumultuous times.