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Who is to Blame?

Borrowers and Lenders
Wikipedia references poor judgment of the borrower as one of the factors in creating a housing bubble. Lending practices did change because of pressure from Fannie Mae, Freddie Mac and nonprofits on lenders to provide loans to low or no income borrowers and then, no documentation loans. Many of these were adjustable rate mortgages. When the rate adjusted upward, homeowners could not afford the payments, and the housing bubble was over.

Greedy Corporations and Derivatives
Holding all these new mortgages, lenders created a new class of security which packaged or bundled these mortgages which were bought and sold. As foreclosures increased these mortgage-backed instruments were like the game of hot potato. The lender left holding the security was burned.

Congress and Corruption
A video on youtube from 2004 demonstrates Congress's knowledge of the growing problem. In the House committee hearing, a regulator from the oversight agency for Fannie Mae and Freddie Mac alleged accounting discrepancies, improper lending practices, and possible fraud. The Republican members of the committee called for action and there was a complete denial of the problem by the Democratic majority members of that committee.

Monetary Policy and the Fed
As chairman of the Federal Reserve, Alan Greenspan lowered interest rates to fuel the economy as his guiding policy. Current Fed chief Bernancke has continued that policy. By fueling the market with cheap money, the Fed created the unintended consequence of overleverage by institutions and individuals.

Trade Imbalance and the Value of the Dollar
Previously described trade imbalances continued to balloon as the Treasury Department borrowed money from China even though we had a negative trade balance with them. Foreign investment into the US caused a stock market boom, In hindsight, this boom presented a false picture of the economy.

Speculation
In mid to late 2007 as the stock market began to fall in oil prices began there arise, speculators began have an effect on the downward spiral of unmarked. Hedge funds, funds created for the extremely wealthy and large a leaked on regulated, enjoyed a winter of short selling. The newly created sovereign wealth funds joined in the fun.

Inconsistent Government Intervention
Many analysts credit the Fed and the government for exacerbating the impact and depth this financial crisis. According to Jim Cramer, former head fund manager and CNBC Market analyst, in an article dated October 3, 2000 8, "The government's capriciousness is legion: Bear Stearns(BSC) is allowed to fail at $300 billion in debt, Lehmann(LEH) is not too big to fail at $700 billion. Washington Mutual(WAMU) is seized for bad loans, but Downey(DSL) and BankUnited(BU) are allowed to keep playing with their toxic loans. And now that Wells Fargo(WFC) and Citigroup(C) want to pay more for Wachovia(WB) than the FDIC ever thought it was worth shows you that it is every bit as incompetent as the Fed and as capricious as the Treasury."

Part of the Business Cycle
Christopher Grey writes,"Meltdowns, as painful as they are, are a necessary part of capitalism. They do not cause depressions. Depressions are caused by governments that prevent the market from correcting itself and therefore to choke off economic activity. This is what happened during the 1930's in America. It was onerous regulation, tax hikes and the New Deal that prolonged the downturn. We're in this mess right now because of government meddling by Alan Greenspan, who kept interest rates artificially low for too long and inflated the credit bubble."

Conclusion
Unfettered and free, the marketplace through the " invisble hand" of Adam Smith will correct itself in the most efficient and straightforward manner. As enumerated, there is plenty of blame to go around in our current financial crisis. The big question is where we go from here?

Learn more about this author, Jeff Vidrine.
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