Who is to Blame?

As the stocks slide the blame seams one sided, unfair, and wrong.  So who exactly is to blame, and how did we get into this economic mess?  Let me explain from the beginning how we got so very very wrong.

I think a lot of people are to blame for what happened.  If we start at the beginning of the cycle we see a consumer, realtor, or consumer turned investor.  They are small guys for the most part just like you and me; housing prices have been rising gradually due to an increased demand and people see a potential of a small profit in flipping or fixing up a property.  Credit still is hard to get, in that the loans are fully documented and you do need the cash as a new investor to carry this house.  What does get shady at this point is perhaps you claim in your greed the house is a second home as you’ll get better rates and thus better returns when you sell after slight touch ups on this 20 year old house.

Pay attention, at this point the dotcom bust happens, 9/11 happens.  Mortgage lending rules also ease up to help first time buyers and minorities get on the housing ladder.  Specifically, stocks are sold and the cash is put in housing hot spots like Florida.  Now several mortgage companies, especially Countrywide, get in on the fun in pure greed thinking only on the current second.  They approve no documentation loans where your income and assets are stated from thin air, people gladly sign unto this as rates keep falling due to:

1. They have the house of their dreams and can currently afford it
2. They are sure they will sell it in a few months anyways as a flip.

But then things go crazy, in certain markets prices rise from $300,000 to $700,000 in less than a year due to constant flipping.  You buy only to sell the next month.  You don’t need to afford the mortgage, your just holding the mortgage till the end users buys.  Even new houses are handled this way, flipped several times before even completion. You honestly believe that holding a property for a month entitles you to $100,000 profit.  Prices increase across the country, as the housing market is now a proof to the Bush Administration that the economy isn’t totally gone.  Banks keep issuing poorly documented loans without truly thinking if the person can afford it.  Employees warning of fraud are ignored even fired as profits in an otherwise stale economy are the key.

And yes profits brings us to the next part in which Wall Street and the big investors go crazy buying these huge loans without looking at the risk.  And the companies involved such as Fannie Mae and Freddie Mac  keep buying thinking that the demand for homes has increased to justify the prices without true independent verification of home values outside of ‘well it just sold for $700,000’.

But then people flipping can’t seem to find someone to sell their property to, there is no end user and the flippers are all stretched to the limit with existing mortgages as the market halts.  Inflation causes rates to go up which hurt home owners who wrongly believe they can afford their mortgage.  Perhaps they ignored the bank rules, or in many cases were lied to.

As you can see ignorance and greed really are to blame.  And consumers turned small investors, banks, Wall Street, and the government are to blame.  Right now we point fingers at Wall Street, before it was the banks, and before that we blamed stupid consumers for buying the houses they couldn’t afford.  Though of course we don’t think about the lies and fraud committed to get those loans.  Those consumers were told they could always sell a house when in trouble, except you can’t sell when the house values drop to their true value instead of an inflated flipped out value.  In fact you have too many homes on the market as over construction cause completely foreclosed and vacant properties.  Even renters suffer as their homes are repossessed and they are forced to move even though they never bought a house and paid rent meanwhile big or small one person investors pocket the money and don’t pay the mortgage.  There is a lot of blame to go around, and each situation is unique, even all banks can’t be blamed as Wells Fargo for example is still posting profits due to deciding to be strict in their lending though obviously not immune to other factors in the current market.

But in reality we can blame one entity, and I’ll prove it.  It is the Government’s fault.  The Bush Administration as I told you before claimed the real estate market was proof the economy was okay.  In fact they encouraged investments and told Fannie and Freddie to relax rules.  After the sour stock market, the real estate market was promoted as safe and backed by tangible goods.  Bush is either extremely stupid, or he knew the facts about what was going on but hoped all would be okay and need this one good card to outweigh other bad cards.   The government ignored phone calls from workers in the mortgage industry to complain about what was going on.  Many saw the signs that fraud (such as falsely valued appraisals) would cause.  Tangible goods were there, but overvalued.  The government lied to people and encouraged activity that has causes the biggest economic failure since The Great Depression.

So don’t blame Wall Street, who blindly bought your loans.  And don’t blame the banks that were stupid and even fraudulent.  And don’t blame the consumer or investor that was greedy or even criminal.  Better government regulation could have prevented this mess and we sorely need better monitoring to prevent events that could have potentially destroyed our economy.