Wall Street Must Shoulder Much of the Blame

Too often, Wall Street is not held accountable in our current mess. This blog and many others have vilified Alan Greenspan, Congressional mishandling of the GSEs, particularly Freddie Mac and Fannie Mae, and both the George W. Bush Administration and the William Jefferson Clinton Administration. Here is a recent account, squarely placing a big share of the blame on Wall Street:

The Ghost of Bankers Past, Herold Meyerson, The American Prospect, Sept. 25: … [President] Bush spent a good chunk of his speech last night telling the nation his version of how the nation got into this mess, and his account was conspicuous for omitting any reference to Wall Street's causal role in its downfall.

As Bush told the tale, "Many mortgage lenders approved loans for borrowers without carefully examining their ability to pay. Many borrowers took out loans larger than they could afford, assuming that they could sell or refinance their homes at a higher price later on."

"In today's mortgage industry," the president continued, "home loans are often packaged together and converted into financial products called mortgage-backed securities. These securities were sold to investors around the world.

"Many investors assumed these securities were trustworthy and asked few questions about their actual value. Two of the leading purchasers of mortgage-backed securities were Fannie Mae and Freddie Mac" -- which provided investors with the illusion of security, Bush said.

And that's it. Borrowers and lenders and investors and Fannie and Freddie are to blame. …

But who cooked up the idea for the securitization of mortgages and reselling them half-a-dozen times in ever-more complicated securities the value of which were essentially indeterminable, but which enriched brokers every time they changed hands? Who came up with credit-default swaps, an utterly unregulated $62 trillion market insuring these bad deals, but with nowhere near the amount of capital needed in case the deals actually went sour? Who created all these new instruments of credit and debt to keep Americans consuming even as their incomes stagnated? Who created a world economy in which Asia produces (Wall Street liked that; the labor was cheap) and America consumes?

Hint: Not homeowners. Not the local mortgage companies. Not Fannie and Freddie. The answer, not that you'd know it from Bush's speech, is Wall Street. But then, had he blamed Wall Street, he might have had to extend the blame to the laissez-faire extremists who, in shaping Republican policy for the past quarter-century, encouraged and enabled Wall Street to run amok. He might have had to blame Ronald Reagan. He might have had to blame himself. Fat chance of that.

Bush's speech, in fact, was about as far as you can get from Franklin Roosevelt's 1933 inaugural address, in which FDR blamed at length "the money changers" who controlled America's financial system for driving the nation into a ditch. Last night, Bush told the nation that we had more to fear than fear itself. Only he didn't correctly identify who'd made it all so goddamn scary.

Remember too, as Barry Ritholtz so aptly explains (Barrons, Sept. 29), Wall Street was helped along for a long time by politicos on both sides of the aisle. Plenty of blame to go around! Now we need to begin the long process of fixing the mess — a process that will, hopefully, take up much time and much thought for the next Administration.

Comments

[Danny L. McDaniel]

The average American taxpayer should shoulder some of the blame as well for the current financial mess. First, Americans have adapted to the same spending philosophy as the federal government; that is, spend until you drop like there is no tomorrow. The credit card debt for the typical American family is beyond description.

Second, it seems ever American now requires a overpriced vinyl sided mansion. Americans have greatly assisted the housing mess by buying beyond their means and the constant "flipping" of homes.

In short, what this bailout constitutes is a covering of the Congress' gambling debt and the stupidity of the American people that good times will last forever with no need for saving for tomorrow.

Americans have no sense of history and most have never experienced hard economic times. As Mark Twain once said, "History might not repeat itself, but it sure does rhyme." This is going to be a long, drawn out era with alot of difficult events.

Danny L. McDaniel
Lafayette, Indiana