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How did we get here? How did the United States get itself into the untenable position where homeowners, Wall Street and most financial institutions need -- and more importantly, expect -- help from one government agency or another?
Another good question might be this: Can those proposing solutions to the current financial crisis answer those questions? If not, how do they know their course of action won't make matters even worse?
What must be understood is that the current economic crisis didn't start with the subprime-mortgage problems of 2007. It has been 20 years in the making (and is the subject of my recent book).
Our present predicament is the culmination of many poor policy decisions. Easy money, lax credit standards and the Federal Reserve's interference with the business cycle -- combined with a lack of supervision on the part of the Securities and Exchange Commission and bank regulators -- created an environment that led to excessive risk taking on the part of individuals and financial entities of all stripes.
Where were the referees?
Wall Street and all the willing partners in the "securitization process" who sliced and diced or bought and sold mortgage-related paper are thought of as the culprits in this financial tragedy. But they were only spokes in this wheel of trouble. Homeowners, who for a number of years were the beneficiaries of the financial daisy chain, must accept some responsibility.Folks now in trouble with mortgages larger than the value of their homes at some point willingly suspended disbelief in order to convince themselves that home prices could only rise and that this "housing ATM" could be counted on to provide funds in times of financial distress.
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Still, the real failure and culpability was on the part of the regulators. No one in a position of authority (the adults, if you will) lifted a finger or sounded a note of caution while the insane housing and credit bubble of 2001-07 was under way.
And it didn't take a genius to see at the time that the problems we now face were a guaranteed outcome of that reckless behavior. Many were worrying about just that for years. Search online for "housing bubble" and "2004" and you'll find more than a half-million stories. So it was clear to some that there was a problem even then.
Thus the various government entities -- especially the Fed -- that might have been counted on to help prevent the housing bubble deserve some serious blame for the damage inflicted by its bursting.
More debt to solve a debt problem?
Congress and the White House are now attempting to right past wrongs with bailout schemes -- some aimed at lenders and others at borrowers. And of course, the Fed is being called on -- and has willingly obliged -- to provide more easy money in the hope that more of what created the problem can solve it.The latest example by the Fed: Handing JPMorgan Chase (JPM, news, msgs) a $30 billion credit guarantee to get it to buy Bear Stearns (BSC, news, msgs).
The insidious and dangerous unspoken corollary to all this: Financial pain is now unacceptable. Those in trouble demand to be rescued, and the government seems to agree that the "creative destruction" component of capitalism must not be allowed to do its work. It's a sad irony that as former communist countries embrace capitalism, we seem to be headed in the other direction.