From Boon to Crisis: Redux

When I analyzed the things that lead to the mortgage meltdown, I blamed it on five entities. I blamed it on the borrowers, the banks, the mortgage brokers, Wall Street, and Congress. In that particular piece I didn't mention it, but Alan Greenspan certainly also has plenty of blame. As I have examined the situation, most of the entities should be excused from any extraordinary responsibility. As I will attempt to prove, most of the entities were simply responding to market dynamics like any good capitalist, and thus the blame for this mess will be laid squarely in two hands.

First, let's review quickly how each of the entities were responsible.

Borrowers:

Many of them were simply irresponsible and bought more house than they could afford.

Banks:


They created the loans that put irresponsible borrowers into loans they had no business getting into.

Wall Street:

They made a market so that irresponsible borrowers were able to get loans en masse through irresponsible programs

Mortgage Brokers:

They were the middle men that put irresponsible banks together with irresponsible borrowers

Congress:

By making so many laws, it made the process terribly difficult for confused borrowers. It also made it that much easier, ironically enough, for unscrupulous banks and brokers to put borrowers in programs they had no business being in.

Finally, there is Alan Greenspan. By lowering the Federal Funds Rate to .75%, he created too much loose money. At the time, housing was one of the only sectors that was performing well. As such, banks had lots of money and only one place really to put it, mortgages. So, in effect, Greenspan started the chain of events that created the crisis.

So, now let's examine each group and see how much responsibility we should apply to each.

Borrowers:

Yes, they were irresponsible and so of course they should have ultimately bought property that was within their means. At the same time, these folks are irresponsible. That's what irresponsible people do...they act irresponsibly. By opening up programs to irresponsible people, the system opened itself so that irresponsible people could act irresponsibly. The trick is to make sure that irresponsible people don't qualify. That's why it takes up to a month for a loan to be approved. That's why banks examine such things as credit reports, income, assets, etc. They are making sure that someone is responsible and qualified to borrow. Once loans were opened up for stated income with no money down, the system was opened up to be exploited by those that are irresponsible. Anyone that is surprised or blames irresponsible folks for acting exactly as they are is simply blind to the nature of the beast.

Mortgage Brokers:

Did mortgage brokers know that they were putting folks into programs that they likely couldn't afford? Sometimes, and other times they simply didn't care. You want to blame the mortgage broker for this that is up to you. In the end, they were also creatures of the market. They had aggressive loan programs and they had borrowers willing to apply for these programs. What exactly did you expect these creatures of capitalism to do? Were brokers really supposed to say no to a borrower that could qualify because it might be too expensive for the borrower? Brokers work on commission not on salary. They are creatures of the market like everyone else. Banks created programs and they had lots of borrowers that were qualified for those programs. Those borrowers were perfectly willing to apply for these programs. It's that simple. If you want to blame a capitalistic creature for responding to the market then you just don't believe in capitalism.

Banks:

It was banks that after all opened up their programs to these irresponsible folks. Here is the inside story. It was Argent Mortgage, the wholesale division of Ameriquest, that wound up getting the ball rolling on all these aggressive mortgages. In a sense, we can all blame Ameriquest. That would be easy given their well earned terrible reputation. Yet, even Argent was only really responding to the market. How was Argent able to provide all these aggressive loans? They found folks on Wall Street willing to make a market in them. That brings me to the last group.

Wall Street:

This story starts in the mid 1980's with a man named Lew Ranieri.

The past quarter-century has seen a revolution in finance. It's felt every time a homeowner refinances a mortgage or signs up for a credit card. No one person can claim to have lit the fuse for this revolution -- but Lewis S. Ranieri was holding the match. Joining Salomon Brothers' new mortgage-trading desk in the late 1970s, the college dropout became the father of "securitization," a word he coined for converting home loans into bonds that could be sold anywhere in the world. What Ranieri calls "the alchemy" lifted financial constraints on the American dream, created a template for cutting costs on everything from credit cards to Third World debt -- and launched a multibillion-dollar industry.

The Wall Street traders that took loans and packaged them into bonds were all proteges of Lew Ranieri. Banks are totally helpless without the support of a Wall Street type to take their loan off the bank's hands and turn it into a bond. That is what provided liquidity in the market. A bank would never come out with an aggressive program unless there was someone on Wall Street willing to buy in bulk loans that qualified for that program. These so called no money down loans were created only because Wall Street was willing to buy them and package them into bonds.

So, it's all Wall Streets fault, right. Not exactly again. Why did Wall Street willingly package so many aggressive loans and turn them into bonds? This question is also answered through simple capitalism. These bond traders simply had too many buyers for their bonds when their programs were more conservative. What did anyone really expect a capitalist working in a trading pit to do when they were simply able to sell their product too easily.

This really came down to supply and demand. If there were more buyers than product then more product needed to be created. The reason they created more aggressive programs was because those could be sold. That's how markets work. Where was all this money coming from that was buying these bonds. Well, of course, much of its nexus comes from the very Fed Funds Rate Cut by Alan Greenspan I mentioned earlier. This leads me to the last two culprits.

So, we really only have two entities left: Congress and Alan Greenspan. Congress is to blame for creating a hyper regulated industry that still was totally impotent to obscene fraud and corruption despite the obscene regulation. In fact, all the regulations created so much paperwork that ironically enough it was easier to corrupt. Furthermore, all the politicians now speaking about a plethora of new mortgage regulation were strangely silent while the abuse was happening. Where was all the talk of regulations banning stated loans, no money down, etc. while the abuse was happening? The Congress stood by and ceded their Constitutional responsibility of regulating business while the market was hot. Only now, do they want to regulate. (though as my link points out even that can be explained by political market dynamics)

The main culprit is Alan Greenspan himself. By lowering the Fed Funds Rate so much he created the environment of irresponsibility that followed. Like I said in my earlier piece, he couldn't have possibly predicted the mortgage crisis itself but should have predicted the law of unintended consequences. By dropping the fed funds rate to an irresponsible level he created an environment of irresponsibility. In fact, all the other players were simply responding naturally to the unnatural stimulus created by his obscene rate cuts.

Greenspan wanted to create overwhelming borrowing and he did. Only, he obviously never thought about the consequences of such overwhelming borrowing. He should have because the mortgage crisis we face is that natural consequence. Every other player can be excused for acting naturally to the stimulus he created.

Thus, in conclusion, in my opinion, there is really one main culprit for this crisis and that is Alan Greenspan. (for a concurring opinion here is Steve Forbes)