We can’t attend an event or business gathering, a soccer match or an ice hockey game, without someone offering their bromide or sizing up a hair shirt to fit the culprit who one way or another got us into this mess. One imagines it is not quite so simple. To our readers then, I offer this list of suspects, all of whom played a role in a our current economic turbulence.
1. Home Buyers: Real-estate values rose consistently for over a six-year period. From 2000 until 2006, housing was the single best investment for the average American. It was not a scheme as much as it was a way of economic life.
2. Legislators: The Community Reinvestment Act of 1977 forced banks with branches in poor neighborhoods to lend money to people with poor credit ratings, in return for the ability to add a branch or buy another bank. The rule was enforced by private groups such as ACORN.
3. Lenders: Subprime loans were the easy answer to the congressional dictate to lend to lower-income families, so subprime went from 2 percent of loans to 30 percent.
4. Fannie and Freddie: In the late 1990s, pressure was put on Fannie and Freddie to buy the securities backed by these mortgages.
5. Investment Banks: These loans were packaged into CDOs rated AAA, which lulled investment banks into relaxing due diligence standards.
6. Legislators again: The 1995 law permitted the securitization of subprime mortgages, making lenders more indifferent to risk.
7. Home Owners: Housing appreciation allowed anyone stretched too thin, due to borrowing, to sell and refinance.
8. The Media: Journalists fed at the trough of conventional wisdom, and allowed ourselves to be hypnotized by the bull market’s rush. Contrarianism became as dowdy as the Underwood typewriter.
9. The Federal Reserve: During this period, the Fed raised interest rates 17 times, eventually dampening affordability.
10. Speculators: Low affordability led to the exposure of borrowers who were too stretched, and speculators no longer had an incentive to keep up.
11. Rating Agencies: Rising delinquencies fed their way into previously issued securitizations, resulting in downgrades by major credit rating agencies.
12. Securitizers: As homeowners lost value in their homes, default rates began to climb, making assumptions look cockeyed and the structured vehicles and ratings seem hopelessly out of date. As Buffett says, you don’t know who is swimming naked until the tide goes out.
13. Financial Services: Shock waves go through the financial system, resulting in a seizure of credit markets.
14. Regulators: The SEC failed to clamp down on creditdefault swaps, even as analysts predicted a collapse. By the time they intervened, cutting off short-selling, it was too little, too late.
15. The Bad Economy: We thought we had the problem licked when the mortgage banks went under, went broke, or were bought. But a downturn in the economy put pressure on cracks in the foundation.
16. Accountants: In 1988, Basel II, as it is now known, became a controversial requirement for markto- market valuing of assets on the banks’ books.
17. Management: Massive book write-downs of assets led banks to require infusions of capital just when cash became king again. It was called a freemarket failure, but it was anything but free.
18. Capitalism: What had taken place was a paradigm shift in the pricing and assessment of risk that would extend beyond housing and affect the broad spectrum of financial services.
19. The World: Economies around the world, which have forever hitched themselves to the U.S. financial engine, were taken along for the ride.