OK, so the housing "party" is over... The electorate is unhappy and looking for someone to blame (and punish if they can); the politicians are looking for someone to blame (or rather, someone to shift the blame to); the titans of industry are looking for excuses (it wasn't us!) and resorting to Rice-like analysis ("no one could have foreseen..."); as are the regulators, etc. Fingers are being pointed in all directions, impassioned 'letters to the editor' are being penned, the call volumes at various politicians' offices are (forgive the pun) through the roof, etc.
Somewhere down the line, when the crisis has passed, a definitive analysis will take place as the entire sorry episode is unraveled and dissected. Many, many books will be written... OK, so this blogger is going to take a leap and anticipate that at that point the answer will be that all of the above parties were complicit in what happened, and that each bears a share of the responsibility, including:
- The public: Although you would think from much of the heated rhetoric that passes for analysis these days that the public at large are unwitting victims of this mess, in truth they were a major participant. This includes many who cashed out their housing "piggy banks" to buy cars, take vacations, splurge, etc; all those who bought houses at the limit of their financial ability, hoping that continued appreciation and subsequent refinancing would make it easier; all those who knowingly bought houses they could not afford, gambling that rising prices and refinancing would bail them out; all those who thought they could ride the gravy train to a second, vacation house; and all those who decided that it was relatively risk free to buy and resell houses as a sure-fire investment. (Note: 22% of recent home purchases were for "investments" and not primary dwelling, while 14% were vacation homes..)
- The politicians: Here we have a fine example that "bipartisanship" is not always an unalloyed good. Republicans continually pushed to reduce oversight and to loosen the rules. And notwithstanding Democratic politicians pointing fingers at Republicans for their reflexive distrust of regulation, many of them have also contributed mightily, their palms greased by massive contributions... Dig into the mess and some names start to pop up with amazing frequency, e.g. Chuck Schumer, Chris Dodd, Barney Frank, and many others. Additionally, some decisions made years ago ended up playing a part in allowing this, including some made during the Clinton and Reagan eras...
- The regulators: Here too you find many that contributed - some actively e.g. by changing rules, etc., others simply asleep at the switch. Some that had been lionized and feted for years (e.g. Greenspan) were shown to have laid the conditions that inadvertently encouraged the housing bubble... (Note: if any reader runs into any articles blaming the FASB and FAS 157 please ignore, this is a complete red herring)
- Industry and their leaders: A lot can and has been said here. When you get to the bottom of it all it is amazing that so many people supposedly knowledgeable about risk and how to mitigate it were so completely unaware of their own risk exposure! For example, "According to the KPMG survey, insurance executives indicated that the industry as a whole did not do a good job understanding its exposure to the credit and sub-prime issues in 2008. In fact, 40 percent gave the industry a grade of 'D' or 'F', while only 19 percent assigned a grade on 'B' or better. Forty-one percent assigned a grade of 'C'. Ironically, in the 2007 KPMG survey, 72 percent of executives indicated that they were confident their companies had a firm grasp on their exposure to the sub-prime market and related risks." Additionally, in this group should figure some companies that have mostly escaped the public spotlight so far, the credit rating agencies i.e. Moody's, Standard and Poor's, and Fitch, that initially rated the subprime financial instruments and continued to keep their ratings high until it was manifestly impossible to do so any more...
A Bipartisan Guide to the Financial Collapse: Who’s not taking money from Merrill and Lehman?
Foxes guarding the henhouse?
Andrew Cuomo and Fannie and Freddie
Anatomy of a Train Wreck: Causes of the Mortgage Meltdown
Insurance Execs See Significant Sub-Prime Impact on 2009 Results
Previous blog entries:
Makes the world go round ($$) - September 25th
One can dream - September 23rd
Finely calibrated reactions - September 16th
Fannie and Freddie - September 10th
Housing Stories III - July 29th
Housing Stories II - May 6th
Housing stories - April 5th