Article Highlights:
- The mortgage crisis led to the overall financial crisis.
- The “blame game” has two main sides.
- The debate has evolved over the course of the recession.
The divisiveness of the United States financial crisis has evolved throughout its duration. Placement of the blame for the mortgage crisis has been the crux of the issue and has been exacerbated by political pundits as the recession intensified and eventually slowed.
Before examining the two sides of the argument, we must first understand how the crisis itself has progressed. Securities—the “bundles” we know today to represent a myriad of financial values in one complex instrument—include mortgages and played a key role in the downfall of the global economy. Prior to the 1990s, banks did not handle the breadth of financial operations as they do now, a controversial yet economical aspect of today’s economy. However, the bundling of assets alone could not have ended in a worldwide recession; it was instead the act of irresponsible lending and/or borrowing, particularly in the sub-prime mortgage market (the growth of mortgage-backed securities amplified this effect). But because banks were so interconnected, one failure led to another and worsened investor confidence. The rest is history.
The “and/or” scenario presented above is the topic of debate in retrospectively analyzing what led to and sustained the financial crisis. Immediately following the drastic decline of the global financial sector, theories and ideas arose as to how and why the problems ensued. “How” was not a highly-contended question; most experts agreed that some form of irresponsibility in mortgage practice put borrowers in over their heads on loans and payments, causing defaults too large and in such high volume that banks simply could not withstand them.
The initial overwhelming sentiment was that the lenders had deceived homebuyers into a false sense of prosperity. The housing “bubble” was inflated by two main factors: liquidity from the previous financial boom and, in turn, an abundance of credit. By some standards, the mismanagement of credit was fueled by the mortgage brokers and banks that saw their respective incomes rise with an increased volume of lending. No responsibility stayed with the brokers after the deal was done, just as none stayed with the banks once the securities in which the mortgages were bundled were valued and sold. Add this to a low-interest federal interest rate (the result of pre-crisis prosperity) and a cocktail for disaster arises.
The resultant collapse and bailout of the banking industry created an atmosphere of remorse towards the lending side of the equation. People saw big banks being “rewarded” for misleading homebuyers and became increasingly infuriated after news of excessive executive bonuses (and the entire AIG saga) was released.
A divergence in opinion became more mainstream after outrage settled and people began critically examining the causes of the recession. Many began asserting that, rather than placing any or all of the blame on the lenders, individuals signing their names to loans they could not afford should be seen as the culprits. At first glance, this argument is a bit less complex than the idea that lending practices were to blame. However, the issue runs deeper than homebuyers being overzealous in taking large mortgages.
Placing the blame on the “American Dream” may seem preposterous, but a false sense of prosperity can undoubtedly lead to irresponsible decisions. U.S. citizens are and have traditionally been (oftentimes unrealistically) optimistic about their ability to have the material desires coupled with the ideas of freedom and opportunity. In their pursuit of a two-story abode with a white-picket fence and two-car garage, many Americans got in over their heads.
(Note: For the two extremes on this debate, see the excerpt of Michael Moore on the Sean Hannity Show from October 6, 2009. The link can be found on the Bulls & Bears Facebook Fan Page)
