Financial Crisis 2008: Who is to blame? Whose fault was it?

The media, as always, will (and has) blame(d) Wall Street and greedy Republicans. But the facts are quite different. To better understand who is to blame for the crisis, we should listen to those who have a lot to lose in a financial crisis and those who were inside the banking industry. Hedge fund managers, whose financial well-being is directly proportional (or perhaps exponential might be a better word) to their performance, have a lot riding on guessing the performance of companies, commodities, and the financial system as a whole.

I found these two great insights into what happened, first by Stephen Schwarzman, chairman of hedge fund Blackstone Group, and Noel Sheppard, editor of NewsBusters who worked in the banking industry during and after the 1980s S&L crisis.

Schwarzman: "It’s a perfect storm. It started with Congress encouraging lending to lower-income people. You went from subprime loans being 2% of total loans in 2002 to 30% of total loans in 2006. That kind of enormous increase swept into the net people who shouldn’t have been borrowing.... Those loans were packaged into CDOs rated AAA [by Fannie Mae and Freddie Mac], which led the investment-banking firms [buying them] to do little to no due diligence, and the securities were distributed throughout the world, where they started defaulting." [Read full article here]

Sheppard: He quotes the Investor's Business Daily, which pinpoints the start of the crisis to Jimmy Carter's Community Reinvestment Act, which forced banks to lend to uncreditworthy borrowers, mostly in minority areas. Then, "Despite warnings from GOP members of Congress in 1992, Clinton pushed extensive changes to the rules requiring lenders to make questionable loans." [Read full article here]

So it wasn't too much regulation of the private market that caused the problem, it was too little regulation of the quasi-government entities Fannie Mae and Freddie Mac and unsound laws passed in the name of equality for everyone.