Politicians made a fine show of standing up to those fat cats and voted down TARP initially and reflected Main Street’s outrage that Wall Street is being bailed out through tax dollars. However, the credit crisis isn’t solely a made-in-Wall-Street phenomenon; there is enough blame to go around.
Government: Politicians couldn’t resist the opportunity to engage in grandstanding just weeks before an election but deserve plenty of blame for the credit crunch. Instead of voting for the regulation of credit default swap markets (which felled mighty AIG), Congress decided to prohibit any oversight of CDS and other derivative markets. In order to increase home ownership rates among minorities and low-income consumers, the Clinton administration pressured Fannie Mae to ease credit requirements on subprime loans purchased from banks.
Main Street: It is on Main Street that the toxic, subprime loans originated. Home owners were willing to borrow mind-boggling sums of money to finance their dreams of home ownership. Many homeowners surely realized that if they could barely afford the “teaser rates” on their subprime mortgage, they didn’t have a snowflake’s chance in hell of affording the regular payments. Still, they signed on
Investors: Who in their right mind would accept securities that paid slightly more interest than US treasuries because they are “AAA-rated”? Imagine if investors has instead sneered at these Wall Street geeks and their complex formulas and demanded higher rates to compensate for higher risk. It would have kept subprime a small part of the market.
Wall Street: The geniuses on Wall Street originated these loans, packaged them and sold it to investors around the globe for a nice fat fee. They also got stupid and drank their own Kool-Aid and kept some of these loans on their books. While Wall Street deserves its share of the blame, it is hardly the only guilty party here.