Placing blame on one particular group for the current state of our economy is easy, but like most economic and social phenomena, this current recession has many causes and many groups to share the blame. Accepting responsibility for the disaster is the difficult part.
The blame game goes something like this: homeowners blame Wall Street, Wall Street blames mortgage lenders and mortgage lenders blame homeowners. The only certainty is there will always be a cycle of blame with no clear resolution.
Though issues within the economy skyrocketed in 2007, the pillars of the economy began to crumble several years earlier.
For years, lenders like Fannie Mae and Freddie Mac, government-regulated corporations designed to purchase and secure mortgages, had been providing borrowers with poor credit histories mortgages with a low down-payment. These homeowners wanted to live the American dream, yearning for a big house even if they knew they could not afford it, and these lenders were eager to satisfy this greed, believing housing values would continue to rise and they would eventually be paid back.
By 2007, housing values began to fall and lending companies felt the repercussions of lending mortgages to unqualified borrowers. The result: an increase in home foreclosures.
It was at this point, according to the PBS Frontline Documentary, “Inside the Meltdown,” that people began to get worried. Homeowners, as well as corporations like Fannie Mae and Freddie Mac, were relying on assumptions that home values would not go down since studies showed they hadn’t since the Great Depression.
Fannie Mae and Freddie Mac were not the only lenders to find themselves in trouble.
Huge investment banks like Bear Stearns, the main focus of “Inside the Meltdown,” began to taste some of the economic poison as well. Large Wall Street firms like Bear Stearns had collected huge fees in the mortgage business. Traders were willing to trade risky mortgages as long as the fees and bonuses continued and firms continued to lend to the hedge funds involved in the lending market. These hedge funds were able to invest large sums of money while only putting up a small percentage of the assets invested. In other words, a firm like Bear Stearns would lend them 10 dollars to purchase securities that were worth 100 dollars. When the assets began to fall quickly, firms like Bear found they had lent the hedge funds too much.
Bear Stearns was not the only Wall Street firm in trouble. Many investment banks were doing exactly the same thing but were not as publicly hurt by it as Bear was. Additionally, since Bear’s problems were so public, other Wall Street banks began to crumble as well.
Fannie Mae and Freddie Mac’s stock prices tumbled 90 percent in a short time, and as firm’s stock price levels dropped to near bankruptcy, it became more expensive and difficult for them to borrow money. Nobody wanted to lend to a company that may be bankrupt tomorrow, even though that is the policy of the Wall Street system.
Each facet of the economy is interconnected, so when there is a tremor in one area, that tremor will trigger other areas to crumble as well. As bankers and brokers couldn’t raise money, hedge funds found it harder to borrow and they had to sell assets.
No matter what, each facet had the responsibility and the ability to see that there may be an issue, it’s just no one was willing to step back, perhaps lose some of the major profits they had been seeing for years, and attempt to fix that issue. By the time the problem was acknowledged and the government stepped in, it was too little too late.
Written by Max Sass | 
