The Crazy Blame Game

Matthew Yglesias has an excellent rant about the home mortgage crisis and whose fault it is:

I was ranting the other day about the evils of the finance sector and its denizens, and one of the people I was talking to, being a reasonable person, tried to get me to put things in perspective. “But,” she said, “don’t you also blame the people who took out loans they couldn’t pay back and bought prices they couldn’t afford?”

As it turns out, though, I’m not that reasonable. Either that or the world is crazy. Because I genuinely don’t understand why people say things along those lines. Someone who takes out a loan they can’t afford and then defaults doesn’t deserve to be “blamed” for anything. They suffer consequences for their actions. Much as the person who issues a loan the borrower can’t pay back doesn’t really deserve “blame.” Both parties to such a deal suffer from the collapse of the lending agreement. Everyone has an incentive to avoid lending money to bad borrows and an incentive to avoid becoming a bad borrow. But mistakes happen and people do dumb things, and then they bear the consequences. That’s life.

Now of course we had more than one person doing this. We had a whole real estate bubble, and lots and lots of bad borrowing fueled by the assumption that prices would rise indefinitely. And it’s true, as various people keep pointing out, that the blame for this is multifaceted, relating to some misguided government policies, to the Fed’s interest rate decisions, to the so-called “savings glut” in Asia, etc., etc., and of course to speculators and unscrupulous lenders and all the rest.

But even though the deflation of a housing bubble would lead to economic problems, it’s just not the case that “the economic crisis” (as folks have taken to calling it) was primarily caused by the rise and now fall of an asset bubble in the housing sector. Such bubbles and their collapse are problematic, but also somewhat banal. We had one just a few years back when the dot-com stock bubble collapsed. That provoked a recession and the loss of a lot of paper wealth in the stock market, but there was no crisis. There was no crisis because the big movers and shakers of the finance world didn’t build a giant house of cards built on the assumption that tech stocks would continue to rise in value indefinitely. Some people made bad bets along those lines, of course, but nothing close to the scale of what we’ve seen recently.

And the essence of the crisis is right there. Not in the deflation of the bubble as such, but in what was done on top of the bubble with leverage and so forth so as to create a situation so precarious that credit markets were on the verge of total collapse a little while back. It’s the people who did that who deserve blame.

I must not be that reasonable, either — because I could not agree more.

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