Like the mindless day traders of the 1990’s who piled into the same hot internet stocks, today’s commentators on the causes of 2008’s residential-real-estate implosion have exhibited a similar obtuseness regarding the workings of financial markets.  One will search in vain for any article that identifies a party other than Wall Street or large commercial banks as the primary villain in the crisis.  Writing in the New York Review of Books on August 19, Frank Rich cited “the widespread conviction that the White House tilts toward Wall Street” at the expense of “those who suffered most in the Great Recession”—i.e., average Americans.  Jonathan Alter, in his recent biography of President Obama, identified a “colossal injustice” resulting from the real-estate collapse and subsequent recession.  Alter furthered the anti­finance narrative as he predicted that “wealthy bankers” would be made whole for their real-estate losses while average Americans would be left footing the bill.  Even Chronicles writers have joined the populist crusade to blame the titans of finance.  “The big banks . . . caused the trouble” read the August American Proscenium (“How To Succeed in Banking Without Really Trying,” William J. Quirk), which pointed the finger at Wall Street as the root cause of our current troubles.

An unsophisticated hatred of finance capital makes for strange bedfellows.

The arguments of leftists like Rich and Alter do have some merit.  The federal government used every fiscal and monetary trick in its repertoire, constitutional or not, to save the economy in the fall of 2008.  Two years after that nerve-wracking autumn we now see government policies that would shock even these skeptical writers.  As detailed in Professor Quirk’s article, the Federal Reserve Bank’s Zero Interest Rate Policy (ZIRP) has funded the commercial banks’ economically unproductive “carry trade,” in which those same commercial banks borrow funds from the Fed at no cost and reinvest the proceeds in U.S. Treasury securities yielding over three percent.  This textbook example of “rent seeking” behavior by the banks is offensive enough on its face.  When we realize that this monetary giveaway is fueling our latest asset bubble in government bonds, anger and fear are the only sane responses.

No one denies that large financial institutions played a major role in the real-estate shenanigans of the last decade.  Politicians will publicly blame the banks for taking advantage of their financially unsophisticated constituents.  The press will be reluctant to blame consumers’ profligate ways, lest they alienate readers.  Yet the usual practices of politicians and journalists blind us from a painful truth: For every mortgage lent, there was a borrower who sought that loan.

Mortgage brokers and small banks profited by writing mortgages to unqualified borrowers.  And what about those unqualified borrowers?  I struggle to sympathize with real-estate buyers who jumped into the booming housing market by putting no money down, buying houses beyond their financial capacity, and then flipping their artificially inflated assets to the next sucker.  Had banks, both large and small, exercised even minimal prudence with their depositors’ funds they would have turned down $40,000-per-year landscapers buying that third investment condo in Las Vegas.  Likewise, bank depositors, lulled into complacency by federal deposit insurance, slept soundly knowing that the insolvent FDIC would protect them from their banks’ idiotic lending practices.  Instead of reviewing their depository institutions’ readily available balance sheets, American savers spent much of 2007 arguing about which washed-up celebrity shook his booty best on Dancing With the Stars.

A recent article in the New York Times exemplified both the media’s reluctance to blame anyone other than the lords of finance and the spendthrift ways of opportunistic Americans who tried to exploit rising house prices.  The Times piece detailed the tribulations of a 42-year-old unionized roofer in Philadelphia on the verge of losing his house, “the only house in which he had ever lived,” through foreclosure.  Such an economic calamity is indeed a tragedy,  yet Christopher Hall’s predicament, which the Times represents as a typical case of a big bad bank abusing a little borrower, is more complicated than the paper’s portrayal.

Christopher Hall purchased his house for $44,000 from his grandfather in the mid 1990’s at a time when his $1,000 weekly earnings easily covered his fixed-rate mortgage.  But sometime in 2006 Mr. Hall opted to consolidate some higher-rate credit-card debt and finance renovations on his house by borrowing against his equity in it.  Instead of just increasing his mortgage balance outstanding, he opted, with the help of a “for-profit credit counselor,” to take out an adjustable-rate loan.  When the interest rate on his mortgage adjusted, Mr. Hall saw his monthly mortgage payment rise from $500 to $950, clearly unsustainable on his $1,000 weekly income.  At his foreclosure hearing last fall Mr. Hall admitted, “When I got the mortgage, I didn’t really understand it.”  Neither, apparently, did his for-profit credit counselor.

Sadly, Hall’s case uncovers several of the explosives borrowers stepped on as they sprinted across the minefield of ever-rising house prices between 2002 and 2008.  Many homeowners opted to borrow against the equity in their property to fund current consumption.  Why wait for your earnings to grow over time when you can tap into your home equity right now?  That equity would always be there.  House prices could never go down, or so they thought.  And why pay six percent for a fixed-rate home-equity loan when you could get the same loan on an adjustable basis for three percent?  As Christopher Hall can now tell you, adjustable-rate loans tend to adjust.  And they only adjust upward, never down.

Few events in life generate more stress and anguish than the loss of one’s residence.  Compassion and charity are the proper response to all the displaced families right now.  But we must also remind those who had a hand in their own economic difficulties of their responsibilities.  If we fail to do so we should expect this crisis to repeat itself for as long as Americans own houses.  Sure, the banks lent to borrowers who put no money down, who opted for adjustable-rate loans, and who used the equity in their houses to finance current consumption.  But right across the table from the bank officer who rubber-stamped these now-toxic mortgages sat a borrower who gladly accepted those easy loan proceeds.  This carefree borrower will do so again if he is not made to recognize his feckless behavior.  Ditto for the bank officer.

Skeptical market observers, along with that minority of Americans who exercised a modicum of financial responsibility during the real-estate market’s Potemkin boom, can now comfort themselves only by wishing a plague on both their houses.  But whatever comfort we derive from such thoughts will be short lived.  Reality will set in as we recall the new $8,000 federal housing tax credit (just extended by Congress this past June) and the future inflationary effects of the free money—some $23.6 trillion, as Professor Quirk ominously highlighted—that flew off the Fed’s printing presses and into the maws of any bank motivated enough to ask for some.

Imagine an eight-year-old Mexican child’s birthday party.  Family and friends have gathered for the highlight of the affair, smashing the piñata.  Suspended by a thin string from the ceiling, the fragile piñata, like the global economy, functions well until external shocks shatter it.  Suddenly, central-bank monetary interventions and government-housing policies disrupt the equilibrium in the same way the stick punctures the piñata.  Combined, these exogenous factors hit the economy with the same accuracy (read: very little) and intent (reckless assault) as the birthday boy’s wild swings.  Yet the birthday boy, much like politicians looking to ingratiate themselves with voters, continues to flail at the behest of the crowd gathered around him playing the role of the press in inciting politicians to fix the crisis.

Once the piñata breaks, candy showers the floor like tax credits, postponed foreclosures, and mortgage write-downs that lenders have to eat.  The parents all yell for the eight-year-old to continue his wanton attack just as the press has urged on politicians in their crusade to bring down finance capital.  The birthday boy’s amigos scramble for the fallen loot like American homeowners sopping up the rewards for their decade-long abrogation of personal financial responsibility.  With the party at full tilt, mariachi music blaring from the stereo, and lights flashing throughout the neighborhood, the residents next door, like responsible American taxpayers who did not jump headfirst into the heated real-estate market in search of an easy buck, wonder what other indignities they will have to endure until the fiesta ends.  “At least,” the neighbors mumble to themselves, “this nightmare will end when the last shot of tequila has been drunk.”

Sadly, America’s housing fiesta shows no signs of ending.