Six Fingers of Blame

Six Fingers of Blame in the Mortgage Mess

Economic View
Six Fingers of Blame in the Mortgage Mess
By ALAN S. BLINDER
Published: September 30, 2007
Until we diagnose what went wrong with the subprime mortgage market, we cannot even begin to devise policy changes that might protect us from a repeat performance.

Excerpt:

Finger-pointing is often decried both as mean-spirited and as a distraction from the more important task of finding remedies. I beg to differ. Until we diagnose what went wrong with subprime, we cannot even begin to devise policy changes that might protect us from a repeat performance. So here goes. Because so much went wrong, the fingers on one hand will not be enough.

The first finger points at households who borrowed recklessly to buy homes, often saddling themselves with mortgages that were all too likely to default. They should have known better. But what can we do to guard against it happening again?

The six fingers:

1. Gullible consumers who borrowed recklessly to buy homes
   
2. Some lenders sold mortgage products that were plainly inappropriate for customers
   
3. Bank regulators for not doing a better job of protecting consumers and ensuring that banks followed sound lending practices
   
4. Many investors, swept up in the euphoria of the moment, failed to pay close attention to what they were buying
   
5. C.D.O.’s, for collateralized debt obligations, were probably too complex for anyone’s good — and the investment bankers who dreamed them up and marketed them aggressively
   
6. Investors placed too much faith in the rating agencies — which, to put it mildly, failed to get it right