While it is clear a lot of borrowers were imprudent, banking over the last 500 minus the last ten years took that as a fundamental assumption and acted accordingly. Borrowers can be dishonest, fools, overly optimistic, or just plain unlucky. And for lenders, it’s never will be any better than what you were promised at the time the loan was made. So lending used to be a high stress affair, with the onus on the borrower to prove he was good for the dough.

Thus as far as I am concerned, the banks bear primary responsibility because it was their money that was being put at risk, and they unilaterally changed the procedures so as to take on more risk.

But as Tanta has said repeatedly, lenders started going for efficiency at the expense of proper procedures. And she also noted, that streamlining also made it easy (”user friendly”) to the borrower, to their detriment. When borrowing was a drawn out process, you had time to question the wisdom of your actions and worry whether this was such a good move.

To give one illustration of how lenders enable borrower imprudence: my father was going to get a home equity loan. After he qualified but before the closing, he asked the bank for a copy of the loan agreement. The bank did everything they could to avoid giving it to him, including telling him he was unreasonable, no one had ever asked to read it. My father read it, concluded it was terribly one sided, and didn’t proceed with the loan. This is a small example, but here the bank took aggressive steps to discourage a consumer from doing what he ought to do.

Similarly, have you every tried reading your credit card terms? They are deliberately printed so small as to require a magnifying glass to read them. Some mortgages are now being challenged for being in similarly small type so as to impede borrowers from reviewing the documentation.

However, the banks managed to shift some risk back on to consumers. In the old days, when there were usury ceiling, banks charged minimum annual fees. This was useful. It discouraged people from getting too many cards, and enabled them to profit from users who paid their balances in full every month. But now their most profitable customers are ones who are on the verge of bankruptcy, on a debt treadmill, paying penalty rates and unable to pay down the balances. And they seek to create these customers by sending out low initial interest rate offers to people with less than stellar credit scores. A lot of research shows that most people are overly optimistic, particularly about their own odds of success and their self discipline. Many of us are suckers in the making.

And then you have aggressive telemarketers from Countrywide calling homeowners telling them to “put your home equity to work for you.” Their pitch is well honed to suggest you are a financial fool if you don’t tap your piggybank, um, house.

This was all in clear view for the regulators to see. We even had signs of systemic imbalances, in the form of chronically low savings rates (6-7%) declining to zero, and debt to GDP rising by 60% since 2001, when the economy was hardly overleveraged (oh, and during this period, business was a net saver! The rest of the economy became even more levereaged).

So the inaction was criminal, and I hold the regulators primarily at fault for letting an ideological attachment to non-intervention go so far as to imperil the entire economy.

you’re missing the point.

the problem was widespread fraud throughout the entire financial system. massive amounts of over leveraging exacerbated it.

a bank that makes a loan knowing full well the borrower can’t repay it is predatory.

taking that junk and peddling it as a AAA security was fraudulent.

sticking this trash in an enron-esque SIV should have been illegal.

then having this self-described “toxic waste” insured by under capitalized bond insurers was just plain dumb.

now add 30:1 leverage.

yeah, this was *really* destined to work, “on average.”

People are not simply autonomous, rational decisionmakers. An easy example: Do we have an obesity epidemic because millions of people simultaneously decided to overeat, or did they simultaneously lose their character and will, or are there larger social forces that guided their behavior? You don’t have to reject free will to understand that behavior is not independent of societal influences. When millions of people start doing the same stupid thing, it’s not random. I suggest some reading in sociology.

Re: Beyond that the largest campaign contributors to both Clinton and Obama are investment banks.

The Senate Banking hearing will be riff with fraud and collusion from all these crooks that are spinning away their inability to uphold The Constitution!

You’ve got your partisan days (noone’s perfect)… but this is one of the rare times when you have gone completely off the deep end.

The fault for this economy lies with the poeple who, for the last decade, have been borrowing money to overspend their means. Incidently, they’ve been borrowing it, albeit indirectly, from the Chinese to buy Chinese goods… so the negative consequences of their choices are not limited to this particular event.

You can try to blame the credit card companies for lending money… but it’s the people who build up the credit card debt that are responsible for their own destitution. In fact, credit card companies prove that you can profitably lend to people who will not pay the money back.

In the same way, you can try to blame the banks… but its the people who took out variable rate loans to buy houses they couldn’t afford who are responsible for their own financial situation. That the banks happened to lose money this time doesn’t mean that it wasn’t a profitable choice on average.

Particularly if the banks, like credit card companies, were reasonable to expect to profit *on average*, then they were doing the logically correct thing when they lent the money. Regulation doesn’t stop the average American from buying a lottery ticket that’s guarenteed to be a loser on average… the last thing regulators should be doing is preventing a bank from making a bet that’s a winner on average.

If you want someone to step in and solve the problem, have your beloved Democrats pass a bill that forbids “Joe America” from taking out a variable rate loan… don’t blame the banks for offering them and don’t blame the regulators for allowing banks to take what was widely believed to be a reasonable amount of risk.

… and if you seriously think anyone out there was “so smart” that they saw it coming, you’ve gotta ask yourself why all of these pundits didn’t make billions (or at least millions) betting on their perfect forsight. The one great thing about derivative markets is that you get fantastic leverage so the pundits can’t use their financial sitaution as an excuse.

That is bang on. There is institutionalized bribery in place by paying off the government officials AFTER they leave office. They get paid with speeches and director seats by corporations. This should be BANNED. We cannot be allowing people to pursue government positions in order to enrich themselves.

Look at what Greenspan is doing for God’s sake. It’s all out there in the open and everyone just looks on admiringly and applauds.