Each day for five days, a different writer from TheStreet.com will make the case for why one of five prime culprits—the banks, Congress, irresponsible home buyers, the Federal Reserve or the rating agencies—is most to blame for the credit crisis and ensuing economic meltdown.
It's tough to wag a finger at those in pursuit of the American Dream: The big house and the white picket fence to call your own.
Yet it flies in the face of reason that someone who earns $50,000 a year could actually believe they could afford to make payments on a $650,000 home. It's a very simple point, a concept that should be easily grasped. Even Saturday Night Live gets it , evidenced by their great skit with a simple instruction: "Don't buy stuff."
But as Paul Nolte, director of investments with Hinsdale Associates, points out, the reckless assumption that housing prices would always rise has brought us to the precipice the economy currently rests on, in danger of falling over.
"The borrowers thought they were getting something for nothing," Nolte said. "They could lever it up because housing prices have always gone up. As it was with the tech bubble, when everyone thought tech was safe, it's the same thing in the housing market. Investors were not conservative in the housing area, just as they weren't conservative in technology in the early 2000s."
Not every borrower is to blame for where the stock market and the economy are now. Some responsible homeowners have always lived well within their means, but a layoff in the household or some other tragedy turned into the tipping point that drove many into foreclosure. These specific cases require some understanding and compassion.
Beyond that, it's tough to find sympathy for unscrupulous borrowers that, simply put, should have known better. There are several types of irresponsible borrowers that need be held accountable: Buyers who took out a mortgage they could never afford, buyers who tried to ride the housing wave without educating themselves well enough, buyers who committed fraud in hopes of netting a quick profit, and buyers who attempted to flip more homes than they ever could manage.
But let's be honest. No one forced a borrower's hand to sign the dotted line. Considering that a home is almost always the largest purchase a person will ever make in their life, buyers should have been well aware of the risk they were taking. Enough with the excuses. For every irresponsible lender, there was an irresponsible borrower.
But some home buyers employed more advanced mathematics, in the name of greed. They leveraged themselves after securing monster mortgages, ones that required interest-only payments, in the hopes they could refinance when the value of the home rose, allowing them to make other purchases. Alas, we know now rising home prices are not a given.
Others, like Rick Sharga, vice president of marketing for RealtyTrac, argue instead that lenders bear more of the blame. They should've been the adult supervision at the party, but "at the first half of the decade they handed the kids the keys to the alcohol cabinet."
Sharga also points out that there were some questionable actions being made by some borrowers.
Perhaps the next major problem the economy and stock market faces is that irresponsible borrowers will not learn from mistakes they've made. If greed and debt caused this meltdown, borrowers need to avoid both if a recovery will ever come.