It seems like everyone is looking for someone to blame for the economic crisis. Congress blames the banks for risky lending practices and corporate greed. Banks blame lawmakers for relaxing regulatory standards, keeping interest rates artificially low, and using Fannie and Freddie Mac to increase homeownership. Both groups also blame hedge funds for manipulating markets and distorting asset prices. So, whos to blame?
In isolation, one group might be responsible for our current difficulties. However, it does not work like that. The U.S. economy is a complex system that involves hundreds of millions of participants that interact in trillions of symbiotic transactions. Consumers lend to banks, who in turn lend to businesses and other consumers. Government provides oversight and takes a cut of every transaction. As you can see, there is no single entity to lock in the stockade for all to tar-and-feather.
The more meaningful question everyone should be asking is: how did I contribute to this crisis? Since the problems are rooted in the housing market, lets start there. If you bought, sold, or refinanced a home in the past 7 years, like it or not, you contributed to the housing bubble. Granted, Mr. Greenspan facilitated your transaction by keeping interest rates too low too long in an effort to spur the economy following the dot-com bubble and 9/11 attacks. But nonetheless, your transaction had a direct impact on the market and drove up home prices.
If you consumed beyond your means and carried a balance on your credit card, you contributed to the credit bubble. With access to cheap, short-term funding, the banks profited from your excessive spending habits and made a nice profit charging a 15% APR. Additionally, the banks probably increased your credit balance, adding more credit and leverage to the system. Plus, all the goods you purchased were probably manufactured in China, increasing the U.S.s foreign trade deficit, which in turn fueled more lending to the banks.
Finally, if you invested in any type of managed investment that had exposure to sub-prime mortgages or leveraged financial instruments, you contributed to Wall Streets greed. Although you are not directly responsible for the decisions of others, your capital enabled institutional investors to gamble with your money. This is one of Robert Kiyosakis primary complaints about managed mutual funds. They always collect management fees, pay themselves performance bonuses in good times, but the investor bears all the downside risk. In short, always perform due diligence and understand what you are investing in. Just because it appears safe, does not mean it is.
All of these transactions were made possible by debt, cheap capital, and leverage. Before looking to blame someone else for the economy, first consider how you contributed to the problem. As the saying goes: every time you point a finger at someone, remember there are three fingers pointing back at you.
In summary, the economy will only begin to recover after each American accepts responsibility for and rectifies their individual actions. The force of the market it much greater than any program the government can create. Even the $700 billion bailout, impressive as it is, only represents about 5% of the United States annual GDP. The economy created this problem and should be allowed to resolve it. Placing blame and looking to government to solve our problems will most likely only prolong the pain.
