Kieran,
Thanks for the post. I personally agree with much of what you wrote.
At the heart of it we are all responsible for the financial crisis. Banks and mortgage brokers were pushing out subprime and Alt-A mortgages which they knew that the borrowers could never service -- they were happy to get the origination volume with the knowledge that they could securitize the loans and onsell them to institutional fixed income investors (as well as Fannie and Freddie). The institutional investors, which included other banks (different departments internally), failed to do basic due diligence because they were getting the yields they required for their investors. The investment banks were happy to securitize these loans without the proper diligence and disclosure given the fees they were earning, and the internal mindset that "whistleblowers" aren't to be tolerated given that they kill deal fees.
Regulators did a horrible job regulating the banks, including sales practices, as well as ensuring that the banks maintained the proper capital levels to conduct business (look at the tangible common ratios of the banks in the U.K., for example). The mortgage brokers, which pushed the majority of these loans out the door, weren't even regulated. Let's not forget that in the U.S. there were public policies that supported loans being made to individuals who otherwise could not get those loans, in an effort to advance home ownership -- but without the proper underlying personal income to service the loan once rates would go up, which inevitably they would. This public policy initiative was supported by the government in part by the requirements put on Fannie Mae and Freddie Mac to buy these toxic loans and securitized securities to create a liquid secondary market for these questionable loans. Fannie and Freddie now hold more of this toxic waste than anyone -- by a country mile -- and the taxpayers on the hook.
Let's not forget the borrowers, who were taking out loans that they likely knew that they couldn't service long term. Yes, there were issues about disclosure from loan officers, but I have trouble seeing how zero equity loans with low teaser rates of interest wouldn't set off warning bells with the average citizen. It was cheaper to buy a house with these terms, rather to rent, and if things went belly up, you could always walk away from the property. There were also the speculators and local retail property developers, who made millions by the excessive use of leverage.
Finally, don't forget the government (more than the Federal Reserve), which kept interest rates low for a very long period of time. This is good politics, and served as a means to enhance the well being of the middle and lower classes who were seeing their earning power eroded given global economic trends (manufacturing jobs going to China, for example). How many people had the discipline to live within their means?
This was a complex problem with no easy solution. The banking industry had to be supported, or else the whole economy would have really been in trouble, although in theory letting foolish businesses fail is probably a good thing. Problem is there were multiple parties who made mistakes. The proverbial comedy of errors.
Tom
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