It is time for politicians of all stripes to stop blaming the financial crisis on "Wall Street greed" and level with the American public. The American consumer played a large role in bringing about the crisis. Yes, Wall Street played a significant role, but the problem was as much hubris as greed. Wall Street was doing what it is supposed to do: making money by taking risk, investing and helping others to invest.
It made a lot of money for a time by taking a lot of risk, especially by leveraging greatly, believing that its computer models would prevent it from taking too much risk and that they would blow the whistle if it were time to get out.
Wall Street failed to heed the warning given by the collapse of Long-Term Capital Management in 1998 when the Greenwich, Conn.,
hedge fund's models failed. Since financial models are only as good as the historical data on which they are based, it stands to reason that models fail when unprecedented events occur, as was the case then and now.
But Wall Street isn't solely responsible for the crisis.
Fannie Mae of Washington and
Freddie Mac of McLean, Va., played a large role by continually lowering the standards on the mortgages that they would buy to package into securities, and taking on excessive leverage.
Congress was partly responsible, as it failed to heed the warnings about the dangers represented by Fannie's and Freddie's activities, especially their leverage.
The
Federal Reserve was partly responsible — it took too long to recognize the dangers of the housing bubble and the flood of dollars pouring into the United States from China and the oil-producing countries.
The Securities and Exchange Commission was also partly responsible; it allowed investment banking firms to increase their leverage to unsafe levels.
There is plenty of blame to go around.
But no politician has explained to average Americans the role that they played in the crisis and the role that they could play in fixing it and preventing a similar crisis in the future.
All Americans who spent more money than they earned over the past three decades contributed to the crisis. They drove the U.S. savings rate to near zero, from close to 10% in the 1970s.
That includes all Americans who ran large balances on their credit cards, who took home equity loans to buy cars rather than saving for them or who bought houses they couldn't afford, hoping that rising home prices would bail them out.
Economists warned that the country couldn't continue living beyond its means, financing our excessive spending by borrowing from other countries, but few politicians — and even fewer individuals — listened.
Perhaps some good could come from this crisis if individuals, and the country as a whole, relearn the discipline and wisdom of thrift.
If consumers began to save for purchases large and small instead of running up debt on their credit cards, and if they stop using home equity for instant gratification, perhaps the U.S. savings rate would rise enough so that the country wouldn't have to borrow from abroad to finance itself.
One unanticipated consequence of the government's actions to shore up the financial sector may be that if its actions are successful, the fear that has struck millions of Americans will quickly dissipate, and we will return to our spendthrift ways.
Ideally, President Bush would be making the case for a return to thrift, but he is so unpopular that his words would probably fall on deaf ears, especially as they would be unwelcome to most Americans.
The Peter G. Peterson Foundation, established by the co-founder of The
Blackstone Group of New York, a former secretary of the Department of Commerce, has attempted to call attention to the disturbing reality that the whole country has been living beyond its means.
But the New York-based foundation needs vocal support from the political class, especially the two presidential candidates. Unfortunately, both of them have joined the "blame Wall Street" chorus and are unwilling to tell the voting public the whole truth: Ordinary Americans aren't blameless, and we all have to shape up if the nation is to come out of it.
