Flagpole,
Here's a few problems I have with your arguments. I'm all for personal responsibility, and doing your homework, and making cautious investments and financial decisions. I would follow and give the same advice. But in fairness, we must hold everyone responsible for decisions and risks they made. This includes corporate and government responsibility.
I'm asking myself, why did the problem happen now? What changed? Bad borrowers and banks have existed for centuries. The problem is well known, and the banks should know how to manage that problem. I think this is important to think about. What is different now, than say 10 years ago, or 100 years ago? Usually bad loans make up a small percentage of a bank's portfolio. How did the problem grow so big, without anyone seeing the risk? How did bad loans go from a manageable problem to an unmanageable problem?
When you borrow money from a bank (or any mortgage lending institution -- for simplicity I'll just say banks), there are two parties in the transaction. If a borrower borrows more than he can afford, you can fault the borrower, and the penalty is that he loses the house, and maybe some money, and some credit rating. But the risk and the blame for each borrower should be narrowly limited in scope, affecting only the borrower, and only in small part, the bank.
But the housing crisis is much bigger than a few bad borrowers losing their houses. People (and governments) not involved in these transactions lost values in their investments, in their house, and sometimes lost their jobs, and taxpayers lost money, socializing the risky decisions made by some bigger banks.
Let's talk about corporate responsibility. Banks are in the business of lending money. Borrowers are in many other businesses, or maybe no business at all, with little education, experience, job history, and money. Borrowers can be easily confused by lots of different borrowing options, and may not always be aware the risk they are taking. But banks should never be confused. They know that there is a risk that any of their loans may end up in default. It is their job and duty to assess and mitigate that risk, usually by asking for collateral, or demanding a higher interest rate to help pay for defaults. If the bank makes too many loans, without properly assessing and mitigating the risk, this is the fault of the bank, not the borrowers. If they offer liar loans, NINJA loans, no-down payment loans, interest only loans, negative amortization loans, etc., they must know that the borrowers are not in a position to take a fixed rate loan with 25% down. No single borrower can be blamed for a banks failure to perform due diligence. It is not the borrowers fault if banks over-leveraged themselves.
So again, I'm all for personal responsibility, and educating people to make informed decisions. But even in the worst case were no one is informed, the banks should have contained the problem. It's their job and their duty.
But the current crisis has a few more new elements. Many banks were not concerned with the risk, because they were immediately reselling the loans. The high risk didn't disappear, but simply lost visibility. These bad loans were being repackaged and sold as AAA rated mortgage backed securities. Investment firms colluded with ratings agencies to produce AAA rated investments. This created an unusually high demand for bad loans.
Some conservative funds, like pensions are bound to invest in AAA securities. They invested in these bad loans without knowing the true risk. Do you still fault the collective borrowers for that? Maybe the pension fund manager should also be faulted for not doing his due diligence.
I have two friends who got married and bought a big house that they could afford. But guess what -- he worked at Lehman brothers, and was laid off. Is that the fault of my friend, Lehman brothers, or the borrowers?
When I see you blame Clinton and the CRA, I have to agree with others, that, despite your sound financial advice from a personal viewpoint, maybe you don't have a clue about the real cause. But maybe I'm wrong. Do you have any data about how many CRA loans defaulted, and how many CRA regulated banks collapsed, and how this compares to other loans? Most of what I've seen says that CRA loans behaved much better, and that most of the banks in trouble were not subject to CRA. I've also seen that Bush Jr. weakened the ability to enforce the CRA, twice, during his term. So it's surprising to read that you think that the CRA led to a crisis now.
I've also seen others blame for repealing parts of Glass-Steagal. He did this by signing an act with Gramm, Leach, and Bliley's name on it. This was not a democratic Clinton bill, but a Republican bill that was passed by the House and the Senate, by such a majority, that even veto-ing the bill would have had no effect. Clinton had little choice.
I'm also not clear about the roles of Fannie Mae and Freddie Mac, but they seem more like victims of the system rather than part of the cause. Fannie Mae and Freddie Mac were not driving the demand for bad loans to a level that caused the crisis. Or if so, what changed since 2000 that caused the crisis now?
The real issue for me is not that bad loans were made and defaulted, but the sheer magnitude of the bad loans. What changed that enabled the percentage and magnitude of bad loans to grow unchecked?
We can assign some of the blame to poor borrowers, but the problem is well known, and never should have gotten out of control. Banks failed to perform their primary duties, investment firms inadvertently hid risks, independent ratings agencies compromised their integrity, and governments neglected to watch the banking, investment, and housing markets.