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Who's More to Blame: The American Consumer or Wall Street?

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Join the Fool as we assess blame for this financial meltdown -- March Madness bracket style! Below is one of eight first matchups you can vote on … enjoy!

The case for the American consumer, by Morgan Housel
It's easy for the American consumer (a.k.a. Main Street) to blame Wall Street because, well, it should. Wall Street screwed up. They were greedy. They were irresponsible. Citigroup (NYSE: C  ) took insane risks, and now it's using tax dollars to clean up the mess. It's sickening.

But the chain of blame isn't quite that direct. Wall Street was able to go berserk over the past decade predominantly because Main Street was addicted to debt.

It's easy to forget about how overcooked American consumers were over the past decade. To bring you back to the good ol' days, I fired up LexisNexis and found some newspaper and magazine headlines from between 2001 and 2007.


  • Americans' Savings Rate Drops to Depression-era Low
  • The Way We Live Now: Home Sweet Debt
  • Borrowers We Be
  • Equity Shrivels as Homeowners Borrow and Buy
  • Savings Enter Negative Territory; First Time Since Great Depression
  • We're Spending More Than We Earn
  • Personal Savings at Lowest Level Since '30s
  • Debt Rises as Personal Savings Falls to Just 1.9%
  • Our Homes Are Our Piggy Banks
  • Why Aren't We Saving More?
  • 2006 Personal Savings Drop to 74-Yr. Low

Yes, banks like Goldman Sachs (NYSE: GS  ) and Bank of America (NYSE: BAC  ) enabled an explosion of credit, but it was Main Street that was eager to gulp it all up … without saving any money, to boot! In 2005, personal savings fell below 0% for the first time since the Great Depression. At the same time, homeowners were pulling $800 billion a year out of homes through home equity lines of credit. That was a boon for the KB Homes and Best Buys (NYSE: BBY  ) of the world, but it was completely unsustainable.

The pain we're dealing with today is largely the American consumers' bill coming due, not just Wall Street's.  

The case for Wall Street, by Horgan Mousel
Why is Wall Street to blame? That's almost too easy.

I don't think there's ever been a period in human history similar to recent years on Wall Street, where complexity exploded at the same time that risk was entirely disregarded. A simple example is to show how severely Wall Street firms leveraged their balance sheets over the years.

Have a look:







Bear Stearns

34 times

29 times

27 times

28 times

28 times

Lehman Bros.

31 times

26 times

24 times

24 times

24 times

Goldman Sachs (NYSE: GS  )

17 times

17 times

25 times

21 times

19 times

Morgan Stanley (NYSE: MS  )

33 times

32 times

31 times

27 times

24 times

Any time a bank leverages up 34-to-1 with subprime assets, bad things happen. This makes total sense in hindsight, but the amount of money Wall Street was granting itself through bonuses and stock options completely blinded rational business sense. The people who run these banks are no less talented than the geniuses at Google (Nasdaq: GOOG  ) , Microsoft (NYSE: MSFT  ) , or Genentech -- they just got completely wrapped up in a vicious cycle of greed.

How can you not blame them?

Now it is your turn to decide who is to blame by voting in our Fool Poll and commenting below.

Check out the Fool’s entire 2009 March Madness bracket here.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Horgan Mousel, on the other hand, does not actually exist. Microsoft is a Motley Fool Inside Value pick. Google is a Motley Fool Rule Breakers recommendation. Best Buy is an Motley Fool Inside Value and Motley Fool Stock Advisor pick. The Fool owns shares of Best Buy. The Motley Fool is investors writing for investors.

Read/Post Comments (12) | Recommend This Article (14)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 17, 2009, at 1:54 PM, Guthree wrote:

    Honestly, it makes no sense to blame consumers. I think you'd have a better chance if you pursued that angle by throwing in a third possibility: Madison Avenue.

    But, bottom line, consumers can only be blamed as individuals. If your cousin gets himself into a mess because of bad financial decisions, you can blame him for that. If your cousin's financial decisions wreck a bank, that's the bank's problem.

    People who bought McMansions with no money down and no savings and an iffy job really didn't do anything wrong other than screw up their credit. They signed a contract that if they couldn't pay for the house, they'd give it back. And they are. (Well, they would if not for government intervention.)

    Think of this business model. McDonald's puts out food and posts a sign, "Take what you want, pay what you want. If we determine you are not leaving enough, we will not allow you to eat here in the future." Now, when people put that restaurant out of business, whose fault is it? The only possible way to blame the eaters is on an individual basis. Maybe a parent might tell a child who gets banned, "Son, I want you to always pay people fairly for what you get from them." But as a group, the people did nothing wrong. Why not go in and eat free until they get banned?

    The blame for indivuals being in financial straits personally is of course their fault, but the idea that the blame for the financial meltdown goes to consumers is totally wacko.

    Well, there is my view. :)

  • Report this Comment On March 17, 2009, at 2:02 PM, RRGY2K wrote:

    You forgot other important choices:

    -The Clinton administration, for lowering lending standards so that lower income people could buy homes.

    -Fannie and Freddie for loving the idea to death.

    -Fannie and Freddie for paying large campaign contributions to house and senate mambers, their regulators.

    -House and senate members for accepting them and then resisting inquiry/restraint on Fannie and Freddie.

    -The financial engineers who designed mortgage backed securities with credit default swaps.

    -The people who knew better than buy them.

    -The people who had a duty to know better than to buy them.

    -Alan Greenspan who saw no problems and no reason to regulate markets for mortgage backed securities, credit default swaps, and hedge funds.

  • Report this Comment On March 17, 2009, at 2:07 PM, cmfhousel wrote:


    Thanks for your comments. We actually provided every one of the choices your suggested:

  • Report this Comment On March 17, 2009, at 4:12 PM, emferguson wrote:

    RRGY2K, the Clinton administration didn't lower lending standards. It drank the conservative free market kool-aid along with the Republican congress to let lenders lower lending standards. Many people want to blame the Community Reinvestment Act, which was meant to encourage lending inside formerly redlined (until the practice was rightly banned as racial discrimination) areas. However, CRA actually prohibited the sorts of predatory lending that caused the mortgage crisis.

    So you're right in your broad point, that deregulation was the culprit.

  • Report this Comment On March 17, 2009, at 5:22 PM, RRGY2K wrote:

    You are absolutely correct. I forgot to include the important work of the Bush administration for sleeping at the switch for 7 1/2 years, while all this developed into a crisis.

    The Clinton administration, in 1993 when the congress was controlled by Democrats, directed Fannie and Freddie to get more lower income people into home ownership as a matter of policy, and relaxing credit standards was one of the tools employed. After all, the federal government stands behind Fannie and Freddie, so what could go wrong? Barney Frank himself was the man, right up there on his high horse protecting Fannie from further oversight and restrictions.

    Predatory lending? Every one of those loans has the same borrower-signed HUD required statement explaining the Fannie/Freddie approved loan terms. Hard to read, yes. But it's exactly the words and numbers demanded by HUD, and no one can close a loan without them and only them.

  • Report this Comment On March 17, 2009, at 5:54 PM, ibropin wrote:

    Here Here you got it right in your first part, I saw finger pointing through all the comments we still dont get it . It must be someones fault we are making all these mistakes it cant be ours that would be sooooooooooo wrong . Wake up and smell the roses we put ourself here . Now at least have the good sense to accept that and know that four of those fingers are pointing back at you.

  • Report this Comment On March 17, 2009, at 11:14 PM, tcalhoun3 wrote:

    I continually read everywhere about how little Americans are saving these days. However, does anyone consider how much money we're throwing at the stock market through 401k and mutual funds? For 20 years I've been hearing that social security won't be there so, you better build your own wealth through those two means. Isn't this the current thinking? Isn't this what the government has been telling us to do? And haven't they made tax laws that encourage this form of investing over simply "saving"-- which we've also been taught can't keep up with inflation. And might it also be the case that all this wealth being thrown at the stock market has itself contributed to the booms and busts? Just asking.

  • Report this Comment On March 18, 2009, at 6:37 AM, Guthree wrote:

    tcalhoun3, great point. 401Ks and IRAs certainly put a lot of money into stock markets that otherwise would not have wound up there. I don't think that gets discussed enough.

    I fear the world is one big pump-n-dump scheme, and the power elite is going to win every time.

  • Report this Comment On March 18, 2009, at 7:24 AM, Xciteddon wrote:

    Those who don't learn from history are doomed to repeat it. We allowed banks to lobby the government to lift restrictions and they did. We apparently didn't learn from passed mistakes. Maybe this time we can pass a law that regulates the financial industry and that can't be overturned so this won't happen again.

    Lobbying should be illegal anyway. What we need is a big dose (huge) of honesty from all branches of government but I don't think that will happen. Using honesty in reference to politicians, lawyers, bankers, and government is unheard of.

    Food for thought :)


  • Report this Comment On March 18, 2009, at 11:31 AM, REIN wrote:

    The first post from Guthree seemed to make some good points. At first I thought I should reconsider that main street is at fault, after all, it isn't practical to blame them because you can't get blood from a turnip.

    But thinking the logic through, returned me to my original opinion that it is main street's fault. If people are free to steal from companies just because companies don't use force to collect, what is that saying? Ultimately our economy prospers based on trust. The more you can trust people to do the right thing, the more flexability and value can be obtained. If you must post an armed guard at McD's to collect for a burger that is more expensive than a cashier and a computer. And if you can trust people to pay for what they take then your cost of doing business is lower still.

    It seems obvious that a lot have trust has been extended over the last 30 years. And in the last two years it appears that people have proven that they can't be trusted, at least not that much. It would be a shame to lose all the trust that has been built. Hopefully just a few limits can correct the problem (like no interest only loans & bank leverage < 16). But it seems the democrats are thinking otherwise.


  • Report this Comment On March 18, 2009, at 8:35 PM, Guthree wrote:


    I think you can blame Main Street for poor morals and reckless behavior. But not for the meltdown. As individuals they are following the letter of the law. They can't afford the houses, they are letting them go back.

    I guess you could apply my same logic to Wall Street and say, Hey, they didn't break the law, either. And just like the buyers ditched the houses, the Wall Streeters are ditching the crisis. And that if we aren't going to check up on them, they -- just like some home buyers -- are going to take advantage. I think there is some validity to that.

    However, there are things like S&P giving AAA ratings to bundles of subprime loans which I personally think were illegal, even if not provable. S&P, unlike the homeowners, deceived innocent people. The homeowners didn't deceive anyone; the lenders were party to the deception in almost every case. The AAA ratings, on the other hand, caused pension funds (and others) to buy something far more vulnerable than they realized.

  • Report this Comment On March 19, 2009, at 12:47 PM, sdb71158 wrote:

    I would add to RRGY2K's list Phil Gramm and the 2000 Commodities Futures Modernization Act (CFMA) Gramm was a big advocate of deregulation and was a leader in the repeal of Glass-Stegall. Further, Gramm is responsible for a provision in the CFMA that exempted over-the-counter-derivatives, default swaps, from regulation by the Commodity Futures Trading Commission. (CFTC) My understanding is the CFMA legislation never had a floor hearing and was attached as a rider to an 11,000 page appropriations bill signed by Bill Clinton in the last minutes of his presidency.The CFMA is 232 pages long. The bill itself contains regulatory provisions; the exemption of credit default swaps (and other derivitives) is found on page 232, last page, last provision.

    Concerning the decline in savings: I have always contributed at least 10% of every dollar that I earn to my SEP-IRA and 30% additional in a regular savings account to cover taxes and provide a cash cushion. From the mid 90's to 2000 the arrangement worked as expected but as the 2000's wore on (and on...) it became increasingly harder to keep up my savings level. Throughout this time, my income fluctuated a bit but my existing expenses skyrocketed. I was confused by this turn of events since all the inflation figures I was hearing were really quite low. After research, I have come to believe the Bush administrations' policies are to blame as well.

    After Bush,(as govenor), deregulated utilities in Texas our utility bills, to date, are currently 60% higher after deregulation. (He further repealed a Tx. constitutional provision which prohibited home equity loans.) As we all know, energy went through the roof dramatically increasing food costs, transport costs etc. (Texas oil men in the white house, anyone?) Medical care? Don't get me started. (My health insurance exceeds the principal and interest on my house)

    The Bush tax cuts of 2003 were devastating to the middle class. By 2006, I, and literally, everyone, was shell shocked; the talk of sky-high prices and struggling to make bills was/is a daily conversation, everywhere. I live in Dallas County; we are staunch republicans but in 2006, every republican judge was defeated by a democrat. The republicans had been in control for 20 years. I would note a few months before the republican massacre, a 15% raise was given, without a vote, to the highest ranking county officials, e.g. judges. Sound familiar? If you've never been to Dallas, I can assure you we are not really kum-ba-ya (sp?) kinda people. We take care of ourselves, don't ask for help and know when we're getting the short end of the stick...and aren't shy about making our feelings known, even if that means, (shudder), democrats on the benches.

    I recently heard, (or read), that since 1980 there has been an unprecedented shift of wealth to the highest earning americans, the only exception being the 90's. Maybe we should have given more thought to the phrase "trickle down" economics. Or being referred to as "the consumer."

    I believe Bush encouraged a "very relaxed" atmosphere concerning regulation. Couple these factors with Bush's reckless spending, (I think it was Bill Gross who likened the Bush spending policies to a neurotic teenager with a credit card), and out of control deficits and you have the perfect storm.

    My point in all this is that savings have declined because middle class americans, quite simply, have no money; the market/wall street has cannabalized its cash cow, the consumer.

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