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

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.

Enjoy: 

• 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:

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.