Frankly, I wish someone with better financial chops than me would look into this question and give a definitive answer, apportioning blame fairly and accurately. However, there hasn't been a high-profile 9-11 type commission, so it's been open season for the usual political spin apparatus.
For the Republican lie machine version, let me paraphrase Kevin Hassett: Fannie and Freddie, pushed by the Democrats, sponsored huge numbers of sub-prime mortgages that allowed unqualified borrowers, many being minorities, to buy properties way more expensive than they could afford.
"Fannie and Freddie did this by becoming a key enabler of the mortgage crisis. They fueled Wall Street's efforts to securitize subprime loans... Take away Fannie and Freddie, or regulate them more wisely, and it's hard to imagine how these highly liquid markets would ever have emerged. This whole mess would never have happened."According to Kevin Hassett, Wall Street banks were just "bystanders injured in the blast" even though they originated sub-prime loans through legions of mortgage brokers and then securitized and sold them to unwary investors. Sure, bystanders. Hassett himself doesn't point out that there were large numbers of minorities, because he's wearing a Republican uniform, but sites like RenewAmerica.com do. Other mouthpieces trace the blame back to Jimmy Carter and the Community Reinvestment Act that tried to reverse banks' practice of red-lining.
For a rare balanced explanation, I had to search a lot, and finally found a readable one at FactCheck.org. They blame a long list, most of them on my suspects list: Federal Reserve, Alan Greenspan, Wall Street firms, Congress, the Bush Administration, Clinton Administration, mortgage brokers, buyers, real estate agents, certain accounting rules, and collective delusion that this wasn't a bubble. They absolve the repeal of Glass-Steagal, and don't even comment on the Community Reinvestment Act.
FactCheck.org doesn't discuss how the mortgage meltdown migrated to affect the entire financial industry, but that's where AIG and other speculators get involved. They sold the slice-and-dice packaged mortgage-backed securities, wrote insurance on the poorly vetted mortgage securities churned out by Wall Street firms, and betted on one or both sides using credit-default swaps.
Based on my research, this is what I think happened:
- The Carter through Clinton Administrations had programs to help lower-income buyers purchase homes. To support these programs, there was some relaxation of lending standards.
- Selling sub-prime mortgages became very profitable. Selling mortgage-backed securities was very profitable. Selling insurance on these securities was very profitable. Buyers of these securities didn't know what was in them, but knew that they paid higher returns than most bonds. Profit motive all around.
- So, these small programs opened the doors a crack, and Wall Street firms rammed their trucks through.
- Yeah, sounds like it was the Dems.
Left and left-leaning: Barney Frank, Southern Poverty Law Center, NYRB, and McClatchey News
Right: Forbes, The Sun, House Republican, FreedomWorks
Non-expert right and far right: Yahoo question and white nationalist
Update 10/7/11: Per a comment from the Atlantic website: "Let's not forget the SEC saying okay to the banks to go with a 30-1 leverage..." Agree! How did FactCheck.org miss that one?
Update 12/18/11: Per a new report, house flippers also had a role.
Update 9/15/12. I'm still reading that it was the Dems' fault. I've had unsettled questions about how much the government was responsible for lowering mortgage underwriting standards. The answer is that government goals for lower income house ownership did loosen standards. However, it was the profitability of securitizing subprime loans that pushed and expanded those loose standards within the private sector:
More sources: A short, readable summary from Wikipedia; a history of Fannie, and the source of the graph above; a conservative blames Barney Frank again using the same complaint that Fannie invented subprime securitization so everything afterwards is their fault.
Another update on 12/12/12 here. A few more facts, but nothing that shakes up the story. The Dems did more than "opened the doors a crack." But all the other factors are still also to blame.