The Irresponsible Borrower

I've been tough on the banker, regulator and even the journalist. As mentioned previously, there's a fourth guilty party in this whole financial meltdown--the irresponsible borrower. Played perfectly by Steve Martin in the previous link, he's the guy who got into a subprime mortgage. The guy who lives beyond his means and rolls over his living expenses on his credit card monthly. Some will argue that the subprime crisis was triggered by his inability to pay off his debt.

However, there is also no doubt in my mind that he's much less culpable. To begin with, he's probably a victim of predatory lending practices, such as the adjustable rate mortgages (ARMs) offering enticing teaser rates for the first few years, only to jack up the interest rates after the borrower has been locked in. What the investment banks did was to take a whole bunch of subprime mortgages, bundle them together (in a process called securitization), and sell them to suckers (usually other banks and insurance companies) telling them they were safe because Moody's (a ratings agency) rated them far more creditworthy than they actually were. Voila, banks started figuring out a way of printing money by selling worthless securities at inflated prices. Allow this to continue unchecked and you've created a credit bubble that runs in the trillions.

Still with me? If you are, you've basically understood how subprime mortgages work and what the roots of our current crisis are.