"Nobody put a gun to anybody's head and said, 'Hey, nimrod, buy a house you can't afford. And while you're at it, put a line of credit on that baby and buy yourself a boat.'"

--Dick Fuld
former Chairman and CEO, Lehman Brothers

I wish we could say the same in the inverse about commercial banks and mortgage lenders, but the fact of the matter is that there was bipartisan supported federal legislation on the books that required lenders to make sub-prime loans. When the investment banks got involved in purchasing the loans, carving them up, and re-selling them as investment grade financial instruments is where we really let things get carried away.

However, I don't necessarily mind commercial and investment banks speculating in risky markets. After all, the only way they were able to get away with what they were doing is because a market existed that would buy those instruments without fully understanding what it was that they were buying, right?

So, once again, we're left with the same question to ponder, who is worse - the drug dealer (the investment banks) or the drug user (those entities that bought the instruments looking to profit from them without knowing what it was they were really buying)?

As a real estate appraiser of 10 years I think I can offer a interesting perspective of what I watched happen to the market over this last decade. We as a nation went through a almost unprecedented period of home appreciation. Starting in the late 90's when interest rates dipped to 6% and a bonanza of purchasing and refinancing occurred I remember quoting banks 6 weeks to get a order completed. Everyone was getting into the game. This drove values at a unsustainable pace. Most of us thought there will be a leveling out period. I remember thinking around 03 04 that we were reaching that. Than the Fed dropped rates even lower and the bubble began to truly build. We all kept waiting for it to burst but it kept forging onward. At some point you can't blame borrowers for believing that it would continue on this way or banks for believing the same thing. But alot of us myself included kinda of felt like i was holding my breath waiting for the inevitable burst to come. When it did many in the lending business refused to recognize what was happening. If you were a appraiser with ethics 2007 was a very tough year. If you couldn't make the values needed your phone went dead as did your business. As I look back on the crisis there is no one bad guy to put all the blame on. Did borrowers take on loans they shouldn't have? Sure but then again they were told by mortgage brokers who were paid by the amount of loans the closed nevermind the qaulity that they would always be able to sell

for more or be able to refinance for a better loan because house's always appreciate and they had a decade of evidence that said that was true. Did banks produce absurd loan products to bring more and more people into the market regardless of risk? Sure they did but as real estate was no regarded as a safe bet the risk of loss due to default was deemed low. Did the federal government encourage or at the very least turn a blind eye towards these practices? Absolutely because 7 to 8 percent home appreciation the money that put in consumers pockets was what allowed the economy to continue to plow forward despite structural weakness that otherwise would have dragged it down. Besides anyone who tried to ring the alarm bell that maybe we shouldn't be handing loans out to anyone with a pulse was scared off with the charge that they were interfering with the minority home ownerships climb. Indeed that was a claim to fame of the Bush administration before the shoe dropped. Are there innocent victims all over the place? Sure but as a society we have to ask ourselves how did we get here and how can we try and make sure this doesn't happen again. Changes in how appraisals are ordered and processed have vastly improved this much I can tell all of you. No longer can a mortgage broker shop his loan around looking for someone to meet his value. Are there other changes that should be occurring I'm sure there are. Should the banks have gotten there bailouts while the borrowers were forclosed

on. Probably not. Are all borrowers innocent victims that should be protected at all costs. Certainly not. Should we all hold the government and the banking industry accountable for the mess they both had a hand in creating you betcha but we must be careful not to through the baby out with the bath water. Yes greed seems unseamly to us all but if we all look into our selves we would realize we all have it. Without the free market really would work. Unbridled greed can be destructive but without any greed there is not progress. The trick is to find the proper balance not nessicarily more regulation but smarter regulation. I could go on forever on this topic but i am sure I would bore all you to tears at some point.

We won't turn a corner in the housing market until (a) we actually let the market bottom out; and (b) as a corollary of that, drastically reduce how intertwined with the housing market the federal government is.

At the end of the Great Depression Congress had in place a group of laws that regulated the banking market. Glass-Steagall is the most notable of these. Beginning in the 80's Congress - at the urging of banks - removed these laws one by one. As a result the lending market, most notable in housing, overheated until the crash of 2008. Any system needs checks and balances to function properly. Restore these laws to restore accountability to banking.

The other problem is moral hazard. The bailouts were done without any reckoning of the failures of the banks. Why should the banks act responsibly if there is no punishment for bad behavior? An individual who took out a bad loan lost their home. The banker who gave him the bad loan got a bonus.
These are the two main lessons we need to take away from the housing crisis.

James, Eric, thanks for the informed analyses. I'd add just a couple more things. During the 90's there was a tremendous increase in capital wealth in Asia, especially in China and India. That wealth needed to be invested and American property has historically been a good investment. IOW, a good deal of the financial products developed were sold beyond our borders to ready buyers.

Secondly, as both of you have alluded to, we have become a society more focused on material acquisition than our forebears. As our nation moved from producing more than we consumed to consuming more than we produced, as our savings rate dipped below our personal debt, our consumption, our increasing standard of living was cantilevered on debt.

Because of the size of our economy, because so much of the rest of the world has become dependent on our consumption, our recession has had global effect making recovery even more difficult.

The author of the original article (well done, Dennis.) raises an important question. I think the lesson for us is that of Icarus.

And those who rail against any mention of any decline as being somehow "unAmerican" are foolish fliers. We are and will continue to decline materially as a nation. The rise of the East in competition for limited resources, the global underbidding of American manufacturing labor assures this.

I agree with James that it is "our fellow financially irresponsible citizens and AIG that owe the rest of us the most" and that there should be "no more bailouts." I too would like to know why the financially responsible people should have to suffer and pay for the greedy mistakes of others.

James, I 100% agree with you. Where's my bailout. We had to sell our home in MN due to a job relocation and lost $110k - so after 20+ years of being financially responsible homeowners we walked away with absolutely nothing to show for it.

Oh, we could have stopped making the payments and just walked away just like many millions of Americans have done but we were able to make our payments and as responsible and moral people we did. We were just thankful that our house sold and we didn't have to bring any money to the table or begrudging walk away.

People need to make responsible choices when buying a home, car or taking a vacation. They need to live below their means and get out of debt. Our American economy won't recover until families start to take responsibility for their own economy at home.

Obviously you can't afford something if you have to put it on a credit card or take out a loan so why do it? What happened with just saving up for those purchases? Delayed gratification can be a good thing.

Fascinating conversation! As I stated in the commentary, quite frankly this problem affects us all in one way or another. I wasn't involved in one of these shady mortgage deals, but watching how this has affected people I know, it's given me a wake up call on how I manage my own finances (especially after having been unemployed for two years). As I looked at my own behavior (because I firmly believe this is where the change needs to take place), I got rid of a ton of debt over the past year. Instead of having numerous credit cards, I have one with a limit of $500, but I rarely use it and I keep a closer eye on my budget. I save more money, I put a lot more thought into large purchases and I don't buy things on a whim. I've also adopted a pay cash mentality and I have to say, it feels pretty good. I'm also dedicated to teaching these habits to my 17-year-old daughter.

Denise - great article and congrats to you about taking control of your finances and teaching your daughter.

I'm a huge believer on living less than you make and to pay off debt and save for retirement and kid's college.

I would like to see more discussion on the article.

Writing about personal finance and educating people on personal finance is key to an economic recovery.

Brian Williams interviewed Andrew Ross Sorkin who wrote the book Too Big To Fail. It's at the beginning of the newscast for February 9. http://www.msnbc.msn.com/id/3032619/vp/18424748#46334363

I don't know that the lenders or borrowers have learned their lesson. I know several first time home buyers who are taking out loans based on 2 incomes, many young not married couples, minimal down payments, no cash to pay the closing costs, thousands of dollars of student loans, no money for furnishings, no thought of having to pay insurance, utilities. Some duo incomes are from minimum wage jobs.

We have to get away from this mindset that home ownership is a right and that everyone should jump right into home ownership, whether they are prepared for it or not. Yes it's the American dream, but in the past, for many of us, that dream wasn't fulfilled until we were older and able to take on such a commitment.

We bought at the height of the interest rates and paid 14 1/2% interest. But we went into it with a goal and our house payment based on 1 income (planning ahead). That was the time when buyers started venturing into $1000 house payments and payments based on 2 incomes. We did not follow suit.

Unfortunately, nearly $26 million of Wisconsin's $143 million portion of the recent mortgage settlement is now going to fill Scott Walker's projected cash budget deficit: http://thinkprogress.org/economy/2012/02/10/422744/walker-settlement-budget/?mobile=nc
Here's what the settlement is supposed to cover:
"Payment to the State of approximately $31.6 million that may be used for compensation to the State, future law enforcement efforts, additional relief to borrowers, civil penalties and/or funding of foreclosure relief and mitigation programs." (http://bayviewcompass.com/archives/10143)

Walker and JB Van Holland justify taking these funds because "all Wisconsinites were impacted by the foreclosure crisis." Perhaps Walker didn't consider how laying off thousands of public workers and cutting pay for others, and presiding over significant monthly job losses would affect the tax rolls. But taking money given to help people to correct a shortsighted accounting error is wrong.

@Bren I think it's a valid point to raise.

Bren, you either do not understand the budget process, or understand it and are intentionally ignoring how it works. The initial budget (Act 32) is a 2-year projection. As that 2-year period progresses, there will ALWAYS be changes up or down, either a shortfall or a surplus. In the middle of the process (and again at the end, if necessary), budgets are adjusted to meet those changes.

Walker's budget was balanced. Over time, it's become off, but only by less than one quarter of one percent, which is very good. In 2009, Doyle had a budget that was off by 6.6 billion - about 10 percent. That's not something he deserves blame for, just used to illustrate that this $140 million shortfall is (a) normal and (b) not a big deal.

Good article, Denise. I don't know that we've learned our lesson when in some quarters we're castigating the banks for not making more loans than they currently are and celebrating as good economic news an increase in consumer borrowing (mostly in terms of increased credit card debt related to retail purchases). We as a nation seem to develop a sour taste when it's suggested that our inflated standard of living contributed to a large degree to the situation we find ourselves in today. Even when we do acknowledge our involvement, we seem to want to blame it on everything from deceptive advertising to whichever group of politicians we choose to blame at whatever point in time we choose to point out as being that when we were all "forced" into a cycle of rabid consumerism.

I don't know what it's going to take for folks today to learn the lessons my parents did by going through the depression. We've all heard the stories, have come dangerously close living through it ourselves and we're still not out of the woods. And yet the moment we can, we seem to want to jump right back on the same freespending road to debt that got us where we are now.

I think one of te biggest problems was the buying and selling of mortgages by speculators. Lenders, not having full ownership in the loans they make, led to some extremely high risk mortgages, realizing that they would only hold the loan for as little as a month. Debt ratio was raised to 50 -60%, whereas in the mid 90's, mortgages required 40% debt ratios. Lenders today have realized that lesson and are tightening up that requirement.

Refinancing at more than 100% value was another key ingredient. One of the biggest causes to overvaluation, which led to the crash. Local governments played along to raise additional revenue through property taxes. The consumer saw this as a cash cow, and with extremely low interest rates, they were more than willing participants. While this practice is now held in check, I'm not sure that it will ever go away.

Lowering interest rates has done more harm long-term to the economy than good. Savings is at an all time low, at least through traditional sources. Taking reserve capital out of the market and creating false consumerism (more purchase on credit) will hurt the economy the longer as more dollars are printed to make up for the loss of cash on hand. The lenders are getting it, as they are now getting out of the practice of 0% down home loans.

The biggest lesson one can learn from this is that no one here was a victim. Poor choices were made by all, and until we learn that lesson, nothing changes.

From my reading/listening, the global recession was a "perfect storm" with a number of parties seeking acquisition (read: greed) with more risk than they were aware of. From Greece to Port to NYC, we overreached.

I think the biggest factor in prolonging, if not perpetuating, this has been the creation of mortgage derivatives, the overvaluing of the same by raters and then when it was realized these bundles were untrustworthy investments, the paralyzing of inter-institutional lending.