Who's to Blame for Subprime Woes? Not the Fed.

I just heard an argument about this and I think it's extremely unfair to blame the Fed for the current crisis in the subprime mortgage industry.

The rationale for doing so postulates that without record low interest rates for so long, the housing market would not have overheated. As a result, many lenders would not have made loans to customers who wanted to buy a house so badly that they might not disclose, or even lie, about their financial condition.

I have a problem with this logic. The subprime meltdown was not caused by low interest rates. Rather, it was caused by loose lending standards. The lenders gave loans to people who couldn't afford them. If you don't require prospective home buyers to verify their annual incomes or net worth, and you give them mortgages without a down payment and low teaser rates, you need to be responsible for the consequences of such actions.

The subprime lenders who are in trouble are the ones who gave loans to people who couldn't afford to pay them back, either right from the start, or when their ARM's adjusted upward a few years later. You have to blame the business people who made the loans, not the people themselves. If you blame the Fed, then you are saying that high demand for mortgages was the problem. However, the problem seems to be that the bankers actually matched the high demand with a huge supply of loans.

Corporations are not required to accept every customer who comes knocking on their door. Rather, they have a duty to shareholders to do business that is profitable and in the best interests of the owners of the business. If they fail at managing their company adequately, which has been the case for most subprime lenders, the only people they (or anyone else) should blame are themselves.