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The Mortgage Monster and the Blame Game

This is a wee bit of a problem:

This is the amount of debt per US family, in inflation-adjusted 2007 dollars, as according to the Federal Reserve’s triennial Survey of Consumer Finances.

Per-family household debt increased by about 130% in real dollars between 1989 and 2007, from roughly $42,000 per family in 1989 to $97,000 eighteen years later. Most of that increase has come during the past six or seven years — household debt increased by 52% between 2001 and 2007 alone.

Almost all of the debt (about 85%) falls into the category that the Fed calls “secured by residential property” — which means mortgages and home-equity loans. Credit card debt, while having increased roughly threefold since 1989, is overall a very minor part of the problem, averaging about $3,400 per family. (We could have paid off every credit card bill in America for the cost of the TARP program.) “Other” types of debt, which I gather are mostly things like automotive loans and student financing, have also increased somewhat, but not nearly at the rate of mortgages.

All of his wasn’t that much of a problem so long as the value of the housing stock was appreciating at 10 or 15% per year, keeping pace with the additional debt that households were assuming. But of course, it stopped doing so about 2-3 years ago. Translation: look out below. When people talk about the destruction of the household balance sheet, this is what they’re referring to (or at least what they ought to be referring to).

The collapse of the housing bubble was obviously a very important event in precipitating the current economic crisis. There is some debate among economists about just how important it was; I tend to side with folks like Dean Baker in thinking it was a very large problem indeed.

If so, however, it makes the matter of attributing blame for the economic crisis a little bit more complicated. Clearly, for instance, credit default swaps, which bankrupted AIG, were poorly conceived of and improperly regulated instruments. But their collapse was triggered by the correction in housing prices. AIG bought into the fiction that the housing bubble wasn’t really a bubble, but save for a few prescient economists like Baker, Paul Krugman and Bob Schiller, so did most everyone else.

I know it isn’t in vogue to say this, but I think the manifest excesses of Wall Street have made them perhaps too easy a target in assigning blame for the economic collapse. A more appropriate focal point is probably the Federal Reserve, which many economists believe kept interest rates far lower than they ought to have been, contributing to the climate of cheap credit that triggered the housing boom (and bust). The mortgage companies themselves, of course, also exercised exceptionally poor judgment — as did the media, with its Flip-This-House fetishism, which perpetuated the fiction that one of the biggest asset price bubbles in American history was in fact business as usual. Whether to assign any blame to the homebuyer himself is probably not important. It’s tempting to say: if Joe the Homeowner had only read Schiller, none of this would have happened! But it’s difficult to expect the consumer to behave rationally when they were getting such bad information from their televisions and their elected (and appointed) officials.

Nate Silver is the founder and editor in chief of FiveThirtyEight.