I am interested in the various claims about what has caused the economic meltdown this year. Blame is being directed in a myriad of directions.

I've heard blame placed on all of the following: investment bankers, investors, investment banks, the Fed, Ben Bernanke, Alan Greenspan, the Treasury, George Bush, insurers, under-regulated markets, over-regulated markets, sub-prime borrowers, mortgage brokers, mortgage lenders, Bill Clinton, Congress, foreign investors, foreign savers, and more.

That's a lot of blame to go around. Let's consolidate the list a bit.

First, let's roll up the lending/investment part of the financial industry into a single category. They're pretty intertwined these days, particularly after the repeal of the Glass-Steagal act in the mid-90's. This will also include insurers.

Single individuals may wield significant power and influence over certain organizations, for example the Fed chairman over the Fed. However, those individuals are still beholden to various boards, or other forms of oversight. So, we'll combine those people with their groups.

Let's combine the Fed and Fed chairmen as that's really one concept, the US's central bank. And we'll combine presidents, their administrations, and Congress into just the Federal government. After all, if all parties are exercising their proper checks on the other, they have to work together to act.

We have different classes of investors and those can be combined for our purposes.

That leaves us the financial industry, investors, the Fed, the US Government, under-regulated markets, over-regulated markets, and sub-prime borrowers.

What do we know about each of these groups? Well, the financial industry has, in recent years, engaged in massive fraud. They gave loans to unqualified people, qualified people against a low teaser interest rate instead of the long term likely rate, pushed adjustable mortgage rates. Then, they securitized all these mortgages so they wouldn't have to actually carry the loans themselves--after all, they knew about the borrowers' (in)ability to pay and didn't want to hold them. They hired insurers who lied about the quality of the loans and gave them inflated ratings. The mortgage/investment banks also put all of this into SIVs (structured investment vehicles) so they could write it all off their books. That's a lot of fraud.

The US Government (President and Congress) enabled much of this. It started by repealing the Glass-Steagal act which kept many of those functions as separate companies. The government also directed their own GSEs (government sponsored enterprises), Fannie Mae and Freddie Mac, to lower their loan standards so overall home ownership would increase. This is largely how subprime loans became so popular.

The Fed also artificially lowered the interest rate (that they even can means we have regulated, not market, interest rates). This sends false signals to the market that there is an excess of savings and to spend it in capital investment. The ultra-low reserve percentages required of banks also allows the banks to print their own money in the form of increased lending. This drives significant inflation. Most of that inflation was evident in increased home and stock prices.

Sub-prime borrowers frequently lied on their loan applications (and the lenders were good with this). More fraud.

Given what I've outlined with the government and Fed manipulating policies, interest rates, and more, it's easy to find support for both under-regulated and over-regulated claims.

We also should not consider fixing the fraud part of this as regulation. Fraud is criminal activity. I suspect we already have more than enough laws to prosecute the fraud. We should prosecute too. Fraud and other criminal activity is never acceptable and needs to be dealt with appropriately -- even if it means thousands or tens-of-thousands of criminal prosecutions.

Considering what's left after the fraud, there's not nearly so much. Some of it is clearly over-regulation. Interest rates and the money supply, both of which are regulated by the Fed, should be market decisions. If the market had control over those, interest rates would have been much higher, curbing most of the dangerous activity. The government's manipulation of official inflation figures is also a problem. I'd like to call that fraud too, even though it's not really criminal behavior -- it's just political manipulation of figures to benefit the President and Congress. That the formulas to calculate official inflation and other key statistics are revised periodially should make it pretty evident that something's not right.

If we're going to regulate more at all, it shouldn't be to regulate results, but to regulate to enforce transparency. If SIVs had been on the books, the absurdity of what was going on might have been evident earlier. Keeping massive organizations a bit smaller by a separation of concerns (reinstituting Glass-Steagal) might have benefits too.

However, there is another option -- make it very public that there is substantial risk in what these firms are doing in general. That is, don't allow them to fraudulently claim levels of safety in their investments that's not there. The government doesn't need to guarantee, insure, or whatever any of it. If the market is aware of the risk of all of it, the market can regulate it all itself. This has the added benefit of all market-centered approaches: millions or billions of individuals will always evaluate things collectively better than a small set of bureaucrats even if they are ostensibly not politically motivated.

The last group are individual investors. After everything else is considered, I don't think it's fair to blame them at all. Especially since the majority of them don't actually invest directly, but indirectly by use of mutual funds, money market accounts, and other investment vehicles--all of which are managed by... investment banks.

So when all is considered, it seems that the current economic meltdown has resulted from two major things: systemic fraud and over-regulation of interest rates and the money supply.