Let's first recognize that a fair amount of the pain in the financial industry was self-inflicted. There simply wasn't enough attention paid to risk management. Yes, there was a surplus of quantitative modeling, but at the end of the day too many relied on the math geeks, many of whom didn't provide much value when it came to estimating the potential pitfalls of leverage, buying and holding mortgages of questionable risk, and diving headfirst into derivatives. Alas, the temptation to leave the analysis there is strong. It's also a mistake, and probably dangerous if it influences the inevitable wave of policy changes that are coming.

Whatever degree of blame lies with Wall Street (and its considerable amount), it's clear that the financial industry had a helping hand in shooting itself. The government was no bit player in stoking the flames of the current financial crisis, which is first and foremost a real estate crisis. Yesterday's New York Times detailed the extent of misguided efforts in Washington to promote financial institutions to make loans to people who couldn't afford mortgages. Three key paragraphs summarize the article's message:

Fannie, a government-sponsored company, had long helped Americans get cheaper home loans by serving as a powerful middleman, buying mortgages from lenders and banks and then holding or reselling them to Wall Street investors. This allowed banks to make even more loans — expanding the pool of homeowners and permitting Fannie to ring up handsome profits along the way.

But by the time Mr. [Daniel H.] Mudd became Fannie’s chief executive in 2004, his company was under siege. Competitors were snatching lucrative parts of its business. Congress was demanding that Mr. Mudd help steer more loans to low-income borrowers. Lenders were threatening to sell directly to Wall Street unless Fannie bought a bigger chunk of their riskiest loans.

So Mr. Mudd made a fateful choice. Disregarding warnings from his managers that lenders were making too many loans that would never be repaid, he steered Fannie into more treacherous corners of the mortgage market, according to executives.

In addition, it's this editor's belief that the Federal Reserve in 2003 and 2004 kept interest rates too low, which helped spark the extraordinary real estate bubble. Yes, there were other factors involved, and so it's unclear if higher rates would have prevented or modified the property bubble. But it's now clear, at least to this editor, that the Fed was part of the problem. Indeed, a cursory look at leading economic indicators in 2003--including building permits and housing starts--strongly suggested that economic activity was on the mend and so higher rates were necessary. In fact, the Fed did begin raising rates in June 2004, but not only was the decision late, the rate hikes were a long series of tiny 25-basis-point increases. In short, too little, too late, as we and others were already suggesting in March 2005, for instance.

Again, our message here is not to shift blame from Wall Street to Washington. There's enough blame (and increasingly pain) to go around. What's more, the problems that afflict the economy-problems that are likely to get worse before they get better-took years if not decades to fester and involved a myriad of players. Cleaning up the mess will take time, and lots of money. So it goes.

But let's try to fully and objectively assess what brought us to this point, if only so that we can emerge from the crisis at some point with insight and an understanding of what went wrong. The only thing worse than enduring a major financial crisis is suffering through one and not learning anything once the storm passes.