By Martin Bosworth

As is often the case when crimes go bad, the crooks are quick to point the finger at each other to escape culpability, and the collapse of the housing market is no different. Here’s a bunch of hedge fund managers accusing Bear Stearns of propping up its subprime portfolio:

Hedge funds that had sold short such securities made profits when an index tied to a basket of subprime bonds was falling. But the index has recovered in recent weeks, leading to howls of protest from hedge funds, according to the report.

The chief critic, John Paulson of Paulson & Co., a $12 billion fund, says Bear Stearns wanted to prop up faltering mortgages-backed securities by purchasing individual mortgages that were rapidly losing value to avoid doling out billions in swap payments, the Journal reported.

What this basically means for those who can’t translate “MBA-ese” is this: The hedge funds were profiting off the failures of the subprime market, but Bear Stearns is apparently propping up this particular group of funds to keep itself afloat. So it’s really a war between carrion eaters when you think about it.

And what about the average Americans who have been bamboozled and victimized by the age of easy credit and rubber-stamped loans? Here’s a look:

As a surgeon cracked Mr. DeWitt’s chest open for a quadruple heart bypass, the broker approached her in the waiting room of Elkhart General Hospital in Elkhart, Indiana. “It’s now or never,” she remembers him saying. Afraid of losing out on the chance to buy a home, she left the hospital and signed the loan documents. Lelon DeWitt survived the surgery, but not the $143,400 loan from Irvine, California-based Argent Mortgage.

I’ve never understood why a business sector like real estate, which is so essential to our economic stability, can let situations like this persist. Buying a home should not be such a pressure-cooker transaction, fueled by shady and unscrupulous brokers and agents who engage in collusive, monopolistic business practices that distort the market and take advantage of people’s fears.

And regarding people’s fears, a common argument I encounter when advocating for stronger oversight of the mortgage sector is “Well, consumers know what they’re getting into. They just needed to read the fine print on those loans.” In a perfect, rational world, that would be correct. But newsflash, kids–people aren’t rational. I will quote Kevin Drum’s commenters for truth here:

The idea that people are rational in the market place is specious. Most of the consumer market place is driven by advertising which uses all sorts of means, subtle and blatant, to make the consumer make irrational choices. Nor is there anything rational about the stock market. It rises with irrational exuberance and falls with the panic of a stampeding herd. Check the housing market. It rose with irrational expectations…

Why would anyone say that people are rational in the marketplace? Consumers fall victim to silly fads, they eat foods that make them fat and unhealthy, they run up huge debts on credit cards to the point that they are spending more on interest payments than on anything they want or need, they spend a dollar a bottle to get water that is no better than the tap water that cost less than a penny a gallon.

The distortions in the housing market which led to the boom, then the collapse, were exacerbated by tropes like “Buy now or be priced out forever!” They played to men’s fears of not being able to provide for their wives and families, or to enjoy a standard of living as good as their parents’, and women’s fears of not being able to live up to the example set by the Joneses. When you play to the most deep-seeded anxieties of people–the need for stability, security, and protection–is it any wonder that they’ll ignore all the evidence in favor of instinct?

What kills me the most is that people saw this coming. Bloggers like Ben Jones have been covering the run-up to the collapse and its effects for years. It may not have been possible to avoid, but it could have been stopped or slowed a lot sooner, and many more people could have kept their homes and their loans intact. As it is, even while Fed chair Ben Bernanke continues to claim that all will be well, many foreclosed and impoverished ex-homeowners are seeing a very different picture indeed.