Both.

A month or three ago, I made the foolish, careless mistake of leaving my truck unlocked in the driveway. Sure enough I woke up the next morning minus my car stereo, sunglasses, and loose change.

Does my dumb mistake excuse the thief's behavior? Of course not. I shouldn't have to be perfect to not have my stereo stolen. The thief belongs in prison because (s)he should've just damn well not stolen it.

This is where the debate of the mortgage bubble breaks down. It's like a cage match: "Dumb Borrowers" vs. "Predatory Lenders." But this is a false choice. The answer is both. Although this microeconomic tit-for-tat seems to carry the day, it's kind of irrelevant.

The simple fact is that banks create money by the act of lending. Money is just a universal I.O.U.: a promise of some future productive economic activity. There is a limit to how much money can be created, and how far divorced from productive activity it can become.

Exceeding that limit causes inflation. Really, really exceeding it causes a bubble, where inflation feeds back upon itself until people start to realize they might not get paid. They stop lending, start demanding cash, and the whole edifice comes crashing down.

This is a macroeconomic emergency, not some micro tale of how closely Richard C. from Phoenix read the terms of his super double bonus option ARM. Real banks have well established cash-reserve limits and mortgage affordability guidelines. New Deal banking regulations work very well for the banks that obey them.

Financial "innovation" is just banking by another name. Bypassing the rules that ordinary banks follow, financial "geniuses" create money by lending, just like a real bank. With only "market forces" to stop them, the "geniuses" created way too much.

Runaway housing inflation has distorted the whole economy in immeasurable ways, for decades to come. Government needs to prevent this kind of thing because the world economy depends on it, whether we feel sorry for Richard C. or not.