Fed gov is responsible for causing part of it. However Wall Street bankers invented the liar loans, had rating agencies rate it AAA paper and sold it to unsuspecting investors and pension funds. This was not perpetrated by a few isolated bankers, it was bank wide. Almost everyone was doing it until it exploded. MERS, robo signing, liar loans, etc were not Federal mandates. The only thing the feds did wrong was subprime loans and willing to guarantee the mortgage notes thru Fannie Mae and Freddie Mac without thorough review of the paper they were buying, and lying about the losses till it was too late. Gov is further complicit by not prosecuting the bankers for violating SEC laws as well as local state laws on banking. Obama is suppose to be the most anti business POTUS has not even put one major CEO in jail, instead he goes to them for political donation for 2012 election. Can we say Wall Street owns Wash DC?????
Wrong.
The financial sector reacted to the stupid Federal mandates and Court mandates.
Mixing bad loans with good loans was done so that the total portfolio could be rated A or better, as it was put on the market.
The problem is, that in a portfolio yielding a 5% return on investment, in good times, a 5% default in that portfolio pretty much wipes out the interest return, as the cost of recovery on the principal is is factored in.
When the human body gets infected, our immune system sometimes over reacts. (That is what causes allergies and, perhaps, arthritis, and many other human illnesses.)
The government infected the financial markets with bad paper, and the government does not “prosecute” as you suggest because, for the most part, the financial sector did nothing criminal.