People seem to get confused about what the problem really is because it is kind of complex. Deregulation did not cause it and there is nowhere anyone can point to say this law made all these banks go nuts. It didn’t happen. If that did happen, the housing market as a whole would not have responded to rising interest rates, which it most certainly did.
We actually had two problems that fed each other. The first one was the housing bubble that is the result of artificially low interest rates; which by itself would not have caused the financial system to collapse. The second problem was the collapse of the mortage backed securities market, which did lead to the collapse of the financial system. So why did the MBS market collapse?
Subprime lending couldn’t exist within the framework of accepted lending standards. And of course, the main culprits, Fannie Mae and Freddie Mac were exempt from the banking acts because they could never hope to carry out their charters under them without the government funding it. It wasn’t until Fannie and Freddie were put under these acts, abscent of government funding, that the whole house of cards started coming down and their main partner in crony capitalism, Countrywide, was the first to collapse.
Congress knew that in order to get what it wanted it had to have these government entities out there doing it so it would imply some sort of government guarantee, and they would buy up the mortgages as fast as the banks who were involved, either volunarily or by coersion, could write them, and then spread them around as secuirites to keep the government off the hook. And to make it more of a reality, they had to get high credit ratings for these instruments so they chopped them up and mixed good with bad to imply less risk and/or to obscure what was really behind them. Otherwise, they wouldn’t be able to get investors willing to pony up the cash.
In the end, it had nothing to do with industry wide deregulation, but everything to do with the government trying to get something for nothing and not following its own rules to get there. If the diversified securities had not been there, we would have had some pain with the bursting of the housing bubble, but it would not have lead to the collapse of the financial system.
So the government,which can arrest and physically punish deadbeats,giving it supreme financial security (like a mafia loanshark),got involved in the financial free markets,the fix was in—cause what can a private bank do without the gun the GSEs have to collect debts?
And when liberal Democrat political correctness forbids the GSEs to use the gun,
The collapse!