Oil Prices have not been a "little hit" it's been a major hit. It's a much worse scenario than in the early 70's when we also took a major hit from oil prices. This would have been a major economic hit even without leverage. Energy prices are one of the 4 or 5 key inputs to the economy.
To suggest that oil price increases would have been an economic cake walk if not for mortgage leverage is not in my opinion credible.
I agree that leverage magnifies the intensity of a recession. But mortgage debt is less of a magnifier than other forms of debt. People have to live somewhere. They are paying rent or they are paying a mortgage. They may be doubling up with multiple families occupying a residence. But they can do that whether they are renting or paying mortgages. So mortgage leverage is not that great of a magnifier.
In the absence of the mortgage leverage, you'd have seen a commercial real estate crisis first with rental units going bust. Granted that commercial real estate may have more equity backing. The problem would show up in Insurance company stability, REITs going bust, etc.. and wouldn't have hit the banks quite as hard, but the net impact to the economy would probably have been pretty much the same.
Next, President Clinton appointed Andrew Cuomo to head up Housing and Urban Development (HUD) and urged his imposition of regulations requiring lending institutions to substantially increase sub-prime lending.
Cuomo created regulations which forced the government sponsored mortgage entities, Fannie Mae and Freddie Mac, to step up loans to minorities under the logic of the affordable housing movement-every American should be a homeowner. It turns out affordable housing did not mean inexpensive homes poor people could afford, but instead, easy credit to buy homes they could not afford.
Clinton's Treasury Secretary, Democrat Robert Rubin, aided by Democrat Lawrence Summers, organized and led the effort to repeal the Depression era Glass Steagall Act, allowing investment banks to use federally insured depositor cash to back millions of mortgages, while easing underwriting standards at the same time. No money down? No problem.
In addition Rubin pushed through the Commodity Futures Modernization Act, which allowed the creation of mortgage back securities, fictitious loans packaged as investments, and sold to pension funds. Democrats in the New York State Insurance Regulatory commission allowed AIG to insure mortgage backed securities with an invention known as the Credit Default Swap.
The Justice Department allowed the laws of the government to be used by the combined legal efforts of both themselves under Reno and Gorelick, and community activist organizations like ACORN to sue lenders for not making sufficient numbers of (risky) loans to the groups that the government defined as needing home ownership.
There was widespread misuse of government funding and corruption of Fannie Mae and Freddie Mac by top Clinton Cronies, Raines, Johnson, Gorelick, and Rubin that essentially enabled government backed organizations to enter the private mortgage market with federal money to compete with and coerce private banking into practices heretofore considered unethical.
Regulatory oversight had changed dramatically to accommodate the Federal home loan mortgage activity designed to enable sub par loans to be made.
In an effort to reverse the activist activities of government backed entities and its own regulatory people, The New York Times reported in September of 2003:
"The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago. Under the plan, disclosed at a Congressional hearing today, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac, the government-sponsored companies that are the two largest players in the mortgage lending industry".
But Democrats defeated this legislation. Rep. Barney Frank and his supporters said this (that is found in the Congressional Record): " 'These two entities - Fannie Mae and Freddie Mac - are not facing any kind of financial crisis,' said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee."