The 1990s and early 2000s were a time of great innovation in financial engineering. Derivatives had been around for decades. But the ‘quants’ in financial firms hadn’t started fully exploring the world of arcane and exotic paper until recently.
The financial industry, with the cooperation of Congress, stripped off the last shackles of Glass-Steagall, because of course “it would be different this time” when investment banking and commercial banking were mixed together. And to add icing to that cake they made sure that Congress exempted OTC derivatives from any and all regulation. A home grown recipe for disaster. No European input required.
It was a mess all around but between being forced to make subprime loans and aggressive lending practices (some made via advocacy to boost minority ownership, most probably focused on the color of commission money) lenders tried to get someone else to share in the risk.
I’ve a different mind about investment, looking at the historically safe yet cheesy returns investors got from the old structures (e.g savings accounts and having the average Joes biggest investment tied up in real estate subject to market forces) opening up equity investment to a wider range of people and not just elites is good for all concerned. What I meant re Europe is that Europe never had a Glass Steagall regulation and that sort of regulation, or deregulation, had nothing to do with our crash. I also believe TARP was necessary but the abuse of bankruptcy regulations on behalf of GM and Chrysler vs investors and debtors should not have gone forward.