Much has been said about who is to blame on the bad effects resulting from the 2008 financial crisis. Liberals blame free market and the lack of regulations, conservatives blame liberal regulations and libertarians think that 2006 -2008 was the bad part and 2008 the healing.
Here is my take on the issue. There are banking regulations dealing with capital such as deposits (people’s savings accounts) and liabilities (money banks loaned out for house loans). Banks were playing too close to the line( percentage of capital to liabilities) in that if the value of a house (collateral: part of the capital side) were to fall that the bank would be out of line and would no longer have money to lend and even call some loans. Well, the house values did drop some and the dominoes started to fall in a catch-52, in that banks could not make needed business loans and then people started to get laid off and foreclosures increased and lowered the value of house more, thus repeating and cascading.
While this is the results, the big question is why banks were playing so close to the regulatory line and here is the real cause to the crisis. Many factors contributed however I will only address a few. 1. Tax policies heavily favored banks playing it close. 2. The FED controlling the interest rates, which is the price of the use of someone else’s money, caused mal-investment. 3. Non free market-Low rates on mortgages caused people to be able to afford greater debt for their home, thus driving up housing prices. 4. Liberal policies about minority lending strongly pushed banks to predatory lending, which drives up housing prices and hurting minorities’ credit reports. 5. Government buying up mortgages though Fanny and Freddie and the FED, caused lower underwriting standards, thus resulting in borrowers qualifying for greater loan amounts and in turn driving up housing prices. 6. The preceding list all had the housing market being driven up by Government policies, this caused an inflated (bubble) market that when rapidly deflated caused a financial crisis.