It's a little unclear, because (like many things in public policy) there's several putative explanations for what caused the crises, peoples' preconceived notions color which ones they favor, and it's manifestly unclear who is right. And it should be remembered that "everyone" is a perfectly plausible answer.
At a broader level, there is most consensus on the idea that the key failure in 2008 was that no one--neither investors nor creditors nor credit-rating agencies nor regulators--correctly understood the risk profiles of the new financial products, and things that were thought to be very safe or at least combined uncorrelated risk profiles suddenly started all taking in unison at the same time.
> It's a little unclear, because (like many things in public policy) there's several putative explanations for what caused the crises, peoples' preconceived notions color which ones they favor, and it's manifestly unclear who is right.
I thought 2008's cause was perfectly clear: the banks all sold insurance policies on each other (in the form of credit default swaps) that they couldn't fulfill. When one bank went under due to bad bets in the market, this triggered policies that, if fulfilled, would bankrupt the next bank. That in turn bankrupted the next, and so on.
People focus on the conditions that bankrupted the first bank, but that was just the final snowflake that happened to trigger the avalanche.
But why was there bad debt on the market ? Yes the defense mechanisms couldnt work since they were interdependent, but I saw a hairdresser on tv talking of how she used to flip 600k houses before the crisis, makes me think she s also part of the problem by failing to obey general accounting principles (dont borrow what you cant repay just because market goes up).
And no, saying natural idiocy in the citizenry is to be embraced, does not simplify the issue: it was caused by natural idiocy which was enabled by lax enforcement. There are countries where your credit score matters not at all and your current ability to actually repay is analyzed.
You can fix the banks all you want but if people take stupid loans you ll never run out of ways to crash.
This is my point, the focus on bad debt is like obsessing over the last snowflake that fell before the avalanche. The bad debt didn't cause the avalanche, the underlying structure of credit default swap contracts between the banks did. They were all writing each other checks that they couldn't cash. If the underlying problem of unaccounted-for credit default swaps didn't exist, the bad debt would've just been another snowflake falling on the ground, essentially.
That doesn't square with Goldman's bankers chopping up and retranching known low quality derivatives, submitting them to the rater, and not being surprised when they were rated far less risky than the same mortgages when rated in previous tranches. To some degree there is blame to be shared, but there is also fraud for which nobody was truly held accountable.
Too big to fair came after 2008. Before then it was assumed that if a large institution did fail it would be orderly and the system could take the shock. That turned out to be wrong when it did happen...
I thought it was more about "too big to fail" attitudes preventing enforcement from being fairly applied to the largest participants.