Even though I work in the financial industry, I normally stay out of financial discussions and let people vent about what they think happened. But since Dude says he works in the industry as well, my opinions differ from him in some ways.
The housing bubble and associated financial crisis was caused in part by a "homeownership for everyone" crusade, which necessitated lowering mortgage underwriting standards.
Wall Street played a role in the housing bubble and financial crisis, but so did politicians who pushed for easy credit, quasi-governmental entities such as Fannie Mae and Freddie Mac who purchased low-quality mortgages, off-Wall-Street mortgage brokers who encouraged people to borrow too much, and home buyers who borrowed too much and lied on their mortgage applications. Blaming Wall Street alone makes for a tidy morality play but is not accurate.
Well, sure, there were others that "had a role" in the disaster, just like there are passengers who would "have a role" in a bus flying off the overpass... but there's only one driver.
Who was this single bus driver? Was it the "independent" ratings agencies that were bought off by the companies that paid them to rate their products? Was it the money management firms (my field) that knew the ratings were a joke but where some people ignored them because of the fees they could generate? Was it the mortgage brokers that encouraged the liar loans? Was it the quasi-governmental Fannie & Freddie that accepted these loans knowing that they had a government backstop? Was it the guys at AIG that priced credit default swaps like it was car accident risk (claims occur mostly randomly, and costs are well understood) rather than hurricane risk (claims are all tied to a single event--the hurricane, and upper bounds of damages not easy to estimate).
In other words, there is plenty of blame to go around. And a key part of the blame rests with people that lied through their teeth in order to get the loans in the first place. A contributing factor is populist support for home ownership. Stopping any part of this chain would have stopped or limited this crisis.
First of all, there's almost no difference between Wall Street and the federal government anymore, because they all went to the same schools, they're constantly exchanging employees, and the latter owes its job entirely to the campaign financing of the former.
So pretending they're different entities is a waste of time... they're both privileged members of the top 1% financially. This is not to be confused with the top 1% IQ... a Venn diagram of the two groups would look not unlike the view through poorly-focused binoculars.
Sure you can find some people in government at high levels that are privileged. But most are not. There are two kinds of "talent" in finance. Some people really have a gift of making money. But others have a talent of knowing the weak spots in regulation and pushing those limits without necessarily breaking them, because that is where money can be made. Invariably the people with either of these talents end up in industry for most of their careers, not the government, because that is where they money is.
Case in point is Bernie Madoff. The SEC couldn't pin anything on him for years, despite someone in the industry, Harry Markopolos, describing to the SEC in minute detail what Bernie Madoff did and why it could not possibly be realistic. Another example is high-frequency trading. Now in reality the costs to long-term investors of high frequency trading are minuscule, but a very good argument can be made that it is front running. The reason it exists is that the guys in the trading firms are smarter than the guys in government. There are some fairly simple ways to get the benefits of high frequency trading (yes, there are some) while discouraging front running, but don't look to the government to figure it out.
Then these same Wall Street analysts who cooked up this pyramid scheme began repackaging loans, trading default options and buying insurance amongst themselves, while making absurd guarantees to their investors, buying favorable investment ratings that had no basis in reality, and overall creating such a fantastically elaborate fiction that they even started believing it themselves... because... talent?
I actually don't blame the Wall Street trading firms much at all. Anyone who has been in the financial industry for more than a week knows that they are sharks that would sell out their own mothers if it would help them profit. Trading firms serve a useful function in that they make a market (selling when others are buying and buying when others are selling), but why would you possibly believe what they said about an investment?
Also a bit of perspective. Before I worked in the financial industry, I worked in the telecom industry in the late 1990s at a fairly high level. Worldcom was a customer of ours, and I have presented to Bernie Ebbers a few times (another Bernie!). Bernie helped fuel the Dot-Com boom by making false claims about Internet growth. These numbers were used to justify the valuations of Worldcom, and that of other dot-com companies as well. I knew these were false because our company provided Worldcom with the accurate growth numbers--the traffic was measured by our equipment. So while there are dishonest people in every profession, the vast majority of people in finance, like telecom, are decent, hard-working and honest people. Just watch out for those traders. :-)
