Banks used cheap capital to create a bubble. Their lending strategies fueled and fed off the housing bubble, and they did so using mortgage products whose performance was premised on continued growth of that bubble.
After 2004, the financial industry coalesced around high
-risk mortgage lending as their primary cash crop. Subprime mortgages, which had been an effective if sometimes shady means of extending credit availability to under-served borrowers, suddenly became a foundation of 21st century financial capitalism. The complete collapse of the financial system and resulting recession have shown the folly of that strategy. What has saved the financial sector is the government takeover of the GSEs and the bailout of the rest of the banking system
Regulators and policymakers enabled this process at virtually every turn. Part of the reason they failed to understand the housing bubble was willful ignorance: they bought into the argument that the market would equilibrate itself. In particular, financial actors and regulatory officials both believed that secondary and tertiary markets could effectively control risk through pricing.
http://www.tobinproject.org/sites/tobinproject.org/files/assets/Fligstein_Catalyst of Disaster_0.pdf
Conservative Ideas Can't Escape Blame for the Financial Crisis
The onset of the recent financial crisis in late 2007 created an intellectual crisis for conservatives, who had been touting for decades the benefits of a hands-off approach to financial market regulation. As the crisis quickly spiraled out of control, it quickly became apparent that the massive credit bubble of the mid-2000s, followed by the inevitable bust that culminated with the financial markets freeze in the fall of 2008, occurred predominantly among those parts of the financial system that were least regulated, or where regulations existed but were largely unenforced.
Predictably, many conservatives sought to blame the bogeymen they always blamed
Politics Most Blatant | Center for American Progress
