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Originally Posted by Rathji
Didn't the government cause the subprime crisis by forcing the banks to offer them? I know this is an over simplification but still.
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That was part of it, for sure.
The government was pressured to repealing the Glass-Steagall act - a measure that was designed to separate commercial banks (lenders) from investment banks (bond/equity sales). This led to commercial banks acting like high risk investment banks, routinely growing more and more ballzy every year until the point where they were carrying a 30:1 debt to capital ratio. Prior to this commercial banks were forbidden from such a high ratio.
The repeal was lobbyed for by the banking industry (who blew an estimated 300 million on that campaign) because they wanted more flexibility in pursuit of high returns on investment. Basically, greed overshadowed good sense and we are now stuck cleaning up the mess. The Federal Reserve had plenty of time and power to put a stop to this situation.