Some seem to be forgetting something. The '08 crash happened in large part because of:
- DC didn't want to slow down the housing market as it was one of the only economy drivers at the time
- The Fed Chairman thought he was a genius for creating what was obviously a massive inflationary housing bubble
- Mortgage firms (small and large) selling short-term mortgages as long-term mortgages
- Mortgage firms (small and large) having people lie about details on their loan application
- Mortgage firms (small and large) were able to off load their risky loans as safe loans
- Absolutely no oversight from ratings agencies
- No where near enough liquidity to back up all of the loan
So the mortgage companies, big banks, ratings agencies, Fed, and DC were
all asleep (or pretending to be asleep) at the wheel. We need to really look at the entire system.
Yes, you are largely right as far as you go. The obvious question that no one seems to ask is why did all of these things happen? What changed to cause these things to happen?
What caused the greater number of those things to happen at the same time was the invention of the tranced mortgage backed security. The idea that you could combine a large number of home mortgages together and that somehow the risky mortgages would become less risky. Then you could slice up the security into pieces across the whole and make them even less risky again. Your #5.
Then it dawned on them that they didn't have to slice across the whole because the same risk reducing magic would happen if they sliced across piece of the whole separated by risk. All of the risky, subprime loans were put together and then sliced up with only a small part of any one loan in each slice. And since the subprime trances carried the highest returns, they were the most popular, since there was no risk. Since they were so popular the originators were paid more for those loans and they were paid more the larger the loans were. Hence your #4.
Since the borrowers couldn't possibly pay back this high interest, large loan variable rate mortgages were written with a low initial fixed rate and for a short fixed term. Your #3
But of course, the returns for the mortgages were amortized across the entire term of the loan.
The deep dark unsaid reason that Wall Street considered the risk to be low on these loans was that they could foreclose on the house and turn around and sell it, the very definition of predatory lending. Why did this mitigate their risk? And why were people willing to sign for a loan that they knew that they couldn't pay back?
The same reason, because everyone knew that houses never go down in value.
This is what happened, of course, all of the money flowing into homes drove the prices up, a bubble, and prices did come down when the bubble popped and no one could sell and cover the loans, not the borrowers and not the banks.
Your #1, DC didn't want to dampen the housing market because it was driving the economy. Owning a home is a good thing, it is the way for most people to accumulate wealth. The important question is why was this asset bubble the only thing driving the economy?
Your #2, the Fed's role. Undoubtedly the Fed kept interest rates too low leading up to the 2004 election to help Bush's reelection. But the Fed did realize that the housing boom was turning into a bubble and that they did start raising rates after the election, but higher interest rates didn't dampen the boom. In fact the subprime damage was done in spite of relatively high rates. The important question is why the housing market didn't slow down in the face of increasing interest rates?
The answers to both questions in the above paragraphs is kind of the same and it requires me to beat a well worn solo drum. We have redistributed so much of our national income from wages, demand, to profits, supply, to supposedly drive the economy from the supply side. What has really happened is;
- The economy can now only prosper by building an asset bubble and by building consumer debt.
- The economy wants to be mainly demand, not supply, driven.
- Supply, capital, is now only money and the economy can produce as much as it needs.
- We stunted the demand driven capability of the economy by shifting so much money to the supply side because we did it by suppressing wages, the overwhelming source of demand.
- The housing bubble wasn't dependent on interest rates because the money that was being loaned was a part of this huge amount financial capital that has built up over the last thirty five years.
- Higher interest rates didn't deter the borrowers who were getting the low initial rates.
- Higher interest rates on the full term of the loans made them more attractive to investors, increasing the pressure to originate even more loans.
The failure of the Fed was in they assuming that the banks would self-regulate and pull back by themselves. The banks to avoid regulation were using third party originators like Ameriquest who were paid the same for a good loan as they were for bad one and had no reluctance to be predatory, to write loans that they knew couldn't be paid back. The Fed could have stopped this but they didn't.
It was made clear to the rating agencies that they wouldn't be hired if they came back with a low rating for the tranced mortgage backed securities. Your #6.
Liquidity is money and the problem was too much liquidity. You might have meant that there wasn't enough value in homes and not enough down payment to make the loans solid. Just a guess at your #7.