From what I have read and learned, the reckless loans during the housing boom and subsequent collapse of the housing market were not the cause for the current economic state. Rather, the poor regulation of derivatives and push for an increasingly more free market for the 10-15 years preceding the housing bubble was the cause.  Multiple times throughout the 90’s calls for regulation were discouraged by influential people in Washington, among them Alan Greenspan. A couple examples:

1. 1994 report identifying derivative market as having “significant gaps and weaknesses” also forecasting the exact doom that has occurred

• In his testimony at the time, Mr. Greenspan was reassuring. “Risks in financial markets, including derivatives markets, are being regulated by private parties,” he said. “There is nothing involved in federal regulation per se which makes it superior to market regulation.”
• Bill created later that year to provide more regulation to derivative market never passed

2. 1997, the Commodity Futures Trading Commission investigated derivates and called for disclosures of trades and reserves

• Greenspan fiercely opposed and told regulators head Brooksley E. Born didn’t know what she was doing and could incite a financial crisis
• Quarreling went on and in November 1999, senior regulators — including Mr. Greenspan— recommended that Congress permanently strip the C.F.T.C. of regulatory authority over derivatives.

There is no doubt in my mind that Greenspan’s well respected opinions had a huge effect on regulator’s decisions. The outcome of this pure capitalism belief was a derivatives market that blossomed from $106 trillion in 02’ to $531 trillion in 08’ (or 07’). Further, the decreased regulation in the 00’s allowed for CDO’s and CDS’s to be the fuel for the systemic risk fire that put the world in a recession.

I want to make it clear that I am not an advocate for heavy regulation but I do believe a completely free capitalist market is a utopian idea that is not realistic. Human nature is to be greedy and the events of the past two years are perfect evidence that the presence of oversight is a necessity. Specifically in markets that can link so many industries and economies together (the definition of systemic risk), like the derivatives market.

I truly believe the housing market bubble would have been an isolated incident, respective to that industry, and would have had a much less dramatic effect on the overall economy if the proper regulation had been in place. Nevertheless, this regulation will be sure to come out of the current mess but I’m not so confident the underlying lesson will be learned. These situations need to be prevented rather than fixed. Assuming this recession ends and economic growth resumes, time will heal all wounds and the severity of what happened in the past two years will be dulled in memories. I fear the feeling of need and desire for oversight now will fade resulting in future financial creations, currently nonexistent, exposing all to the poor decisions and risks of a respective few again.

Realistically, the current financial crisis is a product of many, many things. However, my opinion is that outcomes of a belief in pure capitalism were the driving force to what has resulted today.