Dan -- The biggest contributer to the debacle of 08 wasn't the housing bubble bursting as it was the implosion of the Collateralized Debt Obligations and the attending credit default swaps and interest rate swaps that helped these bundles come together.
Once these derivatives lost the ability of their counterparties, like Bear Stearns and IndyMac Bank and others to stand by their obligations, the derivatives began unwinding from off-balance sheet contingincies to real cash flow liabilities.
IMHO, FNMA & FHLMC were only slightly to blame for lobbying to be so thinly capitalized when they had inventory they needed to pass through and when they went raising billions of dollars of debt to capitalize themselves. Thanks, too, to the politicians in Congress who fell for the booze and schmoozing by FNMA's and FHLMC's exec.
The credit rating agencies and insurers that gave good ratings on CDO's, non-agency pass-throughs and a variety of auction rate commitments were also partly to blame, because their models were sadly flawed. How should they have known? These products were never stress tested, and the issuers balked at "unrealistic scenarios" in the evaluation models. But should you give up academic objectivity when you are assuring investors about the likelihood of timely payment of principle, interest and liquidity?
And the credit officers at all of the participating financial organizations need to be shaken up a bit.
It is said that only about 6 people in the whole country can understand the vulnerability of the financial system to the plethora of derivatives and off-balance sheet items. That's probably true. If so, then they should be banned.
Here's the double whammy we're getting next -- Not only are the financial markets hurting, but there will be a slew of unintended consequences: Gasoline will soar to new expensive heights as the dollar slides under the weight of the bailout. And that means the dollar won't buy much, so everything will get more expensive; US bonds, now a safe haven in times of stress won't pay investors much, and the foreign investors will shift their investing to other places if they can; There might also be a rush from international inestors to redeem their US bonds. When we need their cash next time, they might not be as willing to lend; Banks will be very reluctant to refi client's mortgages or loans, and new loans will be given only to the best credits. There is too much risk out there, it seems.
What it looks like is the makings of a crisis of confidence. When this happens, nothing looks very good to inest in.
