The free market has been framed. Government intervention caused the financial crisis by Jacob Spenny. Money. In a free market, money is almost unanimously agreed to be gold and silver, or some other type of commodity that is a limited resource. This makes inflation of the money supply and by any drastic measure a physical impossibility. This is exactly why governments wish to obtain a monopoly over the money supply in an economy, so that they can detach the limited resource from it and print their own money out of thin air. That way they don't need to increase taxes on the population. They can simply print their own money. And when the inflation from that printing finally kicks in and everything starts costing more, the government can just claim that it's a natural part of the economy and blame it on greedy businessmen over charging you. Interest rates. When the Fed artificially lowers interest rates below with the market would set them. And incentivizes consumers to stop saving their money and to start consuming. This creates a boom in the economy. However, artificially low interest rates also create the illusion that there is more savings in the economy than there actually is. This gives a false signal to investors that there will be far more consumption in the future than there is currently. So investors take out these low interest loans and use those loans to increase their businesses' productive capacity so as to meet, so they'll be able to meet this increased demand for consumption in the future. Eventually though, they will find out that this was just an illusion that there is no increased consumption in the future and that all that money they borrowed was squandered. This creates a bust in the economy. Think of interest rates as bricks that someone would use to build a house. When you artificially lower interest rates, it's the same as making someone think that they have more bricks than they actually do. Under this false assumption, they would build a much larger house than the one they would have built if they realized how many bricks they actually had. Eventually they will find out that they don't have enough bricks to build the house and all of that effort was for nothing. Fractional Reserve Banking Fractional Reserve Banking is a method by which a bank is able to keep only a percentage of your deposit in a reserve and then loan out the rest. When you withdraw more of your deposit than the bank hasn't reserves, then the difference is simply printed out of thin air and inflating the money supply. In a free market, the bank would be guilty of counter-fitting. But the government makes this process perfectly legal because it allows the bank to make more loans. This too contributes to the false signal that there is more savings than there actually is, which causes even more resource misallocation. Deposit Guarantees When the FDIC ensures everyone's deposits, then it completely takes away any incentive people would have to care about how much risk their bank is taking or what their bank is loaning money toward. In fact, it incentivizes people to deposit their money in the banks that are making the most risky loans because they have the highest promise of returns. This creates more risky loans than there should be. Loan Guarantees When the Federal Housing Administration and the government sponsored enterprises such as Fannie Mae and Freddie Mac, create the explicit or implicit guarantee that the risk of a borrower defaulting on their loan is ensured by the federal government and that if worse comes to worse, the government will bail out any financial institution who goes bankrupt, then this creates a huge moral hazard in which everyone in the banking ministry feels that they will be able to collect all of the profits and suffer none of the loans. This mentality throws caution to the wind and takes away any incentive for a bank to even care if the person they're loaning money to will even be able to pay it back. So what happened? In the late 90s, there became a huge political campaign to make more Americans homeowners. The Clinton administration began pressuring banks to make more loans to poor minorities who they felt were being refused loans not because they were poor, but because they were not white. The Community Reinvestment Act even opened banks up to discrimination lawsuits if they didn't loaned to enough poor people. Fearing losing even more money in lawsuits, banks decided that it would be smarter to give out riskier loans to poor minorities. Due to political pressures of the time, the goal of the FHA and GSE, such as Freddie and Fannie, became getting banks to lower their lending standards so as to give more home loans to people with low to moderate incomes. They did this by ensuring that purchasing and purchasing loans from the lenders relieving them of any risk of the loans defaulting. The banking establishment knew that if Fannie and Freddie became insolvent, then they would simply be bailed out by the government. So banks no longer cared who they loaned money to. Due to government bailouts of the 1980s, everyone felt that they were guaranteed from failing by the government. But if the mess hit the fan, then the government would simply bail them out. And they were spot on with that belief. This belief, however, created the mentality in the banking industry that they would be able to keep their profits, but any possible losses would be paid for by the taxpayer. This new mentality in the banking industry caused a huge surge of home loans being given out to people who had no chance of paying them back. This caused a dramatic increase in demand for housing, which caused housing prices to go up. This bubble was further inflated by Alan Greenspan artificially lowering interest rates down to 1%, which allowed banks to even further leverage themselves and give even more loans to people who could not possibly pay them back. These artificially low interest rates also allowed speculators who believed housing prices would continue to go up to gamble in the housing market, with the cheap money supplied by the Fed. Homebuilders saw this increase in the housing prices, and since interest rates are so low, it was easy for them to obtain loans so as to build more houses and cash in on these increased housing prices. This dramatic increase in the supply of houses, as well as Alan Greenspan raising interest rates, right back up, thus making credit less available, caused housing prices to bottom out and begin falling. These falling housing prices caused speculators, as well as people who could not pay them their mortgages without the housing prices continually inflating, to begin defaulting on their loans, causing housing prices to drop dramatically even more and leading plenty of banks sitting on empty, worthless houses. What about deregulation? To argue that this crisis was caused by deregulation is to completely ignore all of the moral hazards of government intervention that caused this. It also goes off of the false premise that regulators are incorruptible angels sent down from heaven and would never fall sway to the political pressures of the day. The political motto of the day was to get a house for every American, and if the banking industry had even more regulation than it did, then it would simply give the regulators even more power to lower lending standards so as to meet the political goal of houses for everyone. So hopefully you can now agree that this crisis had nothing to do with the free markets and everything to do with the moral hazards created by government intervention. .