Nice try. I was waiting for someone to pop this question.

Nope. That's not what I am saying.

I am saying that government is usually an ass trying to control things it does not understand. If we are lucky the collateral damage is absorbable without much pain. Every so often the consequences of their attempts at central control go off the rails and things get really ugly. This was one monumental case.

This wasn't about government regulating less but rather about government actively driving an agenda: reason be damned, everyone ought to be able to obtain a mortgage to buy a house.

That's how you got people making $35K per year buying homes for $500K with no down payment and no income verification. They enabled something unthinkably stupid.

Now, let's look at the same situation without any government regulation at all. In other words, the government does not create any mechanisms through which a lender is coerced to lend money to those not able to repay it.

And, let's make it personal. Let's say you are the lender. You have a million dollars. You'd like to make money by lending it to people who will use it to buy homes. You get to charge interest. Over thirty years you'll earn a profit if all goes well. This means that everyone pays you on time and everyone pays off their loans.

Two people come to you for money.

The first makes $120K a year, has an advanced university degree and has been working in the same industry and job for ten years with a history of advancement. She also has very low personal debt, credit cards are paid off every month and her car is fully paid.

The second is a guy who works at a fast food joint. Didn't go to college. Makes $35K per year. Has never worked anywhere longer than a year. Has credit card debt and a car loan.

Both come to you to buy the same $500K home. The first person has also saved $100K for a down payment and only needs $400K. The second has no money and needs you to finance 100% of the home or $500K.

Would you lend money to the guy making $35K or the woman with a solid history of responsible behavior as well as a solid earning history?

There is no need to pull out a calculator to figure this one out. Nobody with barely two functioning neurons would loan the $35K guy a dime. Not one lender. That's what would happen in a free market devoid of government manipulation.

What would happen if government decides that everyone must be able to buy a home? Let's say they create a set of organizations that will actually guarantee loans up to a certain amount so as to artificially remove risk? And, let's also imagine that they create a mechanism through which lenders are also able to package-up loans, slice up these packages and sell them to each other, even to investors.

What would you do then? Well, that's a different situation. You are in business to make money. Now government has removed nearly all risk from the equation. Now Mr. fast-food worker who couldn't possibly even imagine in any prior scenario being able to afford a half million dollar home is given a loan. In order to make this loan "pass" we make it interest only, reduce the interest to damn-near zero for five years and require no down payment nor income verification.

Off go millions of people who should have never been able to purchase homes and, playing along, jump into these ridiculous homes. The market goes insane. Home prices take off. They quickly more than double in price. They quadruple in price. You have people buying million dollar homes. The whole thing is absolutely insane.

Now, you, the lender, are not stupid. You understand mathematics, statistics and market forces far better than the senators and representatives that popped the cork to let out the genie. You know this is a huge house of cards. But, hey, Congress actually WANTS YOU to do this and they fully support it.

Any bank who does not play along stands to die because there is absolutely no way to close normal loans with normal metrics. The market is so inflated that all but a few people are simply not qualified to buy homes. Whole neighborhoods go from $150K homes to the same homes being priced at $700K. Salaries don't keep pace with home price inflation, therefore, as prices skyrocket, the only way a bank can make loans is to play along or else shut-down their lending business. For most banks that's where the make their money. Everyone plays along.

Now, of course, banks have to mitigate risk. This is where the CDO [0] (Collateralized Debt Obligation) comes into play. They know this whole thing is a huge house of cards that is going to explode and crumble. The CDO mechanism allows them to package-up mortgages, slice them up and trade them as investments. There are also new mechanism that actually allow others to buy insurance against credit packages defaulting (in other words, if loans go bad). A few people realize this before others and buy these CDS's (Credit Default Swaps) [1] ahead of the bubble popping and stand to make a ton of money as a result.

Now lenders can write loans as fast as they can push out CDO's. The system is so convoluted and complex that nobody knows what the hell is going on or when the music will stop. People are going insane, "buying" homes they can't possibly afford and also engaging in the dangerous-but-lucrative game of flipping real estate[2]. The pressure cooker has no relief valve. It's only option is to explode.

And it did.

It's been a few years since I read a few books [4] on the subject so the above timeline and details might not be absolutely on point. What is accurate is that nearly 100% of the genesis of the problem was due to government fucking with free markets. They just don't know what they are doing. Most of them can barely add and subtract, much less understand complex economic and mathematical models. It's a pity we don't have a mechanism to prevent the ignoramus from passing laws that affect massive economies world-wide without first having to prove that they have the scientific background (math, statistics, economics, etc.) to model and understand what they are doing.

We are now seeing a degree of this all over again with Obamacare. The Senate and the House have exempted themselves from living by the same law they are imposing on all of us. The very unions that supported the law are now rioting 'cause someone got out a fucking calculator and figured out what's going on. Large corporations are pressuring, and I understand some have been granted, exceptions. Again, you have a bunch of lawyers and other morons passing laws without understanding what they are doing because, through them they pander to the masses and buy votes.

Blame CEO's if you must, but the playground was created by government meddling. Nobody else can own that part.

[0] http://en.wikipedia.org/wiki/Collateralized_debt_obligation
[1] http://en.wikipedia.org/wiki/Credit_default_swap
[2] http://en.wikipedia.org/wiki/Flipping
[4] http://www.amazon.com/Big-Short-Inside-Doomsday-Machine/dp/0...