What caused the financial crisis?

Home loans didn't bring on the recession; gimmicky financial instruments bloated to 100 times their value are what caused all this pain.

Wall Street turned a few million home-loans into what Warren Buffet called "economic weapons of mass destruction," cratered the global economy and then, when the bubble burst, turned around and insisted on a massive bailout courtesy of the American tax-payer.

That rightly infuriated most Americans, but it has nonetheless become something of an article of faith among conservatives that Wall Street bears little blame for the Great Recession. The dominant narrative on the right today is that "big government" is ultimately responsible for the crash. In the words of one of Andrew Breitbart's bloggers, Democratic lawmakers like Barney Frank and Chris Dodd “brought down the banking industry by forcing banks to give loans to people who couldn’t afford them.”

That such a ludicrous claim could gain such wide traction is a testament to the intellectual debasement of modern conservative discourse. No bank was ever “forced” – or coerced or incentivized by the government in any way – to make a bad loan.

Read the rest at AlterNet
The Absurd Zombie Lie About the Economy Right-Wingers Desperately Cling To -- And Why It's Totally Wrong
by Joshua Holland.

You probably know all this already but it is a good summary and reminder. Holland does fail to mention that the FBI warned about rampant fraud in the housing in 2005, but Alan Greenspan tossed of concerns about a bubble as merely a "frothy" market in some areas.

But in this heated political season, we are sure to see this zombie still wandering around.

Lo and behold:

Washington Post Helps Senator Corker Spread the Big Lie on Fannie and Freddie
by Dean Baker, Center for Economic and Policy Research | Op-Ed at TruthOut

When a newspaper abandons journalistic standards in its news pages one hardly expects to find much commitment to truth on its opinion pages. Therefore it is not surprising that the Washington Post opened its pages to Tennessee Senator Bob Corker to spread the story that government support for homeownership through Fannie Mae and Freddie Mac was the cause of the housing bubble.

UPDATE:

Research from Andrew Haughwout, Donghoon Lee, Joseph Tracy, and Wilbert van der Klaauw of the NY Fed shows that speculative behavior driven by highly leveraged loans was "much more important in the housing boom and bust during the 2000s than previously thought." Thus, this supports the limits on leverage I and others have been calling for as a means of limiting the fallout from the collapse of asset bubbles:

“Flip This House”: Investor Speculation and the Housing Bubble, by Andrew Haughwout, Donghoon Lee, Joseph Tracy, and Wilbert van der Klaauw, FRBNY (pdf)....

This is pretty far away from the (false) story that Republicans tell about the crisis being caused by the government forcing banks to make loans to unqualified borrowers.

Investor Speculation and the Housing Bubble
by Mark Thoma at Economist's View

Calculated Risk critiques the FRBNY paper.
Research: New paper on the role of investors in the housing bubble
by CalculatedRisk

But one thing is clear: investor buying did contribute to the bubble, but it wasn't the cause. But - as I noted in 2005:

"Speculation tends to chase appreciating assets, and then speculation begets more speculation, until finally, for some reason that will become obvious to all in hindsight, the "bubble" bursts."

It was no surprise that investors piled in after prices really took off. But the real causes of the bubble were rapid changes in the mortgage lending industry combined with a lack of regulatory oversight. The speculators just added to the fire.