*sigh*
This is why the government should've sued the boards of directors of large banks. It would've hurted society, but in the long run you get this shit: people believing roughly the opposite of reality.
@TerribleTy27 : truth is that up to 2008, the government was lacking. All intelligence concerning money went to work in the bank industry, leaving the government at best naive but arguably an accessory to what happened. You see, up to about the eighties, saving banks and insurance were strictly separated. Stocks, bonds and all that stuff was something for adventurers and people that really knew what they were doing. And what did they know? Among others that houses were a safe investment, and that these houses were worth a lot of money. Slowly but steady, the laws that separated the large population (that just had a house and a mortgage on it) from the investors blurred. Bankers were paid more by selling investments than giving proper economic advice, so they did exactly that. The 2008 crisis went much deeper than that, but I think most governments assumed this was about as bad as it was going to get. Lemme explain...
To start with, I've got to tackle that "no sane bank would've allowed that kind of behavior" you mention (referring to the loans to people that had little to no chance to pay it off). A bystander's opinion would be that it is a bad loan because everybody seemingly loses. But from a bank's perspective, their stance is THAT THEY CANNOT LOSE(1)
Simple example: take a house that costs 100'000 dollars. I'm an average joe who barely makes 500 dollars a month (excluding my average costs) on interim basis and has, say, 5000 dollars in savings. Chances of me paying of that debt is pretty low, because I haven't been able to scrape more money together. I shouldn't be able to loan 95'000 dollars. But to a bank, this is different. Their train of thought is that either I pull off the unlikely and pay off the debt (option A), or somewhere down the road something happens (loss of job, needing extra cash, ...) that causes me to become unable to pay (that's option B).
Option A) is pretty straightforward: at the end of the term, I will have payed back that money and interest (say...10'000 dollar interest, so total payback: 105'000 dollars, over 20 to 30 years). The bank obviously wins.
For option B), you've got to understand what 'mortgage' really means. It means that whenever you can't pay the bank, they can legally sell the house and claim their money back that way. So...say after one year of paying 500 dollars a month, I cannot pay any further because I lost my job and can't get another. I will have payed the bank 12*500=6000 dollars, so I still owe them 99'000 dollars(2). I can no longer pay, so the house gets sold. Assuming housing prices constantly rise, it gets sold for 101'000. The bank takes it's 99'000 dollars and I get the remains (2000 dollars...so basically I will have lost 4000 dollars). Again: the bank wins.
And that's why "normal circumstances" mean that whenever someone (ANYONE!!!) wants a loan, the bank granted it. Either option A or option B: they get their money.
That is, of course, with that assumption that housing prices constantly rise. That assumption is a calculated risk. Then banks started getting creative. ONE house can rise or lower in price, they argued, but on average, houses will always rise in price. So when we bundle ten or hundred of those loans together, then that bundle is guaranteed to make money in the end (again: either option A or option B will garantee money back). Those things were what CDO's CFO's, swaps and even more strange terms were invented and traded. Banks treated these bundles as solid foundations; as if 'owning' a bunch of people paying you back loans was equally worthy as owning money itself.
The way I see the housing crisis is best described as "the wake-up call that houses CAN lower in value". And not just a few houses, but pretty much worldwide. That's why banks (who simply shouldn't be allowed to loan out money that they don't have) suddenly faced a huge-ass wave of problems. Not because "government forced banks to give people loans" (I haven't followed US news at that time, but this is honestly the very first thing I've seen, and it totally mismatches everything I've read on the topic), but because the board of directors thought they had found a way to print money.
(1): I'm currently buying my second house in my life, so unfortunately, this isn't a hypothetical position for me
(2): it's actually a bit more complex than that because you pay most of the interests first and there are file costs, but let's keep things simple for now.
