Here are some of the culprits we regularly see mentioned:
1. A bubble in the housing market
2. The originate-to-distribute model of mortgage lending
3. Lack of transparency in structured finance and mortgage-backed securities
4. Lack of regulation of derivatives
5. Poor credit-rating practices
6. Fannie Mae and Freddie Mac straying from their original mandates
7. Implicit government guarantees for Fannie and Freddie
8. Lack of regulation of hedge funds and private equity
9. Inadequate capital requirements for financial intermediaries
10. The too rapid or generous extension of Fed credit to non-banks
11. The rescue of Bear Stearns
12. The failure to rescue Lehman
And some others:
1. Repeal of Glass-Steagall
3. Treasury Agencies: (Brad Setser)
4. Liberals and the Community Reinvestment Act
Jim Hamilton: Reckless underwriting standards and excessively low interest rates contributed to bidding up house prices to unsustainable levels. Real estate price declines have now engendered current and prospective future default rates that translate into large capital losses for institutions holding assets based on those loans. This erosion of capital makes creditors wary of extending any new funds to these institutions.
But there is also a deeper question here that is harder to answer. How did the financial system come to be susceptible to such a profound degree of miscalculation and inappropriate leveraging of risk in the first place? My answer would be that the core problem was financial arrangements in which the gains went to one group but the downside risk was borne by somebody else. The loan originators offered unsound loans, but still made big profits because they sold those bad loans off to the loan aggregators. Fannie and Freddie earned themselves nice income while the loans were performing, but the taxpayers absorbed the loss when the loans went bad. CEOs and fund managers earned huge bonuses while the boom went on, leaving stockholders and investors holding the bag when things went sour.
Barry Eichengreen blames unintended consequences of Glass Steagall and borrowings from China. My opinion and Angry Bear says Never let economist use unintended consequences again. Economists excel (or should excel) in looking at how regulation affects incentives and either they've been sloppy or lazy or both.