When Pennsylvania Avenue and Wall Street both agreed that there is no time to lay inappropriate blame, and investigations would not be constructive, it became apparent that the blame would eventually be spread thin and impersonally. Clues would come weeks later, as cooler heads prevailed and thoughtful minds deliberated the financial processes that had left our banking system broken, frozen, and no cash flowing. As the origins of the crisis began to reveal the presence of neglect and greed, the public began to get a picture of how it happened and who was to blame. Unbridled capitalism, fuelled by a Friedmanian business mentality, exploited the economic system and self-perpetuated a growing, yet hidden, under-capitalization that nurtured the inevitable crash.
Ronald Reagan had unleashed capitalism from the chains of regulation in 1980, and the pro-market attitudes would experiment for the next 25 years finding out how little regulation could effectively maintain control of the economy. De-regulated airlines teetered on the brink of bankruptcy. Utilities, without the moderation of an independent regulator, were pricing electricity out of the reach of the average California worker. These warnings went unheeded, and the first commandment of free market economics became "The business of business is business"1. Business ethics were simplified and responsibility was cast aside in favor of a new belief that said, "The social responsibility of business is to increase its profits" (Friedman, 1970). By the late 1990s, the mortgage, insurance, banking, and financial sectors had caught the current of the new wave of extremist capitalism that had been shepherded in just twenty years earlier. Economic theories that bordered on moral philosophy became justified in the minds of financiers that were willing to turn their head to the exploitation in the belief that intervention was a form of intrusion. The next ten years would provide specific opportunities to further inflate the economic value of financial instruments, whose only regulation was the market's reaction to their ability to turn a profit. The origins of the financial crisis had sown its seed in deregulation and the moral justification for excessive greed had taken root.
Problems of under-capitalization and instability began to manifest themselves as the creative financial transactions of sub-prime loans, bundling, and the credit default swap combined to eliminate the protection offered by traditional security and transparency. Subprime loans began to become more prolific in the years between 2001 and 2006 when the amount of the loans quadrupled (Crouhy, 2008, p.9). As the demand for housing rose, so did the cost of real estate. This led to market speculation where housing prices continued to escalate, and homebuyers expected to refinance before the reset and accumulate some secure equity (Crouhy, 2008, p.11). The deregulation mentality contributed to this cycle as the "Huge demand from investors for higher yielding assets, such as super senior tranches of subprime CDOs, led to a lowering of lending standards, low-documentation, and even no-documentation loans" (Crouhy, 2008, p.11). The under regulated practice of bundling allowed these risky loans to be combined with more secure instruments, and a creatively deceptive insurance scheme gave the bundles an appearance of a AAA rating for