So, how did this all start again?

Remember, Alan Greenspan was an Ayn Rand disciple. His tenure at the Fed was the closest this country came to having Ayn Rand running the joint. Greenspan was the most prominent deregulator in the most critical regulatory job in the country, that being the job of regulating the money supply. With a deregulator performing the regulatory oversight, it is no wonder the economy blew bubble after bubble from an oversupply of cash in the system. From the tech and stock bubbles during Clinton's watch, to the housing bubble and the Chinese Economy bubble during Bush's watch, it was all enabled by too much cash in the system, cash that both Greenspan and later Bernanke were proverbially dropping upon us citizens from the Fed's helicopter high above (that's where the "helicopter Ben" moniker comes from).

In 1987, when Greenspan took over as Fed Chairman, the Dow had never been above 2,000 points in its previous 100+ years of existence. By 2007, only 20 years later, it peaked at 14,198. Greenspan left his post in 2006.

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I agree with almost everything you said except that you didn't mention a couple things;

1. The repeal of Glass-Stegall which kept commercial and investment banking separate but thanks to Phil Graham and Bill Clinton it was repealed and suddenly those banks were allowed to perform all those risky bets with other people money, ours. Not that is mattered all that much because with Alan Greenspan's help the big investment banks were skirting those laws anyhow but the repeal opened up the flood gates.

2. The lack of enforcement of the anti-trust laws allowed these big banks to become gigantic and thus too big to fail. Simon Johnson talks a lot about this in his book 13 Bankers. Now of course in the last couple years those 13 or so gigantic banks that were too big fail 2 years ago have taken the tax money they were given and instead of lending it out to consumers (which they were under no legal obigation to do) they chose to purchase and merge with smaller banks to become 5 or 6 monster banks that are such a big part of the economy that compared to everything else they pretty much are THE economy now.

Finally all this talk of Credit Defaults Swaps, Collateralized Debt Obigations, Derivatives and all rest of it are just fancy ways of saying that our econmy has degenerated from a society that used to make things of value into one that makes money by moving money around in various ways. Its infinitely easier to make money out of nothing when you own the government than to invent products, hire people and build things.

Who wants to make 5-7% on products produced in a factory in Detroit when they can leverage their money 30:1 on financial "products" that aren't worth anything anyhow because they are little more than bets on mathmatical formulas that are just made up? And if it all goes bad us moron tax payers will bail them out and put up with cuts in Medicare, Social Security, Eduation etc to make up the difference. The last piggy banks are just about dry.

Unfortunately the fake gambling economy is now valued depending on who you talk to at about $500-$700 trillion which of course is about 10 times the value of the entire global economy combined. So when the next crash happens and it will soon because all of the practices that caused this are still going on and worse there will be no more money left to prop it up.

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@DR Although your analysis explains what investment banks do, you should get the story straight on why they do it. What happened on Wall Street is a cycle called the "Business Cycle". That occurs, as I am sure you know, because of the relationship between our central bank (the Federal Reserve), the money supply and our D.C. politicians. With the signing of the Federal Reserve Act of 1913 (and, sadly, the 16th Amendment to our U.S. Constitution), the United States began its tumultuous freefall into the realm of inflation. It was a slow process at first, they were new to the idea back then. WW1 reengineered our factories to fight a virus (war) and was slowing real production in America. We needed to get the economy back as strong as it was before the war so the FED increased the supply of money to help get banks loaning more money to businesses and people, and financial institutions to invest in those businesses. Between 1914 and 1920, currency in circulation had increased 242.7%. 1921 hit the economy unlike the old bank busts, this one was deep because of the paper trail that was spread across the country and nobody pointed the finger at the FED because it was free liquidity to all reserve member banks. But, the grand thing about the 1921 bust and ultimate depression was its quick recovery. The D.C. bureaucrats weren't used to shoveling more money onto a fire to put it out so they stood back and let the correction happen. It took maybe a year and then the country was back on its feet, working like never before - the Roaring Twenties. With this came malinvestment and again the FED was in the business of creating money out of thin air - "The FED took several actions that, in retrospect, were quite bad. The first thing it did was to inflate the money supply by about 60% during the 1920's. If the Fed had been a little more careful in expanding the money supply, it might have prevented the artificial stock market boom and subsequent crash. Second, there are indications that the economy was starting to cool off on its own in early 1929, thus making the interest rate hike in TBD completely unnecessary and avoiding the subsequent crash. The third mistake the Fed made was in early 1931. The monetary restriction was carried out by selling $405 million in government securities and raising the discount rate in three stages from 3.5 percent to 5 percent at all Federal Reserve banks - exactly the wrong thing to do during a contraction." (Hall and Ferguson).

Then as we all know, because we learned the best parts in school, the election of FDR in 1933 brought with him and the congress the chance to save the day. But, no he didn't, he just insighted more barriers and malinvestment to the markets with his many "put Americans back to work programs" which never worked in the slightest, but someone recently thought up some brilliant idea just like it, but, for the life of me, I can't remember his name... Back to reality, The Glass-Steagall Act was a joke because it barred investment banks from underwriting business from commercial banks - if the practice of insuring bank loans is bad then why is the government in the business? Case-in-point, the birth of the FDIC. The Federal Deposit Insurance CORPORATION, one of the early quasi-government programs that is supposed to save humanity from itself. With the government insuring the money in all the reserve member banks it allowed for the practice of lending out more - you want to hear about overleveraged transactions LOOK AT THE BANK YOU DO BUSINESS AT, they don't carry anywhere near sane levels of reserve to secure their loans. Why? Because of the FED reserve requirements, the FDIC, and the NCUSIF (National Credit Union Share Insurance Fund) all safeguards against the threat of malinvestment. When we do have a run on the banks, I wonder if the government would actually try to cover all the deposits or would they create a bogus story on how it was the banks fault for holding so little in their vaults.

And you know Bill was smart ...his fund played the derivatives market very well! Anybody check out his returns? You'd be astounded.

As the movie pointed out, it all began long before the housing market bubble. The Savings and Loan industry was deregulated under Reagan/Bush and that set off massive fraud, which cost the taxpayers 1.25 trillion in the first bailout. That was the first big warning about deregulation, but instead of reversing the trend, it increased under Bush I, Clinton, and Bush II. This allowed banks an unprecedented opportunity for even bigger fraud. Some have talked about there being "too much money," but there was no such thing--the money was an illusion. Banks were allowed virtually unlimited "leverage"--the amount of money over and above the actual cash they had, that they could then use to play with--investing in making and selling loans on houses when they knew these people couldn't pay back the loans, e.g., loans on $200,000 houses on an income of $30,000. The leverage reached 33 to 1--they could play with 33 times the amount of money that actually existed. Using this device, and deregulation, they created a kind of Venturi effect where they got people to slipstream along the virtual cash stream with their own REAL cash. The money got sucked into a vortex of nonexistent money, which ultimately disappeared when the loans began to default. As stated in the movie, it was simply a highly sophisticated Ponzi scheme. The banking officials got hugely rich while ruining their own banks--which continue to give them enormous "incentive" bonuses for using practices that have no oversight. The final important point in the film is that the same people are still running these things and that virtually no reform has taken place, despite the promises. People's savings and investments will get sucked away yet again, for it doesn't matter what the scheme is, S&L's, tech stocks, or housing--the banks learned the simple trick of owning the government, and thus it will just keep happening.

Thanks ! memzilla.

That's a neat little thing that explains what went wrong with subprime loans, but the question was "how did it all start?" And the real problem started many years before the subprime loan debacle. The reason the subprime loan debacle was allowed to happen in the first place was, again, DEREGULATION.