You give a factual account of what has happened but do not explain the cause - government interference with the market.
First, government has introduced fractional reserve banking that enables banks to lend multiples of their deposits.
Second, government forced banks to give loans to low income and low risk borrowers.
Third, the Fed reduced interest rates to extremely low levels. This sent the signal that money is cheap and encouraged people to invest in areas that they would normally not have.

Now we are seeing more government interference in trying to undo the problems that they have caused.
Any guesses what the result will be?

“"interest-only" and "option adjustable rates" mortgages. These new Ponzi schemes soon became a ticking time bomb”

If the author thinks an interest only mortgage is the same as a ponzi scheme, he needs to get his definition straight before bothering to comment upon the validity or fraudulent nature of either.

Interest only loans are not inherently flawed and serve a valid purpose in given circumstances.
I do recall the option adjustable rate mortgages were used to excess by the Victorian labor government when it pursued a socialist dogma to get the “economically challenged” into their own houses, resulting in a high rate people, who after 10 years owed more on the houses than when they started and more than the buildings were worth.

Further loc-doc and no-doc mortgages are valid methods of finance, although it is imperative the borrower understands exactly their obligations, including their responsibilities and the extra interest they will pay (speaking from the experience of having a small lo-doc mortgage myself).

“The logic of capitalist crises is precisely what Marx describes as "the slaughtering of capital values".”

Don’t worry. Marx has already seen millions upon millions sacrificed in the name of his bizarre economics through the failures of the socialist utopias of USSR.

RobertG “Now we are seeing more government interference in trying to undo the problems that they have caused.
Any guesses what the result will be?”

Agree, governments are responsible for regulating the environment in which capitalism and individuals can thrive. This was not a failing of capitalism but a failure of government.

Had lenders not been politically blackmailed, as you suggest, the loans would have never been extended to people who lacked the responsibility and resourcefulness to repay them.

Likewise, had government kept tight regulations, the level of economic retardation would have produced economic stagnation and social mediocrity, things which were the hallmark of the workers paradises of the former USSR.

I agree that there are many aspects of the global financial system which we perhaps could look at better regulating, eg:
- Credit rating agencies
- Mortgage brokers (particularly US)
- International corporate accounting standards - perhaps look for ways to better account for off-balance-sheet risk. (no easy solution here)
- Standardise some common derivative contracts so as to reduce uncertainty.

But the emphasis here is on better not necessarily more regulation; in many of the examples I have given greater regulation may in fact prove too costly.

Over-regulation and govt interference is also an important aspect which contributed toward the financial crisis. eg. The US govt pressure on Fannie Mae and Freddie Mac to finance high risk loans
and the implication that this assured a US govt risk guarantee.

Moreover, I think that there is a risk that we may over-react and place undue restrictions on innovative derivative products. While it is clear many contracts were not well constructed, they can also be quite useful tools for pricing and allocating risk.

Bill, on another note, your housing wealth-effect calculations seem somewhat heroic! How did you come up with such figures

Central banking is fundamentally not a free market institution.

They caused the cheap credit and much of this can be sourced back to its knee jerk short term indicator horizon. Then a policy of leave alone until the next crisis comes.

All roads lead to Rome so to speak and it is erroneous to describe the current monetary system as an unfettered free market arrangement.

Why did not the regulation (that gets more and more onerous over time) stop financial bubbles?

The free market not only creates but also destroys - one must come with the other.

Most the current business models that have collapsed have resulted in a failed long term business model.

Allco Finance, ABC Learning, Babcock & Brown, Centro etc business model would probably still be going strong, except for the fact that it only works in an environment of strong growth, low credit cost and expanding asset prices.

The companies were seen as 'great' because that has been the operating environment for the last 10 years or so.

Problem is what will happen when these conditions are not maintained, answer - collapse! They are not viable for the long term and they have now been culled.

Central banking is a clumsy interventionist institution and gives government a monopoly on money creation (often printed for themself). There is a reason non legal tender is illegal.

The author of this article blames financial deregulation for the present financial crisis, yet in the same breathe describes in detail how a socialist institution - the Federal Reserve Bank - contributed to the problem. For much of American history, there was no central bank. There was free banking and a gold standard. Is it mere coincidence that the greatest economic crisis the world has ever faced (the Great Depression) occurred after the establishment of a central bank?

Read here: http://mises.org/story/3128

The comments on this article remind me of the introduction to one of Paul Samuelson's text book chapters, "Only one in ten thousand understand the currency question and we meet him every day."
Central banks, or reserve banks were invented to limit the ability of independent banks to create currency, a practice bankers took to like ducks to water once it was realised that the receipts for a bullion deposits were as tradeable as the actual bullion. Their practices led to multiple frequent bank collapses. To prevent those collapses central banks were created which required banks to leave a proportion of the deposits each bank accepted on deposit with the central bank in exchange for guaranteed support in times of crisis.
The present crisis has been caused by the financial institutions perennial search for ways to circumvent the restraints imposed by the Reserve banks. Governments have not been always prepared to take the necessary regulatory steps and a prime example has been the relaxation of the reserve holding requirements and the acceptance as capital adequacy ratios as a replacement (such a scheme could only have been dreamed up and sold by a banker). That acceptance has imposed enormous costs on the Australian public as banks set out to achieve profits well in excess of that necessary for reasonable dividends. Those excess profits flowed directly to their capital adequacy pool and a multiplier effect came into play such that since the early 90’s banks have been increasing their lending by 12-15% compound per annum, a sure recipe for an asset bubble with a consequential collapse.
The thrust of the main article is correct.