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.

Foyle no matter which way you look at it - the reserve sets interest rates.

Why did the reserve not increase them when asset prices were ballooning due to asset speculation on low interest rates' Why because you only look at inflation was their faddish mantra and hell I guess growth is occurring - so nothing to worry about. They were worse than useless and now run around like headless chickens to 'solve' the problem - THEY ARE THE PROBLEM.

Like judges all are political appointees.

"Only one in ten thousand understand the currency question and we meet him every day."

If you are going to quote someone - Kin Hubbard was a humourist and cartoonist - had no idea what economics was. It is interesting to see he died before the Great Depression.

The problem is that the vast majority think that Reserve banks are mana from heaven, without questioning their cost. All economic thinking at University if a mistake is made by a Central Bank, is 'this is what they should have done'. Interesting because there is no way to test the validity of this so called knowledge.

Like all General's train for the last war, all Reserve Bank governors train to avert the last crisis; without realising that the new interventionist model is brewing a new unforetold crisis.

Foyle,
There is no such thing as excessive profits for a firm: if you own a business you will seek to maximise your profit!

As interest rate spreads have trended down over the last 20 years or so I can only assume that these "excessive profits" have come in the form of recent increases in bank fees?

Bank fees have been rising because banks have been switching to a more transparent 'user pays' system. As a result, interest rate spreads have reduced as they are not needed to cover the costs of other services provided by the bank. Moreover, de-regulation of the financial services sector has increased competition and thus also contributed to the lower spreads.

Furthermore, the owners of equity in a firm receive a return made up of both dividends and capital appreciation. Therefore shareholders would quite happily exchange dividend payments for capital appreciation if it were to bring greater returns, subject to the inter-temporal discount rate. Therefore if, as you imply, there is such a large incentive to create tier 1 capital - in the form of retained profits - then dividend payments would have dramatically reduced. This has not been the case.

Consequently, the acceptance of capital adequacy ratios have not been the principal cause of higher bank fees - as you suggest.

It is apparent to me that Bob Sanatamria who predicted the fall of Wall Street firms and of the whole system two years before his death in 1998, was right all along.
I suggest that people consider voting for the political party that I am a member of now- the Democratic Labor Party ( DLP).
It is registered and can be found above the line on the Federal Senate ballot paper. Remember it.
I left the ALP because of its anti Australian policies in relation to unions and home industries and on moral grounds. I am most happy to be a rat because when I considered the pro abortion and pro 'free' trade polices and pro big business policies of the Coalition and the ALP, I thought to myself that those kind of policies are most unAustralian and anti the life of unborn Australian babies.
It was time to leave the rot and their media lackeys behind me.
Some of them say that makes me a 'rat' ( ALP talk about those who leave the fold).
My response is that I couldn't care less what the morally bankrup who have led Australia and the State of NSW down the chute, have to say.
They have no credibility.

Only family Aussies in my view are credible and should band together against both the Coalition and the ALP.
The watering down of WORKCHOICES didn't go far enough.
The ALP and the Coalition are much the same and are pro big business and pro radio disk jockeys.
We need a new political party such as the DLP to make these other parties and folk less influential for the moral and big business rot they all love promoting to the average Aussie worker.

All you have described are economic history and subsidiary effects of a prime cause that you have ignored, or failed to understand.

The root cause is the biggest fraudulent scam, parasitic financial practice, and Ponzi scheme of all – government’s monopoly control of the money supply. Prices are the steering mechanism of markets. Government, by manipulating the price mechanism, influences economic calculation. This causes mal-investments on a massive scale, because it misrepresents the true state of time preference and of demand. It makes investments appear profitable which in fact are not profitable. It diverts capital into investments that are unsustainable.

The bust is the process by which capital invested in things that people were never really willing to pay for, is liquidated and allocated to productive purposes that they are.

Actions have consequences, and massive actions have massive consequences.

According to the ‘blame the market’ school of thought, the fact that the crisis arose in a government-favoured industry (housing), in government-sponsored enterprises (Fannie Mae and Freddie Mac), using money that government conjured out of thin air, for government’s purpose of making housing more ‘affordable’, lending hundreds of billions of dollars to tens of millions of people, all these are just a strange coincidence, nothing to do with the cause of the boom and bust, which just arises mysteriously and spontaneously out of non-existent ‘unregulated capitalism’.

Underlying the author’s argument is a double standard. Whereas it is assumed that the markets cannot figure out the most economical way of doing something, it is assumed that governments can. But where did this magic power come from? If it were true, then we could just abolish private property and human freedom, give total power to government, sit back and hey presto: the best possible society.

The current crisis is not a crisis of unregulated capitalism, but of socialist government interventionism, under cover of erroneous theories that have already been refuted.

Anyone who has not refuted the Austrian theory of the trade cycle (http://mises.org/story/3128) is not qualified to comment, and to quote Marx on the topic is nothing short of laughable