Former bank regulator William Black names fraud as the cause of financial crisis. I really liked his definition:
Fraud is deceit. And the essence of fraud is, “I create trust in you, and then I betray that trust, and get you to give me something of value.” And as a result, there’s no more effective acid against trust than fraud, especially fraud by top elites, and that’s what we have.
My complaint about this is that it seems everyone involved was mostly deceiving themselves. People applied for subprime and Alt-A loans so they could move into houses they couldn’t otherwise afford (or to buy houses as investments in hopes of selling them at a profit). Banks sold those loans knowing that people would lie because there was insatiable demand for mortgage-backed securities. Investors bought these securities because they kept going up in value regardless of how crappy they were.
I feel like this was in many ways a fraud we perpetrated on ourselves. People believed what was going on was normal and somehow made sense, when it was clearly unsustainable. So while the fraud explanation sounds good, I think mass self-delusion better explains what occurred.