Here is a quote from Johan Norberg's book, Financial Fiasco. It is the most concise explanation for the recent economic unpleasantness I have seen. There are just three paragraphs from page 134. The book is well worth reading. Mr. Norberg addresses almost all things that contributed to make the 2007-2009 recessions unique.
"Let's look again at the historical background of thecrises. The housing bubble was pumped up and the hunt for ever-greater risk started when the Fed, not wanting the market to set exchange rates, cut interest rates to record-low levels as the emerging economies of the world began to send capital to the U.S. economy. U.S. politicians pumped up risk taking and house prices further through deductions, tax benefits for home savings accounts and restrictions on new construction. By means of legislation, subsidies and government-sponsored enterprises, they managed to generate mortgages even for people that the market deemed uncreditworthy.
"The quasi-governmental institutions Fannie Mae and Freddie Mac developed the securitization of mortgages, which Wall Street fell madly in love with once the credit-rating agencies - which had been given a legallly protected oligopoly by thegovernment - declared them to be safe investments. Government-owned banks and municipalities across the world bought mortgage backed securities like never before. International banking regulations agreed to in Basel, Switzerland, entailed that banks running classic banking operations had to pay extra, whereas those that moved such securities to special companies operating in a shadow sector get away cheap. The central position of Fannie Mae and Freddie Mac reinforced confidence that the [U.S.] government would intervene if the housing market ran into trouble. The Fed's safety net and the federal government's deposit insurance made banks dare to take big risks because they could privatize any gains but socialize any losses.
"When home prices then began to fall and the market no longer wanted mortgage-backed securities, the financial authorities stepped in and decreed that banks had to write down the value of such securities radically, giving rise to several waves of panic selling. And, when nobody wanted to finance the special companies anymore, the banks had to take them over, which put such a burden on their balance sheets that regulations forced them to pile up capital rather than make loans. President Bush and other leading policymakers whipped up a panic to push through the laws they wanted. And just as the financial markets were more worried than ever because they did not know where the big risks were, the authorities banned shorting [short sales], thus depriving the markets of liquidity and information when they needed it the most.
"If this is laissez faire, then I would like to know what government intervention looks like."