Financial Rashomon: one brief history of the financial crisis

A timeline for reference:

• 1997 - Brooksley Born warns Congress about unregulated derivative markets
• 1997 - The securitization of mortgages (MBS=mortgage-backed securities) begins by Fannie Mae and Freddie Mac providing a market for shaky CRA (Community Redevelopment Act) loans
  
• 1998 - Housing prices start to rise
  
• 2000 - The Internet Bubble bursts: trillions in market value lost
• 2000 - Greenspan starts lowering interest rates drastically to promote home ownership
• 2004 - SEC allows the 5 top investment banks to increase their leverage from 12:1 to 36:1
• 2005 - Dollar starts a plunge against the Euro, losing half its value in 2-3 years
  
• 2006 - Oil starts rising dramatically. Peak oil is implicated, but it appears that the pricing was driven by speculation AND the collapsing dollar
• 2006 - Housing reaches its top
• 2007 - Stock prices of several financial institutions reach all-time highs
  
• 2008 - Major financial institutions start failing, March: Bear Stearns, September: Fannie Mae, Freddie Mac, and Lehman
• 2008 - The Enron loophole is closed in July: prices pull back from high of $142 per barrel
  
• 2008 - Congress passes $800 bailout package in October, stocks fall 40% in two weeks.

In this scenario, the oil bubble was part speculation, part dollar collapse, and unknown smaller contribution of peak oil. At any rate, oil (and wheat) price surges were a distraction from the main event.

Also, in this scenario, sub-prime is a problem, but is not the major problem. It does appear that 1997 securitization of shaky mortgages initially triggered the rise in housing prices which started in 1998, but cannot account for the scope of the current problem. Rather the major problem is the excessive leverage starting in 2004 for MBS and other derivatives. It appears that only the 5 investment banks that sought, got and used the 36:1 leverage ratio were pulled into this mess, though obviously other commercial banks had their own difficulty.

In short, the banks went derivative crazy and formed a standard tulip-bulb internet-stock bubble. The complexity of the derivatives made them very difficult to value, but they were monetary instruments so the market assumed SOMEBODY had a handle on it. The trouble with this bubble is that the standard market losses from the bubble are exacerbated by a meltdown of the global financial infrastructure.