If you want to read a very short book on how we got into the financial crisis, I don't think you could do better than John B. Taylor's Getting Off Track: How Government Actions and Interventions Caused, Prolonged, and Worsened the Financial Crisis. Taylor argues persuasively that the Federal Reserve kept interest rates too low for too long in 2002-05 and that "government programs designed to promote home ownership, a worthwhile goal but overdone in retrospect," together with the credit that was plentiful because of unduly low interest rates created the housing bubble.
"The rapidly rising housing prices and the resulting low delinquency rates likely threw the underwriting programs off track and misled many people." The ratings agencies also bear some responsibility for creating the toxic assets that clog the banks and other financial institutions. "The ratings agencies underestimated the risk of these [mortgage-backed] securities because of a lack of competition, poor accountability, or, most likely, an inherent difficulty in assessing risk due to complexity." He also mentions, rather fleetingly, the role of Fannie Mae and Freddie Mac in flooding the marketplace with mortgage-backed securities; his account can usefully be augmented by the works of my American Enterprise Institute colleague Peter Wallison.....
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