Government interference does more harm than good in the long term. Protectionism is the problem. Propping up institutions using taxpayer dollars exacerbates the problem and allows it to continue instead of the natural economic process of "creative destruction". The financial crisis and recession of 2008 and 2009 were serious blows to the U.S. economy, so it is important to step back and understand what caused them. While some people have pointed to financial deregulation and private-sector greed as the sources of the problems, it was actually misguided monetary and housing policies that were the main causes of the crisis.
The expansion in risky mortgages to underqualified borrowers was encouraged by the federal government. The growth of "creative" nonprime lending followed Congress's strengthening of the Community Reinvestment Act, the Federal Housing Administration's loosening of down-payment standards, and the Department of Housing and Urban Development's pressuring of lenders to extend mortgages to borrowers who previously would not have qualified.
Meanwhile, the government-supported mortgage lenders, Freddie Mac and Fannie Mae, grew to own or guarantee about half of the United States' $12 trillion mortgage market. Congressional leaders pointedly refused to moderate the distortions created by the government's implicit guarantee that the firms would not be allowed to fail, which was the catalyst for their rapid expansion. Instead, Congress pushed them to promote "affordable housing" through expanded purchases of nonprime loans to low-income applicants.
The credit that fueled these risky mortgages was provided by the cheap money policy of the Federal Reserve. Following the 2001 recession, Fed chairman Alan Greenspan slashed the federal funds rate from 6.25 to 1.75 percent. It was reduced further in 2002 and 2003, reaching a record low of 1 percent in mid-2003—where it stayed for a year. This created excessive liquidity and generated a huge demand bubble.
Thus, the causes of our financial troubles were unusual monetary policy moves, unwise regulations, and misguided federal housing policies. These poorly chosen policies distorted interest rates and asset prices, diverted loanable funds into the wrong investments, and twisted normally robust financial institutions into unsustainable positions. Similar bubbles have happened in the past. Study the Dutch Tulip collapse of 1637