SSRN-An Autopsy of the U.S. Financial System by Ross Levine

Levine gives a nice view of the failure of the US financial system in this paperAn Autopsy of the U.S. Financial System:
"In this postmortem, I find that the design, implementation, and maintenance of financial policies during the period from 1996 through 2006 were primary causes of the financial system’s demise. The evidence is inconsistent with the view that the collapse of the financial system was caused only by the popping of the housing bubble and the herding behavior of financiers rushing to create and market increasingly complex and questionable financial products. Rather, the evidence indicates that regulatory agencies were aware of the growing fragility of the financial system associated with their policies during the decade before the crisis and yet chose not to modify those policies."

"In this autopsy, I assess whether key financial policies during the period from 1996 through 2006 contributed to the financial system’s collapse. I analyze the decade before the cascade of financial institution insolvencies and bailouts and hence before policymakers shifted into an “emergency response” mode. Thus, I examine a comparatively calm period during which the regulatory authorities could assess the evolving impact of their policies and make adjustments. Specifically, I study five important policies: (1) SEC policies toward credit rating agencies, (2) Federal Reserve policies that allowed banks to reduce their capital cushions through the use of credit default swaps, (3) SEC and Federal Reserve policies concerning over-the-counter derivatives, (4) SEC policies toward the consolidated supervision of major investment banks, and (5) government policies toward two housing-finance entities, Fannie Mae and Freddie Mac. From this examination, I draw tentative conclusions about the determinants of the crisis.

The evidence indicates that senior policymakers repeatedly designed, implemented, and maintained policies that destabilized the global financial system in the decade before the crisis. The policies incentivized financial institutions to engage in activities that generated enormous short-run profits but dramatically increased long-run fragility. Moreover, the evidence suggests that the regulatory agencies were aware of the consequences of their policies and yet chose not to modify those policies. On the whole, these policy decisions reflect neither a lack of information nor an absence of regulatory power. They represent the selection -- and most importantly the maintenance -- of policies that increased financial fragility. The crisis did not just happen to policymakers."

Yep, the US financial system committed suicide. Makes sense to me.