This is an understandable trope in a lot of people's minds (even professional economists), but I think when the evidence is considered there's little support for such an idea.

I'd just like to say that, yes, predatory lending was a thing. Yes, Dick Fuld was a reckless man for leveraging Lehman Brothers to the extent that he did. Yes, we would've had a sub-prime mortgage crisis anyway.

So, estimates for the beginning of the financial crisis have varied. Some people place it as the failure of Lehman Brothers in late 2008, whereas some place it with the discontinuation of three of BNP Paribas's hedge funds. I prefer the second definition, since--as I will demonstrate--disintermediation as caused by a reduction in banking activity isn't that important and using the actions of BNP Paribas leaves a very uneventful year-long gap in which nothing significant seems to happen.

As for the Recession, we know it began in December of 2007, but was exceptionally mild for the first six-or-so months. Lee E. Ohanian points out that the Depression couldn't have been caused by the 'financial crisis of 1929', because there really wasn't a financial crisis in 1929. The 40pc declination of banks between 1929 and 1933 was because of un-diversification (because of size) and mergers. Indeed, the biggest year of bank failures was 1933--which was the beginning of the recovery, why? Because expansionary monetary policy revived aggregate demand.

AD is key here. Any disintermediation between banks can be largely weathered provided a stable growth of nominal income, which can be supplied by monetary policy. Ohanian goes on to note, regarding the 2008 Recession, that intermediation between banks didn't decline as much as you should expect if you believe the credit cycle primarily drives the business cycle. Bank credit relative to nominal income was at an all-time high by the end of 2008.

And it's only really until nominal income tanks in mid-2008 that the economy goes into a tailspin. The S&P 500 index (as well as house prices) demonstrate* that the economy only entered this tailspin when they had already lost over half their value. While, at the same time, household liabilities** only declined with the drop in nominal income. The same is true for rising unemployment***:

It makes sense in light of the financial crisis, too. Falling nominal income means less money, and would obviously cause or exacerbate any debt problems. I'll end it here, lest I bore you all to death.

Also, these graphs here show the relationship between nominal income and rGDP following recessions supposedly induced by financial crises. One through three, four and five. In other words, so long as the central bank maintains a stable level of nominal income growth (aggregate demand), then the producers will supply the output assuming no exceptional supply-side issues. Financial crises, really, are a non-starter when it comes to discussing downturns.

I've put this in the Bonfire specifically because this is very contentious (at least among economically minded people) and I'm not even sure about my own stance on the issue, so I can't consider it an authoritative guide in any way.

TL;DR
>financial problems don't matter so long as the government maintains spending in the economy

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inb4camnatorlolcommonsense

But seriously Meta, I wish I had half as much Economic intelligence as you do.

Shit, I could be wrong.

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lending was a thing. Yes, Dick Fuld

Stopped reading there.

Why?