I'm not sure how morality plays into the mistake. A lot of people deluded themselves into believing that housing prices would never go down. Some people did that because they worked for investment banks and wanted to earn large profits on bonds and some people did that because they wanted to live in California or Florida or Nevada. The only immorality that I have seen is people who lied about their finances on their mortgage applications and brokers who originated mortgages that were clearly unsuitable for the borrowers. There were plenty of people who did neither of these things who are just as much at fault in what happened because they made an honest mistake while trying to make a better life for themselves. What sort of moral rules should our economy follow to prevent this sort of thing from happening in the future?

The repackaging and reselling of worthless loans, creating money out of thin air, seems pretty immoral to me, and was arguably one of the triggers of the crisis.

> The repackaging and reselling of worthless loans, creating money out of thin air, seems pretty immoral to me, and was arguably one of the triggers of the crisis.

The loans aren't worthless now and weren't worthless then. They're just worth less.

Combining loans into a fund doesn't "create money". It merely allows folks to spread their risk over more loans, to diversify.

What happened was that the collective risk was misunderstood. When folks figured that out, they stopped buying those packages. Since US regs require mark-to-market, 0 buyers means 0 "value". Since US regs also require that banks have sufficient assets, marking huge portions of their portfolios to 0 made them technically insolvent.

Note that most of these loans are still performing and the funds are still producing cash, so they're clearly not worth 0.

The other thing that happened is that a lot of folks decided to insure that risk. These folks thought that being paid to cover losses beyond some threshold was free money. Since they didn't get paid enough to compensate them for their actual risk, they're losing gobs of money.

Which is as it should be. If you're willing to take the profit, you should take the loss.