The problem was that, for the guy making the loan, and his superiors all the way up, this was not a mistake, but rather the whole foundation of their bonuses. The loan was almost certainly at a higher than normal interest rate, and thus when bundled with other such loans, could be sold at a substantally higher price, thus generating higher profits. This, even though everyone making these loans knew (or should have known) that there was no way they were going to be repaid. The trouble was that the bank regulators, unlike those in the 80's during the savings and loan crisis, let this go on unchecked, and have not prosecuted anyone for the massive frauds that took place.
Note, of course, that the profits booked for such loans, were temporary and delusional. The bonuses paid, however, were real, and permanent - never clawed back.
I believe that if actually bank were left to run unchecked, specially having no help from government, more of them would fail... Yes, it would be quite painful in short term, but long term that sort of crap would stop.
The regulation that exist right now, and that people keep trying to expand, has the end result that ties the government too tighly with banks, and bailouts and other help from government become a necessity.
Removing FDIC and letting banks fail would mean that individuals would only deposit money when banks had high equity %. i.e. the bank owners/shareholders invest 30 cents of their own money for every 70 cents of the customers that is loaned out. That way if loans start to fail the customer is protected by the owners share.
well governments de facto need the banks to lend them money, which is used to finance their welfare policies (and their wars), which in turn gets them elected. So politicians make it easy on the bank and ask everyone to pay up. I am making things sound simple on purpose, but it's not too far from the reality.
It sounds like you're talking about eliminating things like the FDIC, which is crazy. People (and banks) suffered tremendously before bank regulation evened out the business cycle. Then they decided to ease things up and let banks play around with depositors' funds, and within a decade we had the financial crisis.
Banks ran wild with unregulated markets that ended up being a huge percentage of the economy. That's what got us into trouble.
Banks and the financial sector were always heavily regulated, even during the years before the crisis.
The whole securitization of debt and cutting it up into tranches only get fuelled up to such an extent, because there were customers hungry for yield but barred from buying anything that didn't have some official (even useless) triple-AAA stamp on it.
Note, of course, that the profits booked for such loans, were temporary and delusional. The bonuses paid, however, were real, and permanent - never clawed back.