I'll disagree on the first line. Totally agree on the second line. (Assholes have to stick together. Wow, that sounded kinda ghey.)

Funding innovation is what got us here. CDS, other deriviatives, etc, were all forms of funding innovation, creating great things out of crap, essentially polishing turds. The biggest issue was the actions of the money center banks who's CEO's had to follow the lead of the other "funding innovators", lest they be canned. The boards of directors of banks behind the curve noticed the profits of the other banks who were using derivatives and other "unique financial instruments" and gave direction to the CEO's and presidents of the other banks and said, "Make money!"

We saw this at our bank and couldn't make sense of it, the option arms primarily. Approve a person at a payment based on a 1.9% rate, give them a negative amortizing loan based on the 1.9% "supposedly fixed rate", yet the underlying loan was actually accruing at a rate of 7.5%. Add in a 110% LTV clause so that when the loan balance reach 110% the payment switched to the payment based on the 7.5% rate. Payments doubled. These were essentially ticking time bombs, where 5% of the original loan balance accrued every year, so $0 down loans, or 3% down loans, were destined to implode 2-3 years down the road.

We (your local community bank or credit union) didn't cause this bull sh!t, but we have certainly taken LOTS of collateral damage. My little bank started scaling back on spec financing in 2006, and stopped it altogether in 2007, except for projects under way. Thankfully. It was unpopular, and certainly not innovative, but it saved our ass. We saw the writing on the wall.

As far as the incentive to lend, that has all but been regulated away. Imagine if you will each bank has a number of buckets. These buckets represent the limit of how much of a percentage of the net worth of a bank can be leveraged towards certain types of loans. We'll work in whole numbers, say $100 million is our net worth, aka total risk based capital. The standard for this risk based capital to be "well capitalized" (aka... having sufficient liquidity to weather loan defaults and a run on the bank) was 10%. Well the FDIC and OCC (office of the comptroller of the currency) changed this measurement to be 12% to be well capitalized. This dried up the ability of banks to employ funds in an "innovative manner". Instead of leaveraging at 10:1, the ratio changed to 8:1, reducing money on the street available to lend by 20% overnight. Add to that the change in the bucket method, where it was okay to use 300-500% of your equity on non-owner occupied loans (hotel/motel, apartments, rental houses, where income from rents repay the note) to a "written in stone" limit of 300%. We were at 374%, or $374 million (MM) in this type of loan when the decree was handed down to us. We had to wait until $74MM paid down vefore we were at the limit. If you had more than 300%, guess what, no lending, period, in that category, no matter what, until you drained the excess out of that bucket. The fawkers hit us at both ends of the spectrum, making many banks pass on completely bankable deals. ( I turned away 3 decent deals this week because of this. ) Obama is a fool because he wants banks to lend money "dammit". The policies put in place by his administration are hampering lending, not helping. He has no clue.

I have no love for that whore, our governor, as she has sold us out, and so have the folks who voted to suspend the initiative. Every chance she got, she sold us out. Unions, tribes, etc. Now it is their chance to correct government, and they choose to not make the hard sacrifice and cut staff within the State machine. Every other business has had to do this, except for one of my clients in the Voc Rehab business (and they are looking for employees if you are a techi). Time for the State to bleed off some excess as well.

Lots more to cover, but I have a some wine calling my name.