There are many people in positions of power and authority who like to focus on the financial aspects of the crisis because it makes it appear complicated and gives them an excuse for having failed to recognize it in advance and taking steps to stop it. The reality is that it was all very simple and the people in positions of responsibility were simply too incompetent and/or corrupt to do anything to prevent this disaster.

+1000, you could use this to describe many political issues, especially, say, terrorism. Terrorism is a very simple concept but policy makers often are forced to define it in strange ways, otherwise the US and its allies would be terrorists and that would be a problem.
There is another factor at play though that does not exactly fit incompetent or corrupt, something you might call institutional corruption. The majority of people directly involved with the housing bubble/financial crisis got to their positions based on their ability to see things the way that would best suit the "markets" as opposed to how they were. By definition only certain people are able to do this-one does not get to be the New York Fed president if one has a have strong belief in the power of the "market" to redistribute income, nor does one get to be the Fed chair if you think the most important mandate of the Fed is employment-even though in theory employment is as important as inflation according to the Fed's own rules. You get to those positions if you believe in the "free" market, which has been defined by giving the financial industry the "freedom" to do what it wants, because of course it knows best, and would not endanger the entire economy. This is a far bigger problem then any individual and really requires systematic change in each of the regulatory bodies.

The collapse of this bubble was the basis for the crisis. If we had seen all the same crazy financial schemes without the bubble, the consequences of their implosion for the economy would have been minimal. By contrast, if the bubble had grown to the same level without crazy financing, its collapse would have still led to a severe recession.

Hello. Is this the emergency number for reporting forest fires and housing bubbles?

No. We only do individual trees and houses here, since all forest fires and housing bubbles are local in nature, tailored down to individual rational economic agents who experience each tree and house as uniquely demanded and supplied. Which one of our 10,000 hyperbranding complexity experts would you like to talk to?

Please, this is an emergency. Where can I report a forest fire and housing bubble?

Thank you. You will be connected to the Elephant Room Department.

Hello, you have reached the Elephant Room Department. Your expected wait time is only 36 hours given our lack of experts in this area. However this can be speeded up by answering the following questions:

Are you sure there is an elephant in the room? Are there 7 blind men crawling over it, trying to figure out what it is? Are you blind as well? Are you or have you ever been a member of Americans Against Asset Bubbles and Other Drivers of Capitalism?

If you answered no to all of these questions you will be connected immediately to a live expert who will explain why all elephants are invisible, only capable of being seen in the form of their individual parts such as a tree or house.

Herbert Hoover tried to convince the Fed, Congress, bankers of the danger of the 1929 stock bubble, but nobody listened. He even got a letter 3 days before the crash from (if I recall) the president of J.P. Morgan poo-pooing Hoover's concern for a collapse, refusing to voluntarily stem the flow of credit. Same as out ever was.

I am also of the skeptical crowd and believe USA political officials and business leaders do not truly want to detect and deflate bubbles.

If the economy grows at 2%/per year and population growth is greater than 0%, then the typical citizen is not much better off than the year before, if at all, in GDP terms.

But people WANT to be much better off.

And politicians want people to believe they will be better off in the future.

So bubbles offer hope and the media can always find willing bubble pushers (see Henry Blodget for Internet stocks and former National Association of Realtors economist David Lerah).

Later reports related that both were skeptical of the markets they were seemingly enthusiastic about.

Bubbles help sell products such as real estate advertising, houses, home improvements and stock, and early bubble skeptics are ridiculed as the bubbles inflate more and the skeptics are "proven wrong".

And I suspect a lot of the participants believe in the "greater fool" theory in which they will be able to unload their positions on someone else.

Furthermore, bubble enablers can do well, Greenspan got an $8 million advance for "Age of Turbulence" and Henry Blodget is back in the news as Amazon's Bezos invests $5 million in Blodget's Business Insider Inc.

I imagine Lerah pulled in a good salary for a while.

Bubble popping will remain a lonely and scorned pursuit, both inside and out of government.

I think the house price bubble peaked in mid-2006. The recession started in December 2007 (18 months later). The recession was very gradual for the first 9 months and really exploded in Sept. of 2008. I distinctly recall thinking in early 2008 that the Fed should cut interest rates to zero right away. They saw it differently (they thought it was just subprime and that it was "contained"). Counterfactuals are always problematic, but don't you think this all would have played out differently if the Fed had cut rates sooner and drastically? Particularly if that had been combined with some more regulation? I guess though my questions prove your point. The Fed and Treasury didn't see the coming collapse of prices that would result from the policies they chose in 2007 and 2008. My point is that the bubble is only a bubble if you later let it collapse at a precipitous rate.

Dean thinks the problem was that Alan Greenspan and Ben Bernanke were never taught arithmetic? I thought the quality of education was declining and that the basics were better taught to their generation. But if they had been able to add 2+2, then one or the other could have blown the magic Fed whistle and the housing bubble would have been deflated harmlessly?

Actually there is plenty of evidence that changes in finance did lead to the world-wide housing bubble, that is to its extent and great danger. Specifically mortgage bundling and credit-default swaps allowed for unsound mortgage lending and vast extension of real risk. Although Greenspan had a significant role in bank deregulation and extension of derivatives (lack of regulation thereof) he was never in control of them, nor did he have an effective means of reversing things harmlessly. There can be asset bubbles without excess leveraging or other financial malpractice, but such bubbles don't threaten the world's economy. In fact local housing bubbles are commonplace, which is probably one reason why authorities were not alarmed.

Prevention of dangerous asset bubbles is in principle fairly simple - restrain overleveraging - but in practice it is difficult because financial people are always looking for loopholes in regulations and creating new devices, and when things are apparently going well there is very little interest in bringing the good times to an end. Some people may recognize bubbles, but if by some chance they occupy positions of responsibility and try to halt bubbles they can be replaced or ignored.

I would pinpoint a different and more plausible fault in education, which is that one or more generations of economists were taught that monetary policy and central banks control economies. Monetary-policy theory reached a high tide in the 60's and 70's for some good reasons as well as bad and untested ones, and there was great optimism about the powers of central banks. Some monumental failures of the theories since then have basically been ignored and many economists still have blind faith in the powers of central banks and their Maestros to direct economies at will. We should not be letting finance run wild and relying on Maestros to blow magic whistles or to conjure up magic inflation afterwards.

Joris Luyendijk over at the Guardian correctly identified the true cause of the crisis, not incompetence in arithmetic, but self-delusion.

http://www.guardian.co.uk/commentisfree/2013/apr/05/bank-delusion-greed-hbos-fail?commentpage=2

Besides, economic growth is basically unsustainable, since it eats up the planet.
The other basic problem with economic growth the OTHER elephant in the room":
Automation.

Why do we have jobless growth now? Because we replace people by computers. We can go two ways:
We trade productivity in for leisure time.
We reduce the 40 hour work week for a 20 hour work week, working 11-3 pm per day.

Everybody works

Or, we could have the present system, where half the people are unemployed and starting to riot.