To whom it may concern:
This thread is for the discussion of Less Wrong topics that have not appeared in recent posts. If a discussion gets unwieldy, celebrate by turning it into a top-level post.
(After the critical success of part II, and the strong box office sales of part III in spite of mixed reviews, will part IV finally see the June Open Thread jump the shark?)
I actually agree with most of those points, and I've made many such criticisms myself. So perhaps larger banks are forced into a position where they rely too much on credit scores at one stage. Still, credit unions won, despite having much less political pull, while significantly larger banks toppled. Much as I disagree with the policies you've described, some of the banks' errors (like assumptions about repayment rates) were bad, no matter what government policy is.
If lending had really been regulated to the point of (expected) unprofitability, they could have gotten out of the business entirely, perhaps spinning off mortgage divisions as credit unions to take advantage of those laws. Instead, they used their political power to "dance with the devil", never adjusting for the resulting risks, either political or in real estate. There's stupidity in that somewhere.
In some cases this was an example of the principal–agent problem - the interests of bank employees were not necessarily aligned with the interests of the shareholders. Bank executives can 'win' even when their bank topples.