- a regulatory environment encouraging subprime loans
- high yielding securities which were rated as AAA (by a legal oligopoly of bond rating agencies) and thus could be used for bank reserves
- a short term interest rate that did not respond to market pressure (because determined by the fed) and thus created a gigantic carry trade
Mistakes in risk models always happen, and they can be caused by many things, including an over-reliance on mathematical model. However, for a real catastrophe, you need to remove all the feedback mechanisms such as
- a free market that would allow the short rate to rise with increased demand
- a free market that would allow bond rating agencies to compete
- a free market that would allow bank to compete for balance sheet quality rather than having a government insurance scheme creating a race to the bottom