Roger Lowenstein says the reason no Wall Street executives have been prosecuted is likely because their actions were stupid but not criminal. But people don't find that satisfying:
While it may be harder to prove criminal guilt, it's easier for people to believe that some bad actor is the cause of bad things. This is a persistent trait in the national character. Historian Richard Hofstadter identified it in 1964 as The Paranoid Style in American Politics. He was writing mostly about McCarthyism, though he recognized that paranoia isn't limited to the political Right. Nor is it always harnessed to an unworthy cause; convicting criminals, especially in high places, isn't just worthy, it's crucial to democracy.
The paranoid style, as Hofstadter defined it, has as much to do with "style" as paranoia—it's about "the way in which ideas are believed [more] than with the truth or falsity of their content." It spawned a rhetoric that tilted every question toward conspiracy, so that random or unfortunate events were seen to compose a "baffling pattern." Thus, the "sharp decline"—Hofstadter was writing about America's perceived international strength, not the price of real estate—did not "just happen." It was inevitably brought about by "will and intention."
He writes elsewhere that the crisis was caused mostly by rank idiocy, not by fraud. He puts it something like "fraud accompanied the crisis, it didn't cause it". This is a view that I am pretty sympathetic to. I believe there was a some outright fraud, but I suspect that is always the case in financial markets. The bigger problem during the crisis was that all sorts of people thought very risky assets were not very risky. And, while some actions taken in the lead-up to the crisis are obviously crazy in retrospect, being wrong is not criminal. We don't imprison the gambler for backing the wrong horse and losing his rent.
In general I think we are too quick to assign bad motives to people when things go wrong, and are too slow to accept that people do very stupid things all the time without intending to. We often assume that people in high positions of business or government are more competent than they really are, so when things go wrong we conclude that it was intentional. I think we're also too quick to connect unrelated dots, rather than starting from the assumption that the world is pretty stochastic. This gets to the "Black Swans" post from yesterday.
There's a political element to this, of course. Hofstadter's famous essay largely focused on 1960s examples of right-wing paranoia (e.g. McCarthyism), but he was clear that this particular pathology affects people across the political spectrum. (One of the examples he mentions, but does not dwell on, is scare-mongering against bankers in the 1890s. It reads like it could have been writing today.) Politicians often try to tap into latent paranoia, and in some cases actively encourage it. (Think of Gingrich's "secular atheist radical Islamist" nightmare, which must have filled out somebody's Bingo card.) Sometimes, as in the case of the Republican establishment, incorporating the Tea Party movement (which I view as a somewhat-coherent but certainly-paranoid mass movement) is more an act of desperation: if they don't, their coalition risks fragmentation, as happened during the populist movements in the 1990s that led to Ross Perot's presidential runs. A big part of Perot's success was manipulation of fear of a "giant sucking sound", and Perot's relative success may have affected legislators' later votes on NAFTA.
Sometimes encouraging isn't really needed. Current populist movements in America on the left and right have strong grassroots characteristics, although media and policy elites sometimes encourage and try to co-opt them. Just as often they try to minimize them. The Birther, Truther, and Deather movements started small and grew, although none have really affected the political landscape in the same way as Perot or the Tea Party. As Hussein Ibish witnessed recently, fear of an Islamic conspiracy to annihilate Western civilization approaches common belief. It doesn't take much to convince lots of people that the financial crisis was the result of conspiratorial actions of bankers, and both Glenn Beck and Michael Moore have built careers playing to certain types of American paranoia. It doesn't take a lot to convince people that foreigners will take their jobs, or attack the homeland, or brainwash their children, or otherwise take away everything they hold dear.
Conspiratorial explanations are obviously appealing, and clearly conspiracies do sometimes exist. But quite often it might be worth taking a step back, acknowledging that the world is a messy place that often doesn't make sense, and chalk up bad outcomes to stupidity instead.