First of all, we are not in a depression because we lack labor, raw materials, arable land, factories, technology, or any of the physical, material components of wealth. We have not lost a large chunk of our productive capacity due to natural or man-made disaster. (Capitalism is by-and-large resistant to such disasters.)
Industrial capitalism is about the (private, individual) ownership of the means of production, i.e. factories, farmland, tools, technology. Finance capitalism he ownership of specifically money, "real" money such as gold* or fiat, socially-constructed money such as dollars. Industrial capitalism regulates the usage of labor; finance capitalism regulates the usage of industrial capital. Our modern, complex economy does need intentional regulation of industrial capital.
*Capitalists around the world dropped the gold standard after the Great Depression because it is ineffective at regulating finance capital, and hinders governments' ability to dig themselves out of financial crises that the gold standard failed to prevent.
For several decades following the Great Depression, finance capital was heavily regulated by the Federal Government; banks were only nominally private. Since Reagan, finance capital has become increasingly deregulated, allowing the owners of money to make their own individual interest predominate over social, collective interests.
The fundamental function of finance capital is not to allocate but to create new money by making loans. As the economy grows, as more and more surplus labor is "congealed" into physical wealth, we have to create new money to represent that wealth. This creation is necessarily a social, collective endeavor. When finance capital is unregulated, the individual owners of money have incentive to create new money not to represent new wealth, but for their own personal consumption and control over existing wealth.
And that's precisely what happened: We gave individuals and individual companies the unregulated power to create money. And they created money by a variety of means precisely to enrich themselves and enhance their own power.
It was a classic Prisoner's dilemma situation. Of course every unregulated "shadow" bank knew it was creating money out of nothing, not at all correlated to new physical wealth. But if any bank refused to create new money, out of (snicker) principle, they would find that the bank down the street had created enough money to buy them out or drive them out of business. Restraint and "principle" works only if the principle is enforced.
(The Republican party also discovered that it need not keep the economy of ordinary people strong in order to gain votes; they focused on "values", mostly religious, and just blamed all the economic problems on socialists, democrats, immigrants, atheists, hippies and black people. Given that they owned most of the media, it's unsurprising this line of bullshit worked. The Democratic party saw which way the wind was blowing and rebranded themselves as the no-responsibility permanent opposition party and the party of slightly more palatable bullshit. Remember, it was Bill "I feel your pain" Clinton who signed the repeal of the Glass-Steagall Act.)
So what the unregulated finance capitalists did was simply this: create a lot of new money with no referent to physical reality. Since this money creation has to happen exponentially, we quickly reached a point where the lack of physical referent could no longer be ignored or bullshitted around. Then they claimed that unless the government supplied the referent, in terms of taxes on future labor, the capitalist system would fall. And that's precisely what the Obama administration has done.
I don't have a Nobel prize in economics, but (given dictatorial powers) I could have solved this financial crisis in 90 days, even staying within a purely capitalist perspective:
- Let all the bankrupt banks and hedge-funds fail, and jail all the executives who committed actual fraud
- As a temporary measure, make obviously safe short-term loans (e.g. to shipping companies) directly by the government.
- Refinance everyone's mortgage without penalty to reflect the true value of their homes.
- Reimpose all the financial regulations destroyed in the last 30-40 years.
- Make the SEC ten times bigger and have them actually regulate the banks.
- Make a few hundred billion — perhaps a trillion — dollars worth of deficit-funded loans to the smaller sound banks, who would be regulated and create new money to fund the production of more actual wealth, not just enrich themselves.
They key, though, is that finance capital is the capitalist social regulatory mechanism. If it is in the hands of individuals, they will "regulate" the economy for only their own benefit, to the detriment of everyone else. It's not just that people don't follow principles just because they're good principles, it's that in a competitive environment, compromising your own interests out of principle makes you vulnerable to those who don't compromise their own interests: winning is relative.
Because the finance capitalists have an enormous amount of short-term socially-constructed power, they control the government, who controls the laws and the taxes. That's why I would have to be given "dictatorial" powers to fix the financial crisis, to insulate myself from ability of the finance capitalists to control the government. Otherwise, the congressmen and senators they own body and soul would just vote down my proposals. Obama is owned body and soul by the finance capitalists, but even if he weren't, he's functioning in a system that is owned body and soul by the finance capitalists, and they will make damn sure that anyone who doesn't fulfill their interests, their demands, is marginalized and excluded.
We cannot reform the capitalist political system: if we could, we would have. But everywhere, even in Europe, the power of the finance capitalists is growing. Only an actual revolution can break the power of capitalism.