What is the most common misconception about the crisis?

That this was a perfect storm of unexpected and unavoidable events. Not true. This was the inevitable result of a series of decisions made by CEOs, bankers, and regulators. A lot of the damage that was done, the actors did to themselves. Lehman Brothers and Bear Stearns, for example, wanted maximum mortgage exposure and wanted to leverage up to do it. They weren’t killed by a series of unfortunate events; they committed suicide.

Is there any company or institution that’s too big to fail?

In a moment of panic, it can look that way. But if you calm down and think about it, why couldn’t, say, AIG, have been allowed to fail? What made AIG important as a company was the insurance side, and that part is OK. AIG could have been split between its insurance operations and what was really a parallel, unregulated, financial operation. I don’t see any reason at all to bail out the latter, which has no value and made its own bad bets.

As for Citigroup, I don’t see why it could not have been told to go through a structured, organized bankruptcy process — fire the CEO, wipe out the shareholders, and sell the toxic debt for whatever you can get for it. Then you have a healthy banking situation again. Similarly for Bank of America, if you are dumb enough to buy Countrywide and overpay for Merrill Lynch, why should you be saved? As I see it, [Treasury Secretary] Henry Paulson and [Federal Reserve Chairman] Ben Bernanke were and are trying to save the banks, but it is not the banks that need to be saved — it’s the banking system. There should be no sacred cows. Too big to fail is a myth.

What is the most surprising thing you learned while researching this book?

That Lehman Brothers could have been saved. Warren Buffett went to Dick Fuld and said, “I’m willing to give you couple of billion dollars on these terms.” Fuld turned him down, and so Lehman died. Buffett invested in Goldman Sachs instead.

Which of the many bailouts you discuss in your book was the most misguided?

Oh, gosh, there are so many. Chrysler in 1980 sort of set the stage. Then there’s AIG and the way JP Morgan talked a naive Fed into giving it $29 billion to take Bear Stearns — that was just horrific. But if I had to pick, I’d say Alan Greenspan’s bailout of the stock market after the crash of 2000. I know that this is not what people think of as a typical bailout, but it qualifies. The run-up in stock prices had been a classic spree, and when you go on a binge, you are supposed to suffer the hangover. Greenspan would not let that happen. Instead, the Fed cut rates to historically low levels and then kept them there for years. The only plausible reason for this is that he was bailing out investors. And the result, of course, was to create moral hazard, in the form of reckless speculation. This was the start of all the subsequent trouble.

So how much responsibility do you think Alan Greenspan ultimately bears for our current mess?

Historically, during the recessions of the ’50s and ’60s, the Fed brought interest rates down to very low levels for very brief periods of time — a couple of weeks or months. Greenspan did something unprecedented, lowering them below 2 percent for three years, and down to 1 percent for more than a year. This had enormous repercussions: higher commodity costs, the spiral in home prices, the mad scramble among bond managers for yield.

Second, the Fed was charged with regulating the banking industry, and it didn’t. Mortgage companies were allowed to lend to anybody regardless of ability to repay, and the mortgage shops didn’t care as long as they could sell [the loans] to Wall Street. So as I see it, the Fed caused the problem, and then, as the disease was spreading, it allowed the disease to go untreated.

Who bears more responsibility for the financial crisis, Republicans or Democrats?

The Republicans controlled Congress from 1994 to 2006 and the White House from 2000 to 2008. But it was a Democrat, Bill Clinton, who signed the repeal of the Glass-Steagall Act, which prohibited bank holding companies from owning other financial firms, and the Commodity Futures Modernization Act (CFMA), which removed derivatives and credit default swaps from regulatory oversight. Both parties kept Alan Greenspan at the Fed, and it was Democrats who passed the Troubled Asset Relief Program (TARP); most Republicans were against it. So this was a bipartisan snafu, but not a 50-50 one; I’d say 60-40, with Republicans bearing more of the blame because they had more responsibility. The best way to assess it is that a lot of the Republican free-market philosophy was made worse by the Democratic reaction to it, of saying, let’s throw a few hundred billion dollars at the problem.

You make the case that being bailed out has become an expectation — one that is harmful to the U.S. in the long term. How can this dynamic be changed?

You have to put the fear of God into bondholders and corporate executives, so that when they screw up, they know they will have to pay for it. One good way to start would be to claw back some of the more outrageous executive compensation packages. It would scare the crap out of executives in the future if they see some big names have to cough up gains based on phantom profits. The principle is simple: You cannot expect to book profits that are ephemeral — practically fraudulent — and expect to keep the gains. You don’t get to live in a 47-room mansion in Greenwich when you helped bring about the end of the global financial system.

Notice how differently the partnership-based institutions did, like private equity and venture capital firms. They didn’t get involved in the subprime [lending] insanity, and none of these blew up. Their risk management approach was different because the partners all bore the consequences of their own actions — it was not the problem of shareholders or, ultimately, taxpayers.

What would you do if you were Ben Bernanke right now?

Make sure that lending is performed in a way that borrowers show that they have the ability to repay the loans they are contracting. I’d reinstate Glass-Steagall and overturn the CFMA, and reduce the amount of leverage allowed. Basically, I’d say that depository banks cannot be casinos; I would make that part of banking a boring, low-risk, low-return business.

What has been the effect of all these bailouts on ordinary Americans?

Every time there is a foreclosure, that brings down property values in the neighborhood. At the same time, a lot of people were priced out during the crazy housing boom. In addition, the deficits that we as a nation have incurred by these bailouts are enormous; our grandkids are going to be paying this. And because we’ve used so much money for these bailouts, our options to do other things — build parks, cut taxes, or whatever — is being limited.