Douglas W. Diamond & Raghuram G. Rajan. The Credit Crisis: Conjectures about Causes and Remedies:

 

over short periods of time, it is very hard, especially in the case of new products, to tell whether a financial manager is generating true excess returns adjusting for risk, or whether the current returns are simply compensation for a risk that has not yet shown itself but that will eventually materialize.

many of the compensation schemes paid for short term risk-adjusted performance. This gave traders an incentive to take risks that were not recognized by the system, so they could generate income that appeared to stem from their superior abilities, even though it was in fact only a market-risk premium. The classic case of such behavior is to write insurance on infrequent events such as defaults, taking on what is termed “tail” risk. If a trader is allowed to boost her bonus by treating the entire insurance premium as income, instead of setting aside a significant fraction as a reserve for an eventual payout, she will have an excessive incentive to engage in this sort of
trade.
... unable to fully control them, because tail risks are by their nature rare, and therefore hard to quantify with precision before they occur.
... in good times ... markets seem to favor a bank capital structure that is heavy on short-term leverage. In bad times, though, the costs of illiquidity seem to be more salient, while risk-averse (and burnt) bankers are unlikely to take on excessive risk.

a combination of psychological and economic incentives is at work here.i have a gut feeling that technology somehow figures into that, but cannot put my finger on it yet.

stimulus tradeoff: fear of private financial institutions to lend vs the government's inefficiency to allocate (and lend) funds.