So there are a couple things going on here. The financial system as outlined in Money as Debt is the GOOD way. That's what's SUPPOSED to happen. Fractional reserve banking is the system that built the world from the Renaissance forward so it's not the problem. There are two aspects to what you're talking about above, (1) the failure of the banking system (2) robosigning and predatory repossession.

I had to read about five books before I understood the economic collapse of 2008, so bear with me if this gets complicated. I'm going to try and simplify things but it's gonna be tough. Here goes:

The instrument of destruction of the finance industry was the Credit Default Swap (CDS). This is basically an agreement that says "I am going to buy and sell the risk of someone defaulting on a loan." The problem is that the more likely something is to default, the more profitable the CDS is, both to buy and to sell. So the banks started writing riskier and riskier mortgages because the CDS they wrote on those mortgages made them more and more money. Unfortunately, the money made buying and selling CDS (and derivatives, and 2nd-degree mathematical instruments) is underpinned by the fact that you're giving hundreds of thousands of dollars to people who will never be able to pay you back. This leads to a spiral of easy money, higher prices, more risk and more CDS until suddenly, people start defaulting on their mortgages and the whole castle in the sky comes crashing down.

So there's the first factor - banks selling things that don't physically exist underpinned by the likelihood of mortgages failing... without recognizing they were writing a bunch of doomed mortgages. The second factor is all these CDS required "holding the note" on the mortgages - literally, physically possessing the deeds on people's houses. And since the banks were "commoditizing" these deeds to create "securities" that could be traded like stocks (literally), what was an orderly pile of real estate deeds became a giant intercontinental game of 52-pickup as everybody scattered the ownership of millions of homes to a bazillion and one securities firms, auction houses, brokerage firms and other securities traders.

So okay. The bottom has come out of the market. There's four million houses in arrears and your job is to try and turn those outstanding mortgages back into money through repossession. Here are your logistical issues:

1) You're not a real estate agent.

2) Foreclosures never happened at this rate before.

3) You have no fucking clue where "the note" - the deed to the house - actually is. Our mortgage changed hands four times between 2005 and 2007 and my wife bought the house in 2000.

4) You have to present the note in order to legally foreclose.

SO:

Securitizing mortgages into CDS made banks write stupendously bad mortgages

AND

Once those stupendously bad mortgages exploded, no one could really prove who "owned" them because they'd been securitized.

SO:

The banks made up paper trails proving they owned houses they couldn't otherwise prove, which is bald-faced fraud.