Was Housing or Banking Responsible For Recession?

Banker Daniel Davies claims that the bankers did not cause the recession. The housing industry did. Delong disagrees:

Alas! I think that the bankers did do it.

Lets start at the height of the U.S. housing boom in 2005:III, when residential construction reached its peak value as a share of potential GDP. At that moment it dawned on lenders that Option ARMS and subprime buy-to-let teaser mortgages were really not the best businesses to be in, and it dawned on potential borrowers that Option ARMS and subprime buy-to-let teaser mortgages were really not the best financial liabilities to assume--especially because they came bundled with an overpriced house. So after 2005:III the U.S. residential construction sector began to shrink. And it shrank, and shrank, and shrank. By the end of 2007--a little over two years later--it was down by 2.5% of potential GDP as housing prices fell and mortgage financing dried up.
But had the economy slid into recession? No. As residential construction stood down, exports stood up. Foreigners earning money from selling imports to the U.S. no longer invested their earnings in MBSs. Instead, they bought exports from the U.S. Residential construction down by 2.5% of potential GDP, exports up by 1.9% of potential GDP--the market economy was doing fine. It was rebalancing in response to a shock to fundamental expectations just as Jean-Baptiste Say would have said it ought to back in 1803. And Friedrich Hayek's claim--the claim of the entire Marx-Mellon-Hoover-Hayek axis, in fact--that a speculative bubble orgy like 2004-2006 was a sin that had to be paid for in blood and pain and fire and unemployment? Wrong, up until the end of 2007.

But what happened in the two years after the last quarter of 2007? Housing construction continued its decline, even though at the start of 2008 it was plausible and by the end of 2008 it was undeniable that the housing bust had been sufficiently long and deep to erase any Hayekian overbuilding of residences. And throughout 2008 equipment investment and exports fell off the cliff, gradually at first and then at a stunning pace.
Why did they do this? It wasn't because, as Daniel claims, of "the disappearance of a huge amount of household sector wealth. It did disappear. But wealth had disappeared before--remember Black Monday on the stock market in 1987, or the collapse of the dot-com boom?--without it triggering a Lesser Depression. It was because people recognized that banks that were supposed to have originated-and-distributed mortgage-backed securities had held on to them instead, that as a result a large chunk of the $500 billion in subprime losses had eaten up the capital base of highly leveraged financial institutions, and that you were running grave risks if you lent to a bank. The run on the shadow banking system that followed was the source of the crash as financing for exports and for equipment investment vanished, and then the whole thing snowballed.
No banks losing track of the risks they were running and holding on to assets that were supposed to be originate-and-distribute, no financial crisis, no credit crunch, and no Lesser Depression. The housing bubble would have deflated, unemployment would now be near 5%, exports would have boomed, and our biggest worry right now would probably be a "weak dollar".

 Both housing prices and housing starts peaked in 2005. The recession did not officially begin until just before the beginning of 2008. Note that the bubble in housing construction is long since over:

the housing bust since 2007 has been much larger than the mid-2000s housing boom, and that there is no overhang of overbuilt houses, rather the reverse: