The ultimate cause of the problem with the banks was indeed chronic government interference, in the form of implicit and explicit guarantees supplied to them free of charge, which hopelessly weakened the entire industry. Reserve ratios – the percentage of deposited cash which is actually retained by the bank rather than lent out – has fallen from over 50% in the 19th century to 2-3% today (or a negative percentage in Northern Rock’s case). That could not have happened in a free market, at least not on an industry-wide scale; nobody would lend to a bank if it tried to take on that much leverage without a government guarantee.
The banking industry had been rendered so unstable by government intervention that it was only a matter of time before it had a crisis, and the crisis could have been brought about by any number of proximate causes. Unfortunately most commentators blame the proximate causes, the particular individuals who happened to be involved at the time, and “free markets”.
In a free market, firms fail from time to time; they aren’t bailed out, people don’t expect them to be bailed out, people arrange their affairs accordingly and so the failure of one firm doesn’t bring down an industry or an economy. Banks were a long way from being a free market.