First paragraph is on the money, Allhaz.
2nd paragraph - in this cycle, capitalism ran into trouble because market-established underwriting guidelines were manipulated.
People that shouldn't have been buying houses - were, and big ones at that. It created an unbelievable snowball effect that imploded.
Had those underwriting guidelines been left alone, we would not be in this terrible mess.
There are always going to be cycles, trends, dips and dives, but the flaw isn't capitalism in and of itself. The flaw is tinkering with it to achieve political agendas and introducing artificial bugs that disease the system.
2nd paragraph - Not quite what I meant. Every system has flaws, holes, broken bits that don't seem to fit anywhere like a shelf from Ikea. The current situation makes a good example of how things can go wrong, why they go wrong, and exactly which stick NOT to pull out in the game of economic KerPlunk.
The problem with capitalism in and of itself is that it is a system which is designed to take money from one group and bring it to another, this exchange can only balance when there is no expansion, profit, or improvement of any kind on the part of either, because all of these things shift it away from balance like a wobbly washing machine. The more unbalanced they become, the more violent the cycle becomes to compensate, much like the hurricane season and strength of storms.
In a system where the goal for everyone is to make a buck on every transaction, the result is some are lifted above the average (those deemed "successful") and others drop below the average (those deemed "unsuccessful"). This has to happen because of a simple physical law that can be applied to economics; conservation of energy(in this case, wealth). That is to say, in order for anyone to take a step up, someone else must have an equal and opposite reaction, a step down. There is no more wealth in the world than there was a thousand years ago.
So in other words, the big flaw in capitalism is that it drives people further and further apart, rather than bringing them closer together. This problem becomes exacerbated by this distancing, first heated battles, then violence, and in the worst case war.
The question is, what do we do about it? Do we try to fix it? Do we avoid making any changes for fear of a collapse? Or do we just abandon the ship and make a better system?
Let's say you have a car that's very old. The engine is temperamental, the key sometimes get stuck, the wheel has a bend in it, the hub-caps are missing, and the coolant system leaks.
You could always avoid jostling any aspect of it, carefully start it up, make sure not to put the key in the position which it gets stuck in, avoid trying to steer with your hand on the bend, avoid grazing any curbs, and don't drive for long periods or without spare coolant in the trunk. You'd do just fine, but it'd take a lot of effort.
You could also try fixing it. Fixing the engine would take a lot of work and cost, fixing the keyhole not so much but I'm sure some mechanic would be happy to charge you plenty, buy a new steering wheel, buy new hubcaps, and fix the coolant system. You'd do just fine, but it'd take a lot of money.
You could also replace it. All things considered, given the price of parts for old vehicles, it'd probably be a good idea. You'd do just fine, you'd spend less money and effort, and you'd have a new car loaded with newer technology.
Now, given those considerations, which sounds better, avoiding disturbing the balance of the conditions, expending large amounts of money to fix the balance so those disturbances aren't as dangerous, or just putting a new and more effective system in place which has less flaws.
In the end, the system will work fine regardless of which choice you make, but the solution which is the most efficient in the long view is often the best one. The more efficient in this case being the one which takes the least work and resources to create and requires the least reinvestment of resources and work in order to continue.