Why more credit???

Time for me to get shallow, and probably expose how little I know of how finance works and the current economic mess...
It seems that much of the problem came on from banks providing loans to people who really didn't have the means to cover the loan, so that those people could buy houses that they really couldn't afford. The banks did this to get some income - they get interest and hope that the loan doesn't default (which leaves the bank with a house that it has to sell for probably less than the loan amount - causing the bank to lose money). The bank then sells those loans as securities to other people, so that the bank gets in more money that it can loan out. The people buying the loans expect to get income from the interest on the loans, at least, and maybe can sell the securities for more than the loans are worth (which seems stupid to me...).
So, the bank makes a loan, then gives away the income from the loan when it sells the loan. To keep making money, the bank has to get more loans which it can then sell. Essentially, the bank only keeps making money as long as (a) people keep making new loans and (b) they can sell the loans to investors.
So, things have broken down because people started defaulting on loans, making it a risky investment and the banks can't sell the loans anymore. I think that there is a somewhat deeper problem in this - that the whole business model is built on the bank always being able to make and sell more loans. There is a natural limitation in this - eventually we run out of people to loan money to. Even if the bank picks ever riskier people, there are only so many people in the USA, and I don't know about you, but there is a limit to how many loans I need (let alone want) to carry - I only have the mortgage right now and am working hard to save money for the next car so that I don't carry a loan for that. Another 10 years and I won't even have the mortgage.
So, a whole business is collapsing (namely the home mortgage market) because it became a silly and unsustainable business model - namely to make sure that we keep making new loans into infinity. I'm a little surprised that nobody really thought through the long-term business model. Sure, this model looks OK in the short term, but once the pool of people needing money dries up, so does the business. Seems to me that, while we need the government to bail out the banking system and shore up the loan based securities (so that people are willing to buy them again, and restore money to the market) there is a shocking lack of prosecution of the people who thought that this was a valid business model in the first place... I want to see (a) an assurance that banks are going to drop the stupid investment model, and just try to live off the interest on their loans and (b) some of the CEOs of companies following this model will get time in the clink...
So - enough ranting. I don't promise this is accurate, its just what I can see on the surface, and what doesn't seem to be showing up in any of the analysis that I see...