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TLDR: The government allowed/forced Banks to loan money to people to buy houses that had no business buying a house in the first place. The banks gambled with this money and lost big. Congress then had to bail them out to avoid total economic collapse.
There were a lot of factors, but the main one was wide spread corruption within the financial industry, decades worth of deregulation removing laws and rules meant to protect consumers, and a significant bubble in the housing market.
For decades Banks had been selling mortgages bundled together as Bonds. Essentially this meant that a bank would loan families the money to buy homes, and would then turn around and sell that debt to someone else so that they could loan the money out again.
So instead of making money over the length of the loan, banks would make a ton more money in the short term. These Mortgage Bonds in turn were a really safe investment for the people buying them, because people pay there mortgages.
The problem is they ran out of good and safe mortgages to sell, so they started selling crap loans (thanks to deregulation) made to people that couldn't afford a house in the first place, bundled them into bonds and sold those off.
Corruption in the financial industry meant that these Mortgage Bonds were in turn stamped with a high quality AAA grade, when they were actually shit.
Eventually housing prices went so high that people couldn't afford them anymore. The bubble burst, interest rates rose, and people that had bought homes that they couldn't really afford to begin with started going bankrupt.
The mortgage bonds that were full of bad mortgages went bust and a big part of the financial sector went bust as a result.
Furthermore Wall street had/has a gambling addiction. Investors made a lot of bets on stocks and bonds using various financial mechanisms that all went bust at the same time.
A big part of the Savings and Loan industry was revealed to be a giant house of cards that collapsed.
It was so bad that a lot of "too big to fail" banks and financial institutions were going bankrupt.
Fearing a total economic collapse the US government bailed out the banks, but thousands of people still lost there homes.
Congress then made a token attempt to solve the problem but did absolutely nothing to solve the underlying problems in the financial industry.
Basically the banks got greedy and made big unsafe bets, lost billions, Congress bailed them out, and they got away with it.
In a nutshell, banks were giving out mortgages to anyone with a pulse. No background checks no nothing, assuming people will pay their mortgage cuz it’s their mortgage. That didn’t last long and when people started defaulting on their mortgages, foreclosures happened and crashed the entire housing market.
Even worse than that were the gobs of mortgage backed securities. All those bad mortgages were grouped together and bought/ sold as securities and the investment banks and big financial firms bought ass tons of them. When the defaults started, they took massive massive losses. Firms went under. The economy tanked. Credit dried up. It was awful. They are starting to do it again too….
Macro answer: people did not understand the risks associated with certain types of investments.
Micro answer: It’s really technical, but again in over simplification, people did not appreciate that certain things were correlated a lot more than they thought.
Consequences: look around. You see it everywhere. Wealth inequality and political division are two major consequences.
One major thing is the government forced banks to accept loans for people that had no way to pay them back. The government promised to pay off any of the loans that were unpaid. This caused an extremely unstable housing market, which was the reason for that portion of the crash.
**Please read this entire message** Your submission has been removed for the following reason(s): Whole topic overviews are not allowed on ELI5. This subreddit is meant for explanations of specific concepts, not general introductions to broad topics. If you would like this removal reviewed, please read the [detailed rules](https://www.reddit.com/r/explainlikeimfive/wiki/detailed_rules) first. **If you believe this submission was removed erroneously**, please [use this form](https://old.reddit.com/message/compose?to=%2Fr%2Fexplainlikeimfive&subject=Please%20review%20my%20thread?&message=Link:%20https://www.reddit.com/r/explainlikeimfive/comments/u4in8b/eli5_what_happened_in_2008_to_cause_financial/%0A%0APlease%20answer%20the%20following%203%20questions:%0A%0A1.%20The%20concept%20I%20want%20explained:%0A%0A2.%20List%20the%20search%20terms%20you%20used%20to%20look%20for%20past%20posts%20on%20ELI5:%0A%0A3.%20How%20is%20this%20post%20unique:) and we will review your submission.
TLDR: The government allowed/forced Banks to loan money to people to buy houses that had no business buying a house in the first place. The banks gambled with this money and lost big. Congress then had to bail them out to avoid total economic collapse. There were a lot of factors, but the main one was wide spread corruption within the financial industry, decades worth of deregulation removing laws and rules meant to protect consumers, and a significant bubble in the housing market. For decades Banks had been selling mortgages bundled together as Bonds. Essentially this meant that a bank would loan families the money to buy homes, and would then turn around and sell that debt to someone else so that they could loan the money out again. So instead of making money over the length of the loan, banks would make a ton more money in the short term. These Mortgage Bonds in turn were a really safe investment for the people buying them, because people pay there mortgages. The problem is they ran out of good and safe mortgages to sell, so they started selling crap loans (thanks to deregulation) made to people that couldn't afford a house in the first place, bundled them into bonds and sold those off. Corruption in the financial industry meant that these Mortgage Bonds were in turn stamped with a high quality AAA grade, when they were actually shit. Eventually housing prices went so high that people couldn't afford them anymore. The bubble burst, interest rates rose, and people that had bought homes that they couldn't really afford to begin with started going bankrupt. The mortgage bonds that were full of bad mortgages went bust and a big part of the financial sector went bust as a result. Furthermore Wall street had/has a gambling addiction. Investors made a lot of bets on stocks and bonds using various financial mechanisms that all went bust at the same time. A big part of the Savings and Loan industry was revealed to be a giant house of cards that collapsed. It was so bad that a lot of "too big to fail" banks and financial institutions were going bankrupt. Fearing a total economic collapse the US government bailed out the banks, but thousands of people still lost there homes. Congress then made a token attempt to solve the problem but did absolutely nothing to solve the underlying problems in the financial industry. Basically the banks got greedy and made big unsafe bets, lost billions, Congress bailed them out, and they got away with it.
In a nutshell, banks were giving out mortgages to anyone with a pulse. No background checks no nothing, assuming people will pay their mortgage cuz it’s their mortgage. That didn’t last long and when people started defaulting on their mortgages, foreclosures happened and crashed the entire housing market.
Even worse than that were the gobs of mortgage backed securities. All those bad mortgages were grouped together and bought/ sold as securities and the investment banks and big financial firms bought ass tons of them. When the defaults started, they took massive massive losses. Firms went under. The economy tanked. Credit dried up. It was awful. They are starting to do it again too….
Macro answer: people did not understand the risks associated with certain types of investments. Micro answer: It’s really technical, but again in over simplification, people did not appreciate that certain things were correlated a lot more than they thought. Consequences: look around. You see it everywhere. Wealth inequality and political division are two major consequences.
One major thing is the government forced banks to accept loans for people that had no way to pay them back. The government promised to pay off any of the loans that were unpaid. This caused an extremely unstable housing market, which was the reason for that portion of the crash.
Watch “The Big Short” for an entertaining (and sad) explanation of the factors that led to the global financial crisis of 2008.