What Caused the 2008 Financial Crisis — and What It Changed
Play The 2008 Financial Crisis →
Causes
- Subprime mortgage lending: Loose underwriting standards extended risky home loans to borrowers unlikely to repay them.
- Mortgage securitization: Those loans were bundled into complex mortgage-backed securities sold widely across the financial system, spreading the risk without necessarily making it visible.
- Excessive leverage: Major banks and investment firms carried very high leverage relative to their capital, leaving little cushion when losses hit.
- Housing bubble: Years of unusually low interest rates and easy credit had inflated home prices well beyond sustainable levels.
Effects
- Unemployment peaked near 10% by late 2009/early 2010.
- The Dodd-Frank Act (2010) introduced sweeping new financial regulation, including the creation of the Consumer Financial Protection Bureau.
- Quantitative easing became a standard central bank tool going forward, used again during the COVID-19 crisis.
- Millions of foreclosures reshaped the housing market and household wealth for years afterward.