Financial Crisis of 2008 - What caused the Crash? (5 Minute History)

One of the key factors that contributed to the 2008 financial crisis was the low interest rate environment that existed in the years leading up to the crisis. The Federal Reserve, the central bank of the United States, lowered interest rates in response to the dot-com bubble burst in 2001 and the 9/11 attacks. These low interest rates made borrowing money cheaper, which fueled the growth of the housing market.

With the housing market on the rise and interest rates at historic lows, many people saw real estate as a safe investment. This led to a massive surge in demand for housing, which drove up prices. The housing market became overheated, and prices reached levels that were not sustainable. This created a housing bubble, which was bound to burst at some point.

One of the key factors that contributed to the housing bubble was the growth of subprime mortgages. These were loans that were given to people with poor credit histories, and they carried a higher risk of default. Despite this higher risk, banks were eager to lend money, as the demand for housing was so high.

Investment banks played a crucial role in the 2008 financial crisis. They were at the forefront of the subprime mortgage market, and they bought up huge amounts of these risky loans. They then packaged these loans into securities, which they sold to other investors, such as pension funds and insurance companies. This allowed them to spread the risk and make huge profits, as the demand for housing continued to grow.

The housing market eventually began to collapse in 2007, as prices started to fall and people began to default on their loans. This had a knock-on effect on the financial sector, as the securities that were based on subprime mortgages became worthless. Investment banks were hit particularly hard, as they held huge amounts of these securities.

The failure of investment banks was the trigger for the 2008 financial crisis. In September 2008, Lehman Brothers, one of the largest investment banks in the world, filed for bankruptcy. This sent shockwaves through the global financial system, and it triggered a massive financial panic. Banks were reluctant to lend money to each other, and many were at risk of going bankrupt.

The crisis continued to spread, and it led to a global recession. Millions of people lost their jobs, and many lost their homes as well. The crisis also had a profound impact on the real economy, as businesses struggled to access the credit they needed to keep operating.