In the early 2000s, the American dream of homeownership took a dangerous turn. To stimulate the economy, the Federal Reserve, led by Chairman Alan Greenspan, slashed interest rates to historic lows. By mid-2003, the rate was just 1%. This cheap money fueled a speculative frenzy in the housing market. Banks and lenders began offering high-risk "subprime" mortgages to borrowers with poor credit. These risky loans grew from less than 10% of mortgages in 2003 to 20% by 2005. As a result, American household debt soared to 127% of annual disposable income by 2007. A massive bubble had formed, built on a foundation of unstable debt. The only question was when it would pop.
The 2008 Financial Crisis
How cheap credit, subprime mortgages and complex securities led to the 2008 financial crisis, from the fall of Bear Stearns and Lehman Brothers to the AIG rescue, the bank bailout and the Great Recession.
Chapter 1
The Bubble Inflates
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Frequently Asked Questions
What caused the 2008 financial crisis?
The crisis was triggered by the collapse of a massive housing bubble in the United States. Years of low interest rates and risky subprime mortgage lending led to a surge in home prices, which then crashed, leaving millions of borrowers unable to repay their loans and causing global financial markets to panic.
What were Mortgage-Backed Securities (MBS)?
Mortgage-Backed Securities were complex financial products created by Wall Street banks. They bundled thousands of individual mortgages, including risky subprime loans, into a single investment that was then sold to investors, often with misleadingly high safety ratings.
Why did the government bail out AIG but not Lehman Brothers?
Lehman Brothers was an investment bank whose failure was disruptive, but AIG was an insurance giant whose collapse was considered systemic. AIG had insured hundreds of billions of dollars of assets for banks globally, and its failure would have caused a catastrophic chain reaction.
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