The 2008 financial crisis grew out of a housing bubble in the early 2000s, when home buying surged and subprime mortgages became widespread. These loans, designed for borrowers with weaker credit, carried higher interest rates and were aggressively promoted by some lenders and brokers, who profited from steering buyers into riskier products. Some borrowers took on mortgages they didn’t understand or couldn’t afford, believing they could refinance as home values rose.
But when the bubble burst and housing prices fell, refinancing became difficult. Defaults rose, and the losses cascaded through Wall Street. Large financial institutions had not only sold bundles of loans as mortgage-backed securities to investors, but they had also invested in them, leaving firms like Lehman Brothers exposed when the market collapsed. Turmoil spread and credit froze across the economy.
Top financial officials argued that drastic action was needed. A team led by Treasury Secretary Hank Paulson and New York Fed President Timothy Geithner pushed for a $700 billion bailout, warning that without it, credit would freeze and businesses would fail.
The bailout was controversial: it supported banks but offered little direct help to the millions of homeowners facing foreclosure. Regulators like Sheila Bair at the F.D.I.C. warned that failing to address foreclosures would slow recovery, but efforts to modify loans reached only a fraction of homeowners.
In the following years, financial markets bounced back relatively quickly, but unemployment and foreclosures remained high well into the next decade. This video traces how the intersection of risky loans, inadequate regulation, investor demand and eager but vulnerable borrowers converged to create the worst economic downturn since the Great Depression.
View transcript here.