The 2008 financial crisis was the worst economic disaster in living memory. Its speed and impact unmatched since the Great Depression. In the early 2000s, people were buying homes at a record pace. You didn't even need a job to get a mortgage, just a pulse. Then, almost overnight, the music stopped. Nearly $19 trillion in household wealth evaporated. Unemployment hit 10% and half the stock market's value vanished. But what exactly went wrong and how could such a disaster happen in modern times? Let's rewind to how a booming housing market nearly destroyed the global economy. The year is 2000. The dotcom bubble has just burst and the US economy is slowing. To revive growth, the Federal Reserve cut interest rates 11 times to 1.75%, the lowest in 40 years. By the early 2000s, the US government was determined to expand home ownership, even pushing legislation requiring mortgage giants Fanny May and Freddy Mack bought more loans for lower income buyers. Fueled by low interest rates and pro homeownership policies, the housing market boomed. Home ownership hit a record 69% in 2004, and lending standards kept loosening to keep mortgages flowing. Lenders started writing subprime mortgages for borrowers with bad or no credit. Some were the infamous ninja loans. No income, no job, no assets. I lost my job. I'm looking for a small loan to pay my rent for the month. Perfect. You're approved for $600,000 and a second home. Hold on. How was any of this legal? After the Great Depression, strict regulations kept banks in check. But over time, a parallel shadow banking system emerged outside those rules. Investment banks and other unregulated players took on bank-like roles without oversight or safety nets. They took huge risks with complex bets and high leverage, and no one was watching. In April 2004, the SEC loosened the net capital rule, which had been limiting these investment banks to a 12:1 leverage ratio of debt to equities. With these new changes, any investment bank with over $5 billion in assets could now leverage itself an unlimited number of times. At the time, the belief was that these banks could internally manage risk better than any rulebook could. A fatal mistake. In fact, banks didn't care about risk because they weren't holding on to these loans. They bundled them into mortgagebacked securities, MBS, and collateralized debt obligations, CDOS. Meanwhile, the credit rating agencies relied on flawed risk models and were paid by the investment banks that had created the CDOS's. This feedback loop resulted in agencies giving AAA ratings on bundles of loans that were basically junk. Wall Street was hooked on the fees. Subprime lenders kept making risky loans. Banks kept packaging and reselling them, and investors kept snapping them up. Everyone was making money. The logic of the system was that if you spread out enough risk, it disappears. The reality was that if you spread out enough garbage, the smell just takes longer to notice. Soon enough, as those garbage loans piled up, the whole neighborhood started to stink. The housing frenzy hit its peak in 2005. Subprime loans swelled to nearly 20% of new mortgages. Interestonly mortgages became common, letting borrowers live beyond their means. Meanwhile, global investors couldn't get enough of anything tied to US real estate, long considered one of the world's safest assets. On the surface, it seemed like the money fountain would never stop flowing. But underneath, small cracks were starting to form. And soon, everything would come crashing down. By 2006, the US yield curve inverted, a classic recession signal, and a growing minority on Wall Street warned that the housing boom was unsustainable. In 2007, home prices peaked and then began to fall. Suddenly, millions of borrowers couldn't repay their loans and defaults skyrocketed. Those mortgagebacked securities and CDOS's everyone was trading, well, they turned out not to be safe as houses after all. Banks, insurers, and pension funds holding billions of dollars of these assets began bleeding cash. In early 2007, over two dozen subprime lenders, including New Century and Industry Juggernaut, went bust amid the surge in defaults and foreclosures. In mid 2007, two Bear Sterns hedge funds imploded under the weight of bad mortgage debts, sending shock waves through Wall Street. Subprime loans made up only 13% of all mortgages, but they now accounted for about half of all foreclosures. As panic spread, credit markets went haywire. Bear Sterns froze withdrawals and banks grew too afraid to lend to each other. The Federal Reserve stepped in with emergency moves, cutting interest rates and injecting cash into the system to keep money flowing. By early 2008, the housing bust hit full force. Roughly a quarter of subprime mortgages had defaulted and millions of homeowners went underwater, owing more on their mortgages than their homes were worth. Then in March 2008, Bear Sterns, one of Wall Street's oldest investment banks, neared collapse. In a lastditch rescue, the Fed helped broker a fire sale deal. JP Morgan Chase would buy Bear Sterns for just $2 a share, later raised to $10 with a $30 billion federal guarantee to seal the deal. As the crisis deepened, the US government seized Fanny May and Freddy Mack on September the 6th, 2008. These two mortgage giants, responsible for about half of all US home loans, were on the verge of failure. So, the government stepped in to prevent an even bigger meltdown. Yet, the worst was still to come. On September 15th, 2008, Lehman Brothers, overexposed to toxic mortgage assets, went bankrupt after the government refused to save it. The largest bankruptcy in US history. The next day, the giant insurer AIG, crippled by mortgage losses, was rescued by the Fed with an $85 billion loan. By then, credit markets were frozen and the entire financial system was on the brink of collapse. With the financial world in freefall, Congress hurriedly passed a $700 billion bank bailout known as the Troubled Asset Relief Program, TARP, in early October 2008. It was a desperate bid to stabilize the banks and a stark acknowledgement of how close the economy was to total meltdown. The waves of damage quickly moved through the rest of the economy. The stock market collapsed with the Dow Jones down nearly 40% from its peak by October. Credit had dried up. It was full-blown financial panic. Lehman just filed for bankruptcy. It's real. London wants to know if we're still good for that $2 billion in CDS exposure. What even is our exposure? We're holding CDL's CDL squared something called a synthetic mezzanine. Those make up 90% of our firm and it's all gone. What? Trenches defaulted, swaps triggered, everything marked to zero. All of it's gone. Poof. While the crisis started on Wall Street, it didn't end there. About 4 million Americans lost their homes and another 4 and a half million fell into foreclosure or mortgage aras. Approximately 8.7 million Americans lost their jobs and unemployment hit 10%. The collapse didn't stop at the US border. European banks that had gorged on US mortgage securities were on the brink of failure. Iceland's entire banking system collapsed. Global stock markets plunged. Many were down 40 to 60% from their highs. and world trade shrank by nearly 10% in 2009. What did we learn? First, deregulation with no guardrails can be dangerous. The financial sector had too many loopholes and not enough oversight. Banks and investors gambled on exotic financial products like CDOS's and credit default swaps without fully understanding the risks. Second, the watchdogs failed. Credit rating agencies slapped AAA ratings on toxic mortgage bonds because banks paid them to and ultimately they underestimated the risk of widespread mortgage defaults. Third, the Federal Reserve dropped the ball. Fed Chair Alan Greenspan's policies kept interest rates too low for too long and trusted banks to regulate themselves. These economic conditions helped inflate the housing bubble and no one stepped in to rein it in. Finally, complex doesn't mean safe. Wall Street's quants relied on fancy risk models, but they wildly underestimated how correlated everything was. When the housing market cracked, the entire global system shook. Lehman Brothers collapse wasn't just one company going under. It was the first domino in a chain reaction that nearly brought down the whole financial system. After the crash, the US government and the Federal Reserve intervened on an unprecedented scale. They bailed out the banks with the $700 billion TARP program that injected capital into failing financial institutions. These moves stabilized the system but infuriated the public. To many, it seemed like Wall Street was being rewarded for its misdeeds. Taxpayer money had saved the very firms that caused the mess. The backlash was fierce and people worried about a moral hazard, the idea that bailing out bad actors would encourage more bad behavior in the future. At the same time, policymakers scrambled to restart the economy and reform the system. The Fed cut interest rates to near zero. And in early 2009, President Barack Obama signed the American Recovery and Reinvestment Act, a $787 billion stimulus bill to jumpstart growth and jobs. In 2010, Congress passed the DoddFrank Act, the most sweeping financial reform in decades to tighten oversight, routinely stress test banks' health, and prevent another crisis. DoddFrank created a consumer financial protection bureau to protect consumers, and imposed the Vulkar rule to stop banks from gambling with depositors money. Insurers had it aimed to ensure that nothing like 2008 would ever happen again. Globally, policymakers rolled out Barasel 3, a set of international banking rules that forced banks to hold more capital and take on less risk. The economy slowly recovered, but the pain lingered. The Great Recession officially ended in June 2009, but it didn't feel that way for ordinary Americans. Unemployment stayed high for years, and it took until the mid2010s for home values and household incomes to get back to precrisis levels. Even the stock market took 6 years to regain its 2007 peak. The scars of 2008 foreclosed homes, lost jobs, and shattered trust endured long after the crisis. It wasn't just a few greedy bankers or a handful of unlucky homeowners that caused the crash. It was an entire system, a house of cards built on bad loans, fragile trust, negligence, and the belief that housing prices would never fall. Many on Wall Street truly believed they had solved the problem of risk. In truth, they simply buried it. Financial innovation isn't bad, but forgetting what you're investing in is. If something sounds too complex to fail, it's probably too complex to trust. If you enjoyed this video, be sure to subscribe for more videos like this.