The higher fees and better rate of return for investors in "sub-prime mortgages" (mortgages made to people who would not qualify for a standard 15 or 30-year mortgage) created a huge demand for these investments. This pressure caused financial institutions to change their regulations so that they could write as many of these mortgages as possible. When the risky mortgages started to fail, banks and investment firms were so over-leveraged (having too much debt and not enough cash) that they began to go bankrupt, starting with Bear Stearns in July of 2007. With so many firms involved, banks stopped lending money altogether to avoid making loans that could not be repaid. This led to the "credit freeze" of September 2008 and the request for U.S. government assistance.
There are, of course, many more details involved than the short paragraph above. Use the links on this page to learn more.
Dr. Christopher Waller is a professor of economics at Notre Dame. After discovering that most people understood only certain pieces about the financial crisis, he put together a presentation to discuss the situation as a whole using terminology that non-economists can understand. This video is from Notre Dame's ongoing "Saturday Scholar" lecture series.
From October 4th, 2008. Approx. 60 minutes.
This American Life is a National Public Radio program of true-life reports and essays. In the episode titled "The Giant Pool of Money," producer Alex Blumberg and NPR business and economics reporter Adam Davidson discuss how the rise in sub-prime mortgages kicked off the current financial crisis.
Listen to The Giant Pool of Money.
(May 5th, 2008. Approx. 60 minutes)
In September of 2008, the global credit market "froze" because banks refused to lend money. This second This American Life show by Alex Blumberg and Adam Davidson picks up where "The Giant Pool of Money" left off.
Listen to Another Frightening Show About the Economy.
(October 3rd, 2008. Approx. 60 minutes)