The 2008 Financial Crisis: What Caused It and What Came After

The Truth Behind Capitalism: A 2015 Video Essay

The 2008 financial crisis was caused by a housing bubble built on risky mortgages, which banks bundled into securities, borrowed heavily against and sold around the world. When US house prices fell, those securities lost value, lenders stopped trusting each other, and the system came close to seizing up. The official US inquiry, the Financial Crisis Inquiry Commission, concluded in 2011 that the crisis was avoidable.

This page looks at what happened, who saw it coming, how governments responded, and why the crash fed a wave of protest from Iceland and Greece to New York. It grew out of a 2015 short documentary, the third episode of a series called Truth Behind Politics from the Wake Up World Education project, which asked whether capitalism itself was nearing collapse.

What caused the 2008 crisis

Through the early 2000s, lenders handed out more and more subprime mortgages: loans to borrowers with weak credit, often with low “teaser” rates that jumped after a few years. According to figures summarised on Wikipedia, subprime lending grew from about 5% of US mortgage originations in 1994, around $35 billion, to about 20% in 2006, roughly $600 billion.

Those loans did not stay with the banks that made them. They were pooled into mortgage-backed securities and more complex products, rated as safe by credit agencies, and sold to investors worldwide. Some firms profited on both sides, selling these products to clients while betting against them, a practice examined in detail by Charles Ferguson's Oscar-winning documentary Inside Job (2010).

The Financial Crisis Inquiry Commission named the main causes as widespread failures in regulation, breakdowns in corporate governance, excessive borrowing by households and Wall Street, policymakers who were unprepared, and serious breaches of accountability and ethics.

Warnings that were ignored

The danger was not invisible. In 2004 the FBI publicly warned of an “epidemic” of mortgage fraud that could rival the savings and loan crisis. (The documentary placed this warning in 2006; the earlier date is the documented one.)

In 2005, at the Federal Reserve's Jackson Hole conference, Raghuram Rajan, then chief economist at the International Monetary Fund, argued that the incentives in modern finance encouraged excessive risk-taking. Former US Treasury Secretary Lawrence Summers called his concerns misguided. Financial journalist Allan Sloan of Fortune also wrote critically about toxic mortgage securities in 2007. Very little changed before the crash.

Lehman Brothers, AIG and the bailouts

On 15 September 2008, the investment bank Lehman Brothers filed for bankruptcy with more than $600 billion in assets, still the largest bankruptcy filing in US history. Days later the US government stepped in to rescue AIG, then one of the world's largest insurers, which had sold huge volumes of insurance-like contracts on mortgage securities. AIG went on to report a net loss of about $99 billion for 2008, far more than the $11 billion figure often quoted at the time.

The AIG rescue began with an $85 billion Federal Reserve credit line and grew to about $182 billion in combined Treasury and Federal Reserve support. Public anger peaked in March 2009, when AIG announced more than $165 million in bonuses for staff, including in the very unit whose bets had sunk the company.

The human cost

The recession that followed hit ordinary households hardest. The United States lost nearly 9 million jobs in 2008 and 2009, about 6% of the workforce, and employment did not return to its pre-crisis peak until 2014. American household net worth fell by close to $13 trillion, about a fifth, from its 2007 peak.

Millions of families lost homes to foreclosure. Governments that had borrowed to rescue banks then cut spending, and in much of Europe the bill arrived as austerity: lower wages and pensions, fewer public services and long-term unemployment, especially among the young.

Europe: austerity, Spain and the Greek referendum

Podemos supporters gather in Madrid, Spain.
Photo: David Ramos/Getty Images

Southern Europe was hit hardest. In Spain, the 2011 Indignados protests against inequality and corruption gave rise to Podemos, Spanish for “we can”, founded in January 2014 by political scientist Pablo Iglesias. In Greece, Syriza, whose name comes from the Greek for “Coalition of the Radical Left” and echoes the word for “root”, won power in January 2015 promising to end austerity.

On 5 July 2015, Greeks voted in a referendum on the bailout terms offered by the country's creditors. The result was a clear rejection: 61.3% voted No. Critics argued that much of the bailout money went straight back to creditors, servicing old debt while adding new interest. Yet within days the government asked for a new three-year programme, and on 13 July it agreed to a third bailout with terms harsher than those voters had rejected. Greece formally left its bailout programmes only in August 2018.

The same summer, China's stock market lurched sharply, and in London organisers said around 250,000 people joined an anti-austerity march in June 2015. Coverage of these events varied, but together they showed how unsettled the post-crisis world remained seven years on.

Iceland: a different path, and what really happened

Iceland is often held up as the country that refused to bail out its banks. The real story is more complex but still remarkable. By mid-2008, the assets of Iceland's three main banks were more than 11 times the size of the national economy. In October 2008, regulators placed Glitnir, Landsbanki and Kaupthing into receivership within days of each other and created new domestic banks to keep savings and payments running.

Months of protest, remembered as the Kitchenware Revolution because demonstrators banged pots and pans outside parliament, helped bring down the government in early 2009. Former prime minister Geir Haarde was later tried before a special court and convicted in 2012 on one minor count, without punishment. Prosecutors investigated around 200 cases linked to the collapse; by 2018 more than a dozen trials had ended in guilty verdicts, with several bankers jailed. Iceland also introduced household debt relief, including a scheme to write down mortgages above 110% of a property's value.

So the popular version, in which 200 bankers were charged and all debts were wiped out, overstates things. What Iceland did show is that letting failed banks fail, while protecting depositors and households, was possible.

Occupy Wall Street and the 99%

Occupy Wall Street began on 17 September 2011 in Zuccotti Park, Lower Manhattan. (The documentary dated it to 2010.) Its slogan, “We are the 99%”, spread quickly; within weeks, coordinated protests were reported in hundreds of cities worldwide. Police cleared Zuccotti Park on 15 November 2011, and the camps faded.

The movement's lasting effect was on the debate. In January 2015, Oxfam estimated that the richest 1% held 48% of global wealth, up from 44% in 2009, and projected that they would hold more than half by 2016. Talk of “the 1%” and “the 99%” is now ordinary political language, which was not the case before 2011.

The documentary and the question it asked

(The video originally embedded here is no longer available on YouTube.)

The 30-minute film behind this page covered the history of central banking, the creation of the eurozone in 1999, Occupy, and the protests in Iceland and Greece. It urged viewers to move their savings from large banks to smaller, community-based lenders, and it closed with a deliberately provocative question: was Karl Marx right that capitalism would undermine itself, and could a fairer, more community-based system emerge in its place?

Readers will answer that in different ways. Market economies did not collapse after 2008, and many of the reforms that followed, such as stricter capital rules for banks, were designed to keep the system running rather than replace it. But the crisis left real questions on the table: who pays when finance fails, why so few senior figures faced consequences, and how much inequality a democracy can bear. Those questions are still worth asking whatever your politics.

Sources: Documentary from the Wake Up World Education project, published via Collective Evolution; photo of Podemos supporters in Madrid by David Ramos/Getty Images; Wikipedia: Subprime mortgage crisis; Wikipedia: Inside Job; Wikipedia: Bankruptcy of Lehman Brothers; Wikipedia: AIG; Wikipedia: 2015 Greek bailout referendum; Wikipedia: Podemos; Wikipedia: Icelandic financial crisis; Wikipedia: Occupy Wall Street; Oxfam (2015).

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