In 2008, a series of bank and insurance company failures led to an economic crisis that effectively halted credit markets around the globe and needed immediate government intervention. The effect was so severe that the Fannie Mae (FNM) and Freddie Mac (FRE) which are the largest corporations established by the U.S. federal government to provide liquidity in the secondary mortgage market were placed n conservatorship of the FHFA. The basic operation of these corporations include buying mortgages from banks and financial institutions and selling mortgage backed securities (MBS), a type of bond, to investors of all sizes. Other drastic events include declaring of bankruptcy by Lehman Brothers; JP Morgan Chase had to purchase the assets of Washington Mutual which is the biggest bank failure in history till today, etc.
America being one of the major economies of the world, it can be said that the global monetary crisis had its roots in the US. There are numerous reasons and causes which can be directly linked to this catastrophic event. A major reason is market instability created due to the new lines of credit that were introduced in the period which dried up the flow of money and slowed the trade of assets. This left many individuals and business institutions with mortgage backed assets that had dropped in value and were unable to bring in the required amount of money to pay back earlier loans. This also restricted the ability to make new loans since the reserve cash was also dried up.
The American economy is built on credit which is a great tool if used wisely. Cheap credit made it too easy for people to buy houses or make other investment. Since people were able to get money easily, they wanted to spend in an equally easy manner. Unfortunately most of the purchases were things that increased demand and lead to a slow inflation. Equity firms leveraged billions of dollars to buy companies and assets and then earned back even more simply by shuffling papers and not creating anything valuable. The mortgage brokers or the middle men determined who got loans without any firm criteria and then passed on the responsibility of recovery to others in form of mortgage backed assets, taking a fee or brokerage for themselves. Thus risky mortgages become investments. Under these circumstances, many people took loans greater than what they could afford I hoping that they could flip it for profit at a lower rate and more equity. A lot of people became rich quickly in this money game but greed ultimately took everyone down. They wanted more and kept investing in bigger properties. The housing slump set off a chain reaction in the American economy. Investors could no longer flip their homes for a quick profit. Mortgage rates adjusted skyward and mortgages no longer became affordable for many homeowners, and thousands of mortgages defaulted, leaving investors and financial institutions holding the bag. This caused massive losses and required federal intervention.
This small market crisis slowly developed into a massive economic depression hitting the US first and then Europe, Japan, China, India and other major countries in the world. Inflation, unemployment were on their zenith. Starting from the last quarter of 2007, till present day in 2010 the world is still recovering from this great meltdown.
Some links to give more information and stats about the event have been pasted here by:
1) http://www.wikinvest.com/concept/2008_Financial_Crisis
2) http://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80%932010
3) http://en.wikipedia.org/wiki/Late-2000s_recession
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