A financial crisis is a severe drop in asset prices and liquidity shortages in financial institutions that result in businesses and consumers unable to meet their debt obligations. The crisis is often caused by a combination of systemic and regulatory failures, overborrowing and credit bubbles that burst.
In the case of the 2008 financial crisis, low interest rates and lax lending standards fueled an overheated housing market and allowed banks to lend money to unqualified borrowers. The mortgages were then packaged together into financial instruments and sold to investors, who thought they were safe because the loans were backed by mortgage payments. When the housing bubble burst, these securities lost value and were a source of the crisis. Banks also held huge amounts of these assets in their own portfolios, resulting in large losses.
The global financial crisis led to massive layoffs in the private sector and government bailouts of institutions like Bear Stearns, AIG, Goldman Sachs, and others. The crisis also sparked an economic slowdown and deep recession, from which many economies are only beginning to recover. The crisis also spawned changes in banking and financial regulation and congressional legislation that significantly affects the Federal Reserve. The financial crisis also provided a rare opportunity for policymakers to make critical decisions with conviction and speed that helped shape future legislation and change. Several followers of heterodox economics have been credited with predicting the crisis, including Dean Baker, Wynne Godley, Fred Harrison, Michael Hudson, Eric Janszen, Steve Keen, Jakob Broechner Madsen and Jens Kjaer Sorensen, and Nouriel Roubini.