It was like a nightmare. One of the most significant global financial crises and the worst the U.S. had seen since the Great Depression. Trillions of dollars were lost in the U.S. stock market between late 2007 and 2009, and another $9.8 trillion in wealth was completely wiped out of existence. Where did these absurd amounts disappear from? Three words: the housing market.

Around the early 2000s, the housing market began to boom. This was largely due to increasing numbers of investors abroad and in the U.S. who pooled money into a new kind of financial instrument known as mortgage-backed securities. A mortgage is a piece of paper that banks keep in exchange for lending out money for borrowers to purchase a home. This paper requires the borrower to pay recurring fees with interest, and give their home up to the holder if they fail to do so. Around this time, financial institutions came up with the idea of selling these mortgages in bundles to investors. This was an attractive deal for investors because these mortgages pay monthly with high interest. Furthermore, borrowers would be unlikely to default on their loans since obtaining a mortgage back then required a high credit score — a virtual number that banks assign to their customers in order to determine how much they can lend them. This typically depends on how often the customer borrows and pays back their previous loans.

These investments were theoretically sound. So sound, in fact, that demand for them was always high, and banks had to lend out more and more mortgages in order to sell them. The supply could not keep up with the demand. Eventually, in order to sell more of these mortgages, banks started lending out mortgages to borrowers with lower and lower credit. These mortgages however, differed from the usual ones by their non-fixed interest rates that could fluctuate after some time. These mortgages are sometimes referred to as subprime mortgages by the media. Due to the risky nature of these mortgages, it was a matter of time before the bubble would pop.

A common term that is associated with the 2008 financial crisis that comes up in newspapers, reports and even in movies and T.V shows is the housing bubble. It is called a bubble because bubbles expand and expand until they reach a critical point at which they pop. The housing market was at an all-time high around 2007. Demands for mortgage-backed securities caused banks to keep lending out mortgages with increasingly high risk, leading prices and interest rates to inflate further and further. This exponential growth was bound to go out of control at some point.

This point was around late 2007. As prices grew at a much higher rate than what the average borrower could pay, the bubble inevitably popped. Borrowers started to default on their mortgages due to the extremely high prices. Houses were being seized one by one, which caused investors to panic. They started to sell their positions — i.e., sell their assets — causing a rapid collapse in the market. Home prices plummeted and mortgages became worthless, and this made banks and investors lose billions of dollars. Some of the biggest banks such as the Lehman Brothers declared bankruptcy. Home owners were driven to the streets and the stock market completely crashed, thus causing what we know today as the 2008 financial recession.

One may be wondering, why was the effect of the 2008 recession not as bad as the Great Depression of 1929? This is because, luckily, the U.S. government intervened. President George W. Bush signed the $700 billion Emergency Economic Stabilization Act of 2008. The act allowed the U.S. government to bailout banks. New regulations were also created and put into place, controlling the downfall and preventing the situation from reaching catastrophic levels.

Today, the impact of the recession is barely visible around the world. Europe was where the effects of the crisis was felt most deeply outside the U.S., with the GDP of all eastern and central EU members — with the exception of Poland — growing negatively in the following year. Furthermore, GDP growth all around the EU slowed down between 2008 and 2009. However, the global economy eventually recovered when the U.S. economy did, although the degree to which individual countries recovered depended heavily on how foreign governments intervened in their own economies.

The 2008 financial crisis may not be as widely destructive in its effects as the Great Depression, but it serves as a warning of how easily a country and the globe can descend into economic collapse.