Wonder who wrote this excellent Wiki squib:
There are several "narratives" attempting to place the causes of the crisis into context, with overlapping elements. Four such narratives include:See Wiki, Subprime Mortgage Crisis. [I stripped off he numbering; could't make it work in this format. Also omitted the footnotes.] Seems to me pithy and to the point. The whole piece is useful, if a bit diffuse.
There was the equivalent of a bank run on the shadow banking system, which includes investment banks and other non-depository financial entities. This system had grown to rival the depository system in scale yet was not subject to the same regulatory safeguards.
The economy was being driven by a housing bubble. When it burst, private residential investment (i.e., housing construction) fell by nearly 4% GDP and consumption enabled by bubble-generated housing wealth also slowed. This created a gap in annual demand (GDP) of nearly $1 trillion. Government was unwilling to make up for this private sector shortfall.
Record levels of household debt accumulated in the decades preceding the crisis resulted in a balance sheet recession (similar to debt deflation) once housing prices began falling in 2006. Consumers began paying down debt, which reduces their consumption, slowing down the economy for an extended period while debt levels are reduced.
Government policies that encouraged home ownership even for those who could not afford it, contributing to lax lending standards, unsustainable housing price increases, and indebtedness.