The Great Recession
See: Recession.
The Great Recession was the largest recession since the Great Depression in the 1930s. It started December 2007 in the U.S., and later spread outward to the entire globe, creating a global recession that kicked in around 2009. U.S. GDP dropped by 0.3% in 2008, and by a further 2.8% in 2009. Unemployment peaked at 10%, and stayed up even after the recession was said to have ended. Besides losing jobs, over three million foreclosures happened in 2008 alone.
A liquidity crisis began, as there was a run on the shadow banking system: banks were declaring bankruptcy, or merging to stay above water. Insurers who were supposed to have bank liabilities covered couldn’t handle the damage, so even they were bailed out by the government, in addition to many of the big banks.
Okay, so let’s get down to brass tacks: wtf happened? The TL;DR version: bank regulations were relaxed, and banks bit off more than they could chew.
A lot of shade was thrown at Alan Greenspan, who was the Fed Chair during the Reaganomics reign, when all those big bank regulations were cut. Greenspan really believed that the banks had our backs...that they wouldn’t take on too much risk, because it wouldn’t be in their best interest either. In the man’s own words, “Those of us who have looked to the self-interest of lending institutions to protect shareholders' equity, myself included, are in a state of shocked disbelief.”
The U.S. Financial Crisis Inquiry Commission, the official recession-doctor said, "The crisis was avoidable and was caused by: Widespread failures in financial regulation, including the Federal Reserve's failure to stem the tide of toxic (totally underwater, no hope of paying back principal) mortgages; Dramatic breakdowns in corporate governance, including too many financial firms acting recklessly and taking on too much risk; An explosive mix of excessive borrowing and risk by households and Wall Street that put the financial system on a collision course with crisis; Key policy makers ill-prepared for the crisis, lacking a full understanding of the financial system they oversaw; and systemic breaches in accountability and ethics at all levels.”
Consumer banking and commercial banking were no longer separated, and banks were given a longer leash. Toxic, mortgage-backed securities flourished, and banks took on obscene amounts of risk. All that risk built up, and bit us in the backside when it came crashing down. Since consumer banking and commercial banking were all mixed into one stew, everyone lost.
And, because everyone lost, the Fed and the U.S. Government decided to bail out the banks...the ones that were supposed to be “too big too fail.” And yet, many economists point to this as a mistake. If banks know that the U.S. government will just bail them out when they're acting too risky and greedy, then why would they do anything differently in the future?