What caused the crash of 2008

It started in september 11, 2001. The US Federal Bank reduced interest rate to avoid a crash of the financial system after 911. Bowrrowing becamse very cheap. So people started buying homes. The demand went up so as a result of demand and supply theory the price of homes went up. When the lender saw that the prices of homes was going up and up they starting lending to almost anyone who wanted to buy a home. The lenders knew that in 6 months the price of the house will be higher by $200,000 which would increase the borrowers equity in the house. So people could buy a house with no equity (down payment) they would build equity in about 6 months after buying the house. They did not need any proof of income ("no Doc", "Subprime" or "Liar" loans).

People started borrowing money on their homes. They got home equity loans and spend the money they borrowed like crazy. This made the economy boom. Everybody became well off with the fake money they had gained. This was fake money because it was not earned, it was borrowed money which they could not pay back.

So far this sound like a fairytale with a happy ending. This story does not have a happy ending. So how did the crash start. The Federal Bank increased the interest rates and also people's adjustable mortages and the ones with short term teaser rates went up when the period of the teaser rate ended. People could not make their loan payments. So they had to let go of their home, foreclosures started, the banks stopped giving loans, there was no free money anymore. People had no money to buy things, businesses could not make money because people were not buying their goods and services. So employees were layed off because the demand for the goods and services went down. Employees who got layed off could not spend as much as they did before, the demand for goods and services reduced even more. Banks that had a lot of subprime (liar or toxic) loans went bankrupt and so the FDIC entered the game and took care of the bank customers and gave their money back to them. The stock market crashed on march 9, 2008.

The US goverment stepped in with some stimulus money and this some people believe stopped the crash from being a lot bigger that it could have been.