The 2008 global financial crisis (GFC) was caused by a combination of factors that interacted in complex ways. These factors included structural weaknesses in financial systems, excessive risk-taking by financial institutions, and inadequate regulatory oversight, among others. Below are the primary causes of the crisis:

1. Housing Bubble and Subprime Mortgages

• One of the main triggers of the 2008 crisis was the collapse of the U.S. housing    market. In the years leading up to the crisis, there was a housing bubble fueled by low interest rates, easy credit, and speculative investment in real estate. Financial institutions, especially in the U.S., began issuing large numbers of subprime mortgages (high-risk loans) to homebuyers who were less likely to be able to repay them.

• Banks often relaxed their lending standards, providing mortgages to individuals with poor credit histories (subprime borrowers). These mortgages were bundled    together into complex financial products called mortgage-backed securities    (MBS) and sold to investors worldwide. The assumption was that housing prices would continue to rise, ensuring that the value of the underlying mortgages would remain strong.

2. Securitization and Risk Spreading

• Financial institutions used securitization to bundle subprime mortgages into MBS and other complex financial instruments such as collateralized debt obligations (CDOs). These products were then sold to investors globally.The idea was to spread risk by selling the mortgages to many investors, but this also meant that the true extent of risk exposure became opaque and difficult to assess.

• Many of these securities were misrated by credit rating agencies. Highly complex    financial products, such as CDOs, were often given higher ratings than they deserved, which misled investors into believing they were safe investments.

3. Financial Innovation and Derivatives

• The use of derivatives like credit default swaps (CDS), which were meant to provide insurance against default on securities, played a significant role in    magnifying the crisis. Firms like AIG sold these derivatives without fully    understanding the risks involved. When the value of the underlying assets    (housing and MBS) started to fall, the insurers could not cover the losses.

• The financial system had become deeply interconnected through these complex    instruments, so when one institution faced significant losses, the effects rippled through the entire system, leading to a loss of confidence and a liquidity crisis.

4. Excessive Risk-Taking by Financial Institutions

• Leading up to the crisis, many major financial institutions became highly leveraged, meaning they borrowed large amounts of money to increase their profits. This made them more vulnerable to sudden market shifts. In particular,  banks like Lehman Brothers and Bear Stearns accumulated large positions in risky assets.

• Many institutions underestimated or ignored the risks of their investments, relying on overly optimistic assumptions about the housing market and the performance of their financial products. When the value of these assets started to fall, these institutions faced massive losses and a severe liquidity crisis.

5. Inadequate Regulatory Oversight

• There was a lack of effective regulation in the financial sector. Regulatory bodies    failed to fully understand or monitor the growing risks in the financial system, particularly in the areas of mortgage lending, securitization, and the trading of derivatives.

• Some policymakers and regulators believed in the self-regulating nature of    markets, which led to a failure to impose sufficient safeguards or oversight. Additionally, there was regulatory arbitrage, where financial institutions sought out less regulated markets to conduct riskier business practices.

6. Globalization and Interconnectedness

• The global financial system became increasingly interconnected, with many financial institutions around the world holding U.S. mortgage-backed securities and other related assets. When the housing bubble burst in the U.S., the effects spread to other economies. Financial markets around the world experienced a loss of    confidence, leading to a global credit crunch.

• Many foreign banks and investors were exposed to the same toxic assets as their U.S. counterparts, and the global nature of financial markets meant that the crisis quickly spread to other countries, even those with strong economies.

7. Deregulation and the Erosion of Safeguards

• In the years leading up to the crisis, there was a trend toward deregulation in the    financial sector. Key pieces of legislation, such as the Glass-Steagall Act, which had previously separated commercial and investment banking, were repealed in the late 1990s. This allowed banks to take on riskier activities without sufficient oversight or protections.

• Additionally, government policies such as low interest rates set by the U.S. Federal Reserve in the early 2000s made borrowing cheap and fueled speculative    investment in housing and risky assets.

8. Moral Hazard and "Too Big to Fail"

• The belief that some financial institutions were "too big to fail" contributed to risky behavior. Banks and other financial institutions assumed that, in the event of a crisis, governments would step in to bail them out. This moral hazard led institutions to take on excessive risk, knowing that they could rely on government intervention if their bets went wrong.

• When major institutions like Lehman Brothers were allowed to fail, it shocked the  financial system and deepened the crisis, highlighting the consequences of moral hazard and lack of effective crisis management.

9. Failure of Risk Management

• Many financial institutions, including banks and insurance companies, lacked    adequate risk management systems to assess or hedge against the risks they    were taking. This failure became particularly evident when the housing market collapsed and the value of mortgage-backed securities plunged. Institutions with high exposure to these assets faced catastrophic losses.

Conclusion

The 2008 global financial crisis was the result of a confluence of factors, including reckless lending, financial innovation without adequate risk assessment, regulatory failures, and global financial interconnectedness. These elements combined to create an environment in which financial institutions were highly vulnerable to the bursting of the housing bubble and the collapse of the mortgage market. The crisis had far-reaching consequences, leading to widespread economic downturns, government bailouts, and a rethinking of financial regulation worldwide.