1. Households over-leveraged themselves with credit-card debt and too high mortgage payments(auto, student loans, etc...) 2. In mid-2007 a large amount of households defaulted thus triggering a cascade failure through the financial system, creating toxic assets at each level to the point that huge firm like Bear Stearns and Merryl Lynch were threatened. My take on the whole thing is that financial institutions allowed too many loans to customers based on short-term thinking and not solid fundamentals(ability to pay off the loans). There was a disconnect between mortgage securities and the average loanee. In addition the insurance of these securities was another "innovation" not well thought out because it was not based on the fundamentals of ability to repay the loans. I think in the end too many complex financial instruments were mis-used in the name of short-term profits without regard to the fact they were creating toxic assets, combined with too many layers of indirection between financial instruments and real people on the ground facing financial ruin. Anyone in the industry should have been able to easily predict it and speak up at a board meeting. But they didn't. History will remember.