Real Estate Crash

The Real Estate Crash can be effectively blamed to the Federal Reserve. It's chairman at the time, Alan Greenspan did not realize the effects of free money. The chairman, had set interest rates at a very low rate for a sustained period of time. The banks took advantage of this opportunity and started loaning money out to the rest of the world and the U.S and were making enormous profits (they payed out pennies in interest). They also began in very risky behavior, if they failed, they wold be bailed out and the low interest rates made the money "free".  One of their risky behaviors included inappropriate lending, they would loan huge sums of money to homeowners who could never pay it back. In combination with the average homeowner who started to engage in risky behavior as well (because of the low-interest rate incentives), the homeowner started taking mortgages on their house to buy other houses. Why? Because these low interest rates created an asset bubble, as a result the house prices were rising due to speculative behavior. However, the Central Bank could have aggressively increased interest rates in the beginning, but they didn't. Since there was investments in finance rather than industry, the bubble could no longer be sustainable, the economy was failing. When it crashed, the price of houses fell dramatically, their investments failed, and the houses were foreclosed and the banks were bailed out.

-Please see Capitalism and bailout and "too big to fail" posts to learn more.

*NOTES:

President Bush had actually supported this practice via his affordable home ownership policy. He thought this was god because more citizens were owning homes. They actually didn't own homes but a excessively high debt.

Many other Federal Reserve members new it was a bubble and low interest rates had created it. However they did not stop it because they sticked to policies that were flawed. They assumed it was impossible for speculative behavior to occur in houses.