The defining crisis of the modern era, and the one that resurrected Minsky. It is best understood as a credit chain, so trace it link by link, because the chain is the lesson. Displacement: low rates after the dot-com bust and a global "savings glut," a decades-long belief that US house prices had never fallen nationally (so mortgages were "safe"), and the financial innovation of securitization, which seemed to make lending safer by spreading risk.
What caused the 2008 financial crisis?
Boom, and the chain (memorize the links): (1) mortgages were originated under the "originate-to-distribute" model, in which the lender didn't keep the loan, so it stopped caring whether the borrower could repay. That enabled subprime, teaser-rate, no-income "liar loans," and outright Ponzi mortgages (see the credit cycle: borrowers who could only pay by refinancing against a rising house price). (2) Thousands of these mortgages were pooled into mortgage-backed securities (MBS). (3) MBS were sliced into tranches and repackaged into collateralized debt obligations (CDOs), and the worst tranches repackaged again into CDO-squared, with the alchemical claim that diversification made senior tranches safe. (4) The rating agencies stamped these AAA (paid by the issuers, a conflict of interest), so pension funds and banks worldwide bought them as "safe." (5) The whole edifice was funded short-term, in the shadow banking system, via repo and asset-backed commercial paper, meaning long-dated, illiquid, opaque assets were financed by overnight borrowing that had to be rolled continuously (a textbook speculative-to-Ponzi maturity mismatch, see the credit cycle, done outside the regulated banking system with no deposit insurance and no lender of last resort). Investment-bank leverage reached ~30–40×.
Trigger/Minsky moment: US house prices peaked in 2006 and began to fall. The Ponzi mortgages, which needed rising prices, defaulted; MBS/CDO values fell; the AAA ratings were exposed as fiction; holders had to mark down and were hit with margin calls in the repo market; forced sales drove prices lower still (debt-deflation). The shadow-banking funding ran: a bank run, but on wholesale markets rather than at retail branches. Bear Stearns was rescued (March 2008); Lehman Brothers was allowed to fail (September 15, 2008), and because everyone was counting on everyone else, that froze the entire global credit system; AIG, which had sold vast credit-default swaps insuring the CDOs, was bailed out the next day; money-market funds "broke the buck."
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How did authorities respond, and what did it teach?
The response (the anti-1929/anti-Japan playbook): this time the authorities acted massively and fast, with TARP ($700bn to recapitalize banks), the Fed as lender of last resort on an unprecedented scale (ZIRP, QE, dollar swap lines to the world), and later stress tests to force recognition and recapitalization rather than Japanese-style forbearance. The S&P 500 still fell ~57% (peak 2007 to trough March 2009), and the "Great Recession" was the worst downturn since the 1930s. But the depression that 1929 and Japan warned of was averted.
Lesson (several, all central): securitization did not eliminate risk, it hid, concentrated, and lengthened it, so that no one could see where the losses would land; "AAA" is meaningless if the underlying is Ponzi; shadow banking is banking (maturity and liquidity transformation) without the safety net, so it is more fragile, not less; a run can happen in funding markets, not just at branches; and, on the hopeful side, a fast, overwhelming lender-of-last-resort response can stop the cascade that destroyed the 1930s. India was largely insulated on the asset side (its banks held essentially no US MBS, and its capital account was not fully open) but was hit hard by the global trade and credit freeze. Growth dipped sharply before a large fiscal-monetary stimulus revived it, and that stimulus left a hangover of inflation and the later NPA/twin-balance-sheet mess, which is part of India's business cycle.