There have been many financial crises in the past. However, the most well-documented one is in 2008. There has been an accepted explanation, but I will try to explain it in simple terms and words.
So, it all started when someone buys a house. Often, they borrow money from the bank, to own the house. This is called a “mortgage”. The money is paid to whoever owns your mortgage. If you stop paying, it is called “default”, and the people who own the mortgage gets your house!
Basically, before you get one, you need a rating. These depend on your job, your credit rating, which is how often you can pay your debt to the bank. Why may you ask? Because they don’t want to lose money and taking the risk that they don’t need to take!
Fast forward, many investors want a low risk, high return investment. Which at the time, was the housing market, it was BOOMING. At the time, treasury bonds, which you can hold, are often the lowest risk but low return investment.
But, you can’t really manage a thousand people, can you? So, they fold every paper into a box, and sell people slices of the money that goes to them! It is so much easier.
Now the supply for mortgages is running out. So they have to work around a bit. So, they lowered the rating score required to get a mortgage. As a result, less credible people are getting houses and they are getting money. Seems great?
No. As more people default, housing prices started going down. Houses are becoming worthless. People realized that the mortgage they are paying is higher than the actual value of the house!
At this time, they stopped paying. The house prices went down, and so did the market.