Government induced real estate bubbles can do that. In reality, there wasn’t much real wealth. Imagine if everyone tried to turn that house equity into cash at the same time. If everyone tried to cash their 401K at the top of the market.
It was on paper.
Remember the advertising on television and radio? "Consolidate your bills?" "Upgrade your car, kitchen, family room?" "Take that dream vacation?"
All of that economic activity was fueled by the housing boom--artificially inflating the value of housing, while simultaneously taking perceived equity out. Combine that with "junk" mortgages--those mortgages offered to those with less-than stellar credit...it was the perfect storm for the financial markets.
Here’s Bush in his speech, pushing home loans for totally unqualified minorities.
http://www.youtube.com/watch?v=MqR15H0gNBU
“Government induced real estate bubbles can do that.”
What about Wall Street’s role? Without them to buy up the loans the banks were making, and bundle them and sell them as Triple A rated bonds, banks might have given some thought to how risky their loans were. As it was, they felt like they had no liability for making bad loans. They were sold the next day to Wall Street, packaged with hundreds of others, rated AAA, and sold the world over. The world bought them because they thought anything that Moody’s and Standard and Poor rated AAA was safe. They didn’t realize that the bond rating agencies effectively were in on the game. All the short term incentives were in place. The traders made their millions and when it all went bad and their companies were bankrupt, well, they still had their millions.