1. A deficit-fueled economic boom. Actually starting with Ronald
Reagan whose supply-side economics boosted the relatively moribund
economy of the seventies, kicking it into an even bigger and longer
economic boom than that of the 20s. While the deficit shrank during the
Clinton era thanks to the feuding between the Clinton White House and
Congress, no significant progress could be made on actually shrinking
the debt again thanks to the political unacceptability of raising taxes.
However the boom continued thanks to a major technological transition,
with the rise of internet commerce and a plethora of dotcom startups.
When the dodgier startups crashes the economy stumbled a bit, but
recovered. But then Bush's election caused the deficit and the debt to
explode. With a Republican in the White House and the Republicans in
firm control of Congress, the American government's spending soared to
unprecedented heights, and so did the boom, creating a large pile of
money looking for things to invest in.
2. The central banks and regulators who kept interest rates in the
basement for fear that the booming economy and deficit spending would
kick off out of control inflation, and who failed to keep an eye on what
the banks were doing.
3. The bankers who saw that large pile of money going into the stock
market because low interest rates meant that their "safe" investments of
bonds, bank accounts and other financial instruments were producing even
crappier rates of return than usual. So therefore they figured out that
they could "eliminate risk" from offering high risk high return loans by
packaging them to together with more conservative investments in
financial instruments so complicated it was impossible to evaluate the
risk they posed. Of course actually they weren't eliminating risk.
They were just hiding it in new and creative ways. This caused the
housing market to explode since banks were no longer turning down
applicants with bad credit. Instead they were accepting them with terms
that in the long term guaranteed a default.
4. Eventually some of the smarter investment bankers noticed that shit
was being spray painted gold and sold as bullion, and figured out new
and creative ways to sell their less sensible colleagues short. From
there it didn't take long for a industry-wide collapse of trust. Banks
clamped down on short term credit, and overextended investors started to
go bust.
5. And here the regulators made their biggest mistake, not realizing
that Lehman Brothers really was "too big" to let fail. They didn't
intervene, and instead of coming down gradually, the economy crashed
harder than it had at any time since 1929.