Ten years ago this week (9/15), the venerable Wall Street firm Lehman Brothers filed for bankruptcy following the collapse of the housing bubble. Other financial institutions had stumbled in the preceding months and the U.S. economy had slipped into recession at the beginning of 2008, but the collapse of blue-chip Lehman was a watershed event in the decade’s financial crisis and the “Great Recession.”

This anniversary, countless commentators are arguing that government hasn’t done enough to prevent another such calamity. Few if any of them offer a careful account of what went wrong. So let’s take a look at the run-up to the financial crisis, to determine what we can do to reduce the chances of another crisis in the future.

The broad outlines of the crisis are straightforward. In the first half of last decade, the U.S. housing market boomed as Americans relocated to major metropolitan areas to join growing job markets. Investors around the world were willing to finance this boom, as well as a wave of second mortgages, because of Americans’ strong reputation for paying their mortgages. And people were willing to borrow that money, even as house prices rose sharply. After all, most everyone said, homes were “investments” that “couldn’t fail.”

Then came the mid-decade oil crunch. Hundreds of millions of households in China, India and the rest of the developing world began emerging from poverty and increased their energy use, straining that era’s production capacity. Gasoline prices soared as a result, hurting commuters in America’s suburbs. Those consumers, in turn, reduced their spending and some stopped paying their mortgages, causing an economic downturn.

This part of the story leads some commentators on the political right and left to blame housing policy or housing finance for the downturn. The right faults the Community Reinvestment Act (CRA) and other housing affordability policies intended to boost home ownership for lower-income households. The left faults “exotic mortgages” like interest-only loans and adjustable rate mortgages, “predatory lending” practices that supposedly deceived and manipulated borrowers, and “financial deregulation” that ostensibly unleashed greedy Wall Street on the good people of Main Street.

To be fair, there was some mischief in each of those. But economic research shows that mischief doesn’t come close to explaining the financial crisis and severe recession. Mortgages under the CRA and other housing affordability programs were as sound as other mortgages. Exotic mortgages performed as well as regular ones. Some of the loudest complaints were over the repeal of the New Deal–era Glass–Steagall banking law that supposedly restrained Wall Street, but economic research indicates that Glass–Steagall made banks more unstable, not less.

So how did an economic downturn turn into a financial crisis and the Great Recession?

When homeowners fell behind on their mortgages and house prices tumbled, money dried up in the housing finance industry. Among the hardest hit were institutions that borrowed short-term from large corporations and other money-savers, and used that money to finance long-term investments in housing. The corporations and money-savers thought of the loans as the equivalent of “certificate of deposit” for their corporate treasuries, paying little interest but supposedly low-risk because housing was considered a safe investment.

When those loans proved risky, the corporations and other savers grew frightened (hence the term “financial panic”) and cut back on their economic activities. Ultimately, their fears proved exaggerated. But the drop in finance, along with the parallel reduction in consumer spending, turned an economic downturn into a deep recession.

The great financial crises of history have one thing in common: investments that “everyone” thought couldn’t fail did fail—or at least proved riskier than people thought. That’s what unites the housing boom with the 16^th-century Tulip Bulb Mania (yes, one of the worst financial crises in history was over investments in flowers), the South Seas and Mississippi Valley booms, and the Roaring ‘20s. Problem is, such risks are all-too-often seen only in hindsight.

Going forward, people need to more clearly understand when their financial activities are investments at risk of loss, as opposed to deposits that are generally safe. One step toward this would be the creation of “narrow banking”—banks that only invest in U.S. government securities and that would provide safer banking for corporations that today have few banking options. Unfortunately, for unclear reasons the Federal Reserve System opposes the creation of narrow banks.

Another step would be for investors—as opposed to lenders—to bear much more of the cost of a downturn. A decade before the financial crisis, the end of the 1990s U.S. technology boom destroyed roughly the same amount of wealth as the housing bust. The tech bust was unpleasant, but the resulting recession was one of the mildest in American history because investors bore the brunt of the losses. Bankrupt tech firms’ assets were sold off, stock prices adjusted—and the economy began moving forward again.

The housing bust was a different story because people failed to appreciate the risk in real estate. And we’re still dealing with the fallout of that failure a decade later.+

Thomas A. Firey is a Maryland Public Policy Institute senior fellow and a Washington County native.