Why the Housing Bubble Matters

Essentially what caused the economic recession was the real estate bubble burst. (Yes, you could take into account many other variables but this was the BIG one). The big banks and investment firms, which have a worldwide presence but are headquartered here in the US, were knee deep in these "toxic assets" when the real estate bubble burst.
These "toxic assets" refer to the variable interest rate home loans (or sub-prime mortgages, if you will) which were being handed out to anyone who showed even the slightest interest in buying a home. By late 2006, people were finally coming to the realization that real estate everywhere was overvalued, and the people who bought those sub-prime mortgages came to the harsh realization that they were in over their heads. This of course led to a depreciation in people's assets, their homes, arguably their greatest asset... and it left a lot of folks behind on their mortgage payments when that variable interest rate, well, varied. (The Federal Reserve sets the interest rate nationwide and this does and will change).
In the big picture, people were being foreclosed on in huge numbers; once those people left their houses, other people were stuck next to the ugly, foreclosed house next door further devaluing their own property values. And those same banks and investment firms were left holding these "toxic assets."
But by 2007, the main story in every major newspaper and news network was the 2008 Presidential election. Theoretically speaking, this may have delayed the recession by as much as a year...

The Housing Bubble

The economic recession we're now in, didn't simply happen. As far I can tell it all started with a market bubble, a helluva alotta deregulation, and a perverse incentive for investors and banks to find money schemes instead of making solid financial decisions.
So here are my three points:

1. A housing craze hit the country in mid-2000s. People who couldn't afford houses wanted to buy them, because it would be the "best investment they could make." And those that already did put way too much stock into them, literally. Overvalued house prices and increased home ownership progressively made the real-estate bubble bigger, and yes eventually the bubble did burst.

2. Ever since the Reagan administration came up with the concept of "Reaganomics," every single presidential administration has implemented some form or another of deregulation, including the Clinton administration. Essentially Reaganomics is a very laissez-faire concept; it states that the markets work better if they are unfettered by government intervention and regulation. This implementation of deregulation gave banks and businesses much more leeway on what they could do.

3. So if a bank wanted to finance a mortgage for a person who wasn't really qualified to buy a house, it could. If that same bank wanted to give that person a mortgage with a variable interest rate, i.e. a sub-prime mortgage, it could. And if that bank wanted to basically masquerade that mortgage as a reliable source of capital, since it had no damned government regulation in its way, it could.