This post is a response to the question posted my @newtonquach : "How did the Federal Reserve and the Treasury affect the housing bubble?"
The 2008 Recession was caused by a whole slew of policy decisions from multiple levels, different branches, and a number of different departments. Acts of legislature, executive orders, and regulation within executive agencies all contributed to the collapse. The Federal Reserve and the Treasury fall under the third category, and made (and continue to make) decisions that have bad effects on the national economy. The Federal Reserve (Fed) lent federal tax money to big banks and financial firms. These loans had very low interest, so it was effectively free money for the banks. Free money encourages more risky behavior, so the Fed was essentially incentivizing bad business. Later on in the crisis, the Fed was also picking and choosing which businesses they would bail out, so while all of the businesses were doing bad businesses, not all were being bailed out by the Fed.
The Treasury contributed to the crisis by changing interest rates and by printing money leading to inflation. The both of these actions were efforts to fix prices and sustain an economic boom. In reality, both actions created situations at all levels of the market. Because of the extra money and the ability to borrow money with virtually no interest, people thought that they had more money than they really did. This looked like a boom, but it was actually just propping the market up for a pop.