Question

What is the purpose of law in society? In your opinion, did lack of law and strict regulation facilitate the economic crash and recession that began in 2008?

Answer 1

Ideally the law does two things and nothing more. First, it says you may not beat up other people or steal their stuff. Second, it tells government exactly how to prove it was you who did it, make you return the stuff, and make sure you don't do it again.

There are lots of variations and details, but that's basically it.

Now unfortunately, the line that government must never cross (the line between defense/retaliation and initiation of physical force) has never been made clear to government, and it keeps making laws that say it can initiate force (beat people up and steal their stuff). It typically does this by making threats (do what we say or pay a fine. Pay the fine or we lock you up with the real criminals).

The global financial crisis of 2008 in simple terms can be said as the interwoven play of the weakly regulated financial markets of the USA and it's highly corrupt corporates which sparked the meltdown.

Now, USA for many years has been fighting against implementing stringent measures for the financial regulations in the country but to little avail. See, the simplest way of stating this would be that people started buying homes they couldn't virtually afford to live in , then they mortgaged it to the lenders who later sold it to Investment Banks ( Goldman Sachs, Merrill Lynch, Lehman Brothers, Morgan and Stanley and Bear Sterns) which would club such loaned assets and sell them to the public again in the form of CDOs (Collateralised Debt Obligation). Although the loans were not given to the individuals having high credit quotient yet the Investment Banks paid the credit rating agencies to grade such CDOs as "AAA", the highest credit rating possible.This created the perception amongst the mob that these CDOs were safe for parking their funds. One hilarious law in the USA is that the credit rating agencies hold no liabilities if their ratings prove to be wrong in context of any securities, because they are merely "an expression of their opinions".
The lenders of the funds no longer cared whether the borrowers would repay them the money or not, all they did was loan the funds and then sell the mortgaged property to the banks who would further sell it to the investors, this kept rolling the money in the economy. Most likely, the loans were not of the requisite quality i.e. sub prime loans.

Now, when the borrowers paid the monthly installments it would go to the investors worldwide. However, little did one fathom about how long would the people be able to pay such installments. It didnot stop here. This system was a slow ticking bomb, which would explode sooner or later. The Investors now got these CDOs insured by Insurance Agencies like AIG, that meant if the CDOs failed the investors would get their money from these agencies via means of CDS (Credit Default Swaps) which latter went on to be purchased by Investment Banks to uplift the faith of the public in these toxic CDOs. They were in short, betting on the Housing Crash.

This went on for several years, the Senators came and went by, the officials heading these Investment Banks now switched places with the Chief Economic Advisors to the President and some also occupied leading positions on the board of America's Central Bank, The Federal Reserve. All of them were thus a part of this gigantic well planned Ponzi scheme which robbed millions of their hard earned money.

As many had feared, the day came when the banks collapsed due to lack of liquidity. September 2008 saw the fall of Lehman Brothers, Merrill Lynch and AIG which were either acquired by other banks or bailed out by the US Government itself. People lost their homes due to lack of payment of their EMIs on Housing Loans, their jobs due to the growing unemployment and ultimately their faith in the financial institutions of the country. The number of foreclosures went up to 6 million by 2010. Foreclosure means when the lenders put the mortgaged property on sale to recover their loan from the borrowers who fail to pay their money.

How did it affect the global economy?
Well, the countries exporting to the USA suffered miserably, the global clients of the Investment Banks lost their money. From a favourable investment destination, the USA turned into a nightmarish land of losing wealth. Ofcourse, the global economy suffered from the fears of an upcoming recession. Manual , routinely jobs in the USA were now being outsourced from cheaper nations like China.

India was well shielded against this mammoth crisis, as compared to other countries because of the strict regulations imposed by watch dogs like SEBI and the RBI, for which we must be thankful.

I could gather this much from what I read/watched till now.
You must watch : The Inside Job, it is a documentary highlighting the rise and fall of the Housing Crisis of 2008. It is likely to provide the most appropriate answer to your question, I have picked excerpts from the film in simplified terms for explanation here.