What actually went wrong in the economy as described by "The Big Short"? Part of my personality is Engineering, so I look for root causes. I suppose that the cause of any bubble is "speculation", which just means pretending that ghosts are real, or that the word "LION" is an actual Lion. (So ironic when it eats you.) But because this has happened before, would someone please explain the chain of causality from people buying houses to the world economy nearly failing, through the sideroads of drinking and strip clubs? Was it just that people were selling the "actual value" of a long term asset like a house or land, and using it to buy immediate disposable things with no value, like drinks and entertainment? 

What is the basic human failing that allows people to seem to do this repeatedly and not learn from it? I don't want to hear "greed". Greed is one person acting one time. I mean: how can people believe in ghosts? How can many many people pile on thinking that something holds up the entire scheme, and that it will not eventually come crashing down and crush them inside? How can people make this particular mistake? "Stupidity"?
The problem at the bottom of the 2008 crash is that the values of multiple instruments were dramatically over estimated because the risk of default in the various underlyings was dramatically underestimated since it was assumed that they were fully backed by the US government.

Although many commentaries focus on the securitization of debt that was not where the real problem lay, in fact the securitization of sub-prime mortgages into CDOs (collateralized debt obligations) covered by CDSs (credit default swaps - a type of default insurance) was as a result of firms wanting to divest themselves of risks surrounding unknown quantities.

In the (first?) Clinton and Bush administrations there was a political will (rightly or wrongly; it isn't important) to help people buy their own homes. This applied particularly to low income families who previously had not been able to buy, in many cases for generations. To do this bills were passed to offer subprime loans with the implicit backing of the US government. Since these people had never been mortgage borrowers before their ability to repay was not well understood or modelled and came with an assumption that they would continue to have jobs and that their homes would be worth at least what they paid for them. These extra buyers put upward pressure on the housing market (i.e. buyers exceeded sellers so prices rose) meaning that it looked like that latter assumption would prove true at least.

The mortgage companies then had a large tranches of debt on their books that, although apparently backed by Sam, were riskier than their previously core business. To mitigate this risk they rolled them up into CDOs which, given that the probability of any one loan defaulting was taken to be independent of any and all others defaulting, supposedly held lower risk than the individual loans. To further reduce default risk these were further rolled up with high credit rating corporate, municipal, and national bonds. In case there was a default in these wrappered securities insurance companies, such as AIG, wrote CDSs that would pay out a sum to cover losses in return for premia (as is usual with insurance).

Then the economy slowed down a little, house prices started to stall, and unemployment rose. As people who were the borrowers in these subprime mortgages had wages cut and lost jobs they began to default on loans and the value of the collateral (the house) fell, sometimes to less than the original value at purchase, as the bubble burst. The assumption that defaults were uncorrelated turned out to be unfounded and, as you can probably guess, that triggered CDS payouts and huge losses for many of the companies holding the CDOs and writing the CDSs. Drinking and strip clubs were basically what the borrowers preferred to spend their money on instead of their mortgages. Slightly less glibly the value of their house counted as an asset to them against which they could take out further debts (credit cards, personal loans etc.) so that they could afford to live outside their means under the assumption that they would pay it back using future months' salaries. When they lost their jobs they could no longer do so. Remember from earlier that these were people who had never been offered credit before and even professionals make mistakes in their finances when it comes to credit and loans so they were doubly cursed by a lack of understanding of credit and a lack of experience.

A major issue in all of this was hubris and people's belief that current trends would never end; the economy had been growing for the longest time in recorded history therefore it would continue to and everyone would always be employed and able to pay their bills. Add to this that the managers of the funds etc. that held these debt based derivatives believed that their models of the risks of holding them, underpinned by the fallacious assumption of the lack correlation of defaults, were accurate and would model potential profits and losses, and that, in any case, they had insurance if anything bad happened and you have the problem.

These were massively leveraged positions in little understood instruments that wrapped around very risky debts for which there were no good models of repayment and default rates, and those models that did exist did so under the fatefully incorrect assumption that defaults would be totally independent.