The main root cause of the current recession and economic crisis was the huge increase in subprime adjustable-rate mortgages and the CDO's (collateralized debt obligations) that comprised them. The number of subprime mortgages issued in 2005 and 2006 increased dramatically while prime mortgages decreased.
Mortgages are securitized; they are pooled together and sold in pieces, which spreads the risk and uncertainty to those who take part. It created a huge web of risk in that the securities are dependent on the underlying mortgage values. The value of the CDO's and their securities decreased and were miscalculated to begin with. Rating agencies could not accurately value them. This is why so many people lost their retirement which was largely based on these securities.
Worst of all, the federal government encouraged the purchasing of these securities without knowing the underlying risk involved. The web of risk was worldwide, not just in the United States. Major institutions like AIG, Citi, Chase, Bear Sterns, etc. held many of these CDO's.
In general, borrowing and lending also was at an all time high in the past few years. Inflation and money supply are not really related to the whole situation at all.