First of all, it'd be nice if people posting here would share their experience in this area -- blaming the issue simply on housing or the media does nothing but display a stunning lack of knowledge of the larger issues.
I write financial education articles, keep track of and do summaries on financial and banking industry news, and a whole host of other writing and researching duties for a financial services company.
I am not, however, an economist. So keep that in mind.
Now that's out of the way ...
The nowhere near short, fairly-non-political answer is the following:
1. America, and an increasing part of the world, runs on credit. So much so, that we have a negative savings rate in this country (people are spending more than they save).
2. Banks and investors package all of this debt -- credit card debt, mortgage debt, etc. -- and sell it off to other banks and investors, offering them a certain rate of return.
3. For a while, all of that packaged debt was zooming in value ... even though no one actually had any freaking clue what it was worthy, and no regulators were ensuring those selling the investments were giving honest disclosures.
4. A lot of the debt in #2 was mortgage debt, which was making TONS of money because housing prices were skyrocketing (a.k.a. a bubble). This has happened before, such as with Internet company stocks in the 90s: people think something is worth a lot, even though there's no real way to tell what the value really is. But folks are making money, so what the hell?!
5. A lot of those mortgages from #4 were "subprime" (a higher interest rate product for those with high risk of not paying) or adjustable (payments start low, and then go up after a few years). A lot of subprime folks lied about their income or were swindled into loans they couldn't afford, so they defaulted. A lot of adjustable mortgage folks had their payments go up after a few years to levels they couldn't afford, so they defaulted.
6. Since people weren't paying their debt, the investments based on that debt started to go south. Folks who were making tons of money were suddenly losing it.
7. Banks and businesses and pension funds and mutual funds and lots of other people also started to see their investments go sour.
8. Accounting rules for banks state that any investment on the books must have its value recorded as what the investment is worth right now (called "mark to market"). So banks that once looked great because those investments were making money in 2003, now looked unstable because they had to report the value of the investments after people stopped paying their debts in 2008.
9. Due to #8, dozens of banks suddenly lost billions of dollars in value because the investments they had come to rely upon were worthless. So they stopped lending to other banks (which they do all the time, and what the Fed Reserve is discussing when it lowers or raises rates), to businesses, to people ... everyone.
10. Since Americans and an increasing part of the world relies on debt, once lines of credit dried up for everyone -- even those with great credit -- the whole system started to collapse.
Now, that's a really 50,000 foot view. Regulations were changed and/or ignored ... lots of people used their homes as ATMs and got second mortgages for a boat and a jet ski and other crap ... people relied too much on credit cards instead of paying cash ... and the "free market" once again proved that it does not self-correct -- it takes as much as it can, ensuring to privatize the profits and socialize the losses.
Don't get me wrong -- free market
theory is wonderful. But unfettered free market capitalism
in reality has been proven to do major damage. We really need a middle ground -- free market ideas and spirit, but with enough guidance to avoid exploitation, yet at the same time also not horrifically constrictive.
Again, that's my understanding of it based on my professional experience. Take it for what it's worth ...
MM
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