I get really irritated at the whole thing. Alot of the problems are manufactured by people who put too much stock in the, pun unintended, stock market. The stock market is not the economy and when big banks like citi that were doing fine go under because a lot of people have all these irrational fears I just throw up my hands.
There are only two real problems with the economy: loss of home values (making it worthless for people to continue trying to make mortgage payments) and fear. There is plenty of money changing hands out there for people to invest in the stock market, they are afraid. There is plenty of money for banks to lend, but they are afraid to do it because their investors are irrational. If their stock tanks they have to explain why even when it has nothing to do with their business practices.
Lindsey Graham, much though I loathe admitting it, was right when he said it is a "mental recession."
It's a little bit more complicated than that. I had someone who works as a small business lender lay-it out for me a few weeks ago in a ten-fifteen minute rant he gave that was perhaps the most lucid explanation I've heard yet, since he has witnessed everything first hand as this mess unfolded starting in the early part of the decade.
I wish I could be as succinct in my reply as he was, but in short it is not just the housing bubble with people who couldn't afford houses being granted loans that far exceeded their capacity to pay. This is part of it, but it's also a massive scapegoat being used to obfuscate the greed and market manipulations that was happening elsewhere by people who should have known better.
First off, in 1992 the deregulation of Fannie and Freddie led to less oversight, which should have stopped those loans from being made and ultimately sold on the open market. This helped lay the foundation. Secondly, when the banks wanted to be able to offer additional services and deregulation allowed them to do so - with the caveat that they also had to lend to higher risk borrowers as well (a Clinton add-on). Here was a double whammy, banks having some of their restrictions loosened which put them into a riskier position and at the same time having to make more credit risky loans as part of the agreement.
I forget the exact impetus about 2002-2003 that started it (it was a government program to fix the economic downturn at the time), but because of the greater returns expected in real estate, massive amounts of credit was flowing into the real estate market from other sources looking to capitalize on the higher gains (this started about 2002 2003 when the small business lender I noted above noticed it was harder to secure small business loans), and banks were asking for adjustments in their lending ratios that put them all at much riskier positions while our democratic congress stood idly by and watched (well, not exactly idly, Dodd who sat on the Finance committee that was suppose to oversee these regulations enjoyed some dubious VIP loans from countrywide - go figure). Then there were the credit default derivatives which added another layer of complexity to the mess which I don't feel capable enough to give a fully lucid explanation as to how they only compounded the mess we're in.
While the mortgage defaults on many of these homes started the process of the house of cards collapsing, lets not forget that it was that the house was already poorly build to begin with, which poor judgment and greed marring decisions throughout the entire framework.
So all of this amounts to a sudden dramatic shortening of the available amount of credit (which brings us to about 2-3 months ago) - and this is where the person I mentioned earlier has seen first hand the *&^% we're in. He can no longer get credit for businesses. Don't think just home and car loans, but it became suddenly very difficult for him to secure loans for small businesses (that represent 70% of our businesses) so that they could stay open. For instance, he had one client with signed government contracts in hand and needed financing to allow her to continue operating and he wasn't able to secure money for her. So businesses which may have normally been sustainable are now finding themselves unable to continue operations, which is leading to more people who are out of work, which only compounds the problem further.
So what did our government do? Well hey offered 700 billion to banks so they could continue lending. That money was suppose to be used to provide credit for our country to continue operating. And what did these assholes do with the money.... they want to buy other troubled banks and give themselves bonuses ("Well we have to retain the talent who screwed it all up in the first place").
And do you really think the slowdown in manufacturing and less people going out for sunday drives is the reason gas prices have dropped nearly 60% in the past few months? These assholes manipulating the oil exchanges are getting screwed by this and the true cost of gas without their manipulations is becoming apparent.
Think Enron and WorldCom, but across the entire financial sector.
I'll admit to only having a moderate understanding of this mess, but if the American population had a better idea of the *&^% that's been going on (instead of watching American-f-ing-Idol), I think we'd be in the middle of a revolution with regular public executions of some of these assholes.
Edit: Cleaned up a few items on second reading. Also, I was harsh on some democrats and want to point out the republicans also had their hand in f-ing us as well, so don't think I was just being partisan.