First thing to understand is that this crisis was created exclusively by the banks. They were extremely agressive in offering loans, and that exposed them to huge losses when the housing market went down.

Had the banks not inflated the housing bubble, the price fluctuations on houses would have been much smaller, and the banking sector would not have sustained major losses.

When banks collapse, the government steps in to guard the depositors' money and to oversee an orderly closing down of the operation. Often parts of the bank, and it's customer portfolio, is sold to other banks.

This time several huge banks collapsed at once, and the government was afraid that  the entire banking system would fail. This would have devastating effects on the real economy, and on investors.

So the government decided to bail-out the banks. By lowering the interest rates, lending them money from the central bank, buying bank shares, buying bad bank debt . Very opaque, expensive and risky steps.

While this saves the big banks from going bankrupt, it adds to the already enormous government debt. This debt has to be repaid through raising taxes, cutting spending - or simply printing money and cancelling government debt with it. So far the Obama administration has chosen the third option - which is a brilliant idea as long as inflation doesn't result from it.

The "real economy" was hit by the banks tightening credit to business and individuals. Furthermore fortunes have been lost as the stock market tumbled, which caused bankruptcies, lost jobs and a sharp fall in consumption - causing even more bankrupcies.

The  evil spiral has to end before the economy recovers. The surviving banks will start making profits again, government will stimulate consumption and investments, cost cutting and a cheap dollar will lead to more competitive American businesses.

The dark horse is the already huge government debt. This hampers government's role in pulling the economic recovery, and there is a significant risk of state bankrupcy or hyperinflation, which would mean a chaotic business environment.

In the above I blamed the banks for simplicity. The responsibility must of course be shared by politicians, lobbyists and economists that advocated and implemented bank deregulation.

Hi Dan,

I would refer you to David Harvey's blog (http://davidharvey.org/) for some of the most intelligable analysis I've come across.

Basically, the consensus seems to be, it's that the financialization of the economy,--speculative investing, borrowing in leu of growth, insuring highrisk loans and so on--a process started in the 70s, had (predictably) the same defect as a pyrimid scheme or any other attempt to make money out of nothing. Growth won't be exponential forever and eventually more people will try to cash out than cash in.

If it all this seems confusing it's probably because economics mainly exists to provide ideological cover for a grotesquely injust and irresponsable economic arrangement and not to help people understand what's really going on. As an alternative, the business press (WSJ etc) can be a source of fact-based reporting because their patrons need to know what's really happening in the world not play games with elegant statistical models that have about as much scientific value as astrology.

Hope this helps,

Peter