A number of people have asked me if there is a simple explanation of the financial crisis. It is difficult to give a simple explanation that doesn’t paint the exclusive cause as naive greed. The credit crisis is one contributing factor to the financial crisis (I see these as two different issues).
I see four major factors as contributing to the credit crisis.
- Poor quality loans on high risk mortgages and lending practices
- Securitized high risk loans tainted asset pools that investors purchased
- Easy money to avoid a recession since dot crash
- Unchecked naked short selling in the market (allegedly by hedge funds)
When the asset inflation driving US housing bubble stopped, it’s like the music stopped in musical chairs. The scramble to get out drove prices further does and undermined asset prices further.
Here is a funny and slide show that explains the first point