There's a much simpler explanation: the collapse of subprime mortgages forced people to confront the fact that there is way too much leverage in the economy. T

There's a much simpler explanation: the collapse of subprime mortgages forced people to confront the fact that there is way too much leverage in the economy. Too many people and companies owe money that they won't be able to pay back. The level of production of goods and services was based on the level of consumer and business spending, which everyone now realizes was being fueled by excessive debt. The level of production must now fall to a level that is consistent with businesses and consumers using much less debt going forward, and it will certainly overshoot on the downside because of panic and lack of information. The question that I see being repeated in the media these days is "what are the banks doing with the bailout money, why aren't they lending it?" Perhaps the answer is that there is currently nobody out there who is a good enough credit risk to lend money to. Another possible answer is that the banks now realize that they've lost the ability to quantify credit risk correctly and they are going to need to relearn that skill.