Why economics meltdown?

Answer 1

Briefly Too many financial institutions took too much risk for high returns. They thought that by buying a bundle of high risk mortgages they were taking less risk. Since institutions were wiolling to buy these CDO's Investment banks sold them and since investment banks sold then mortgage brokers knew that even high risk loans would be approved they convinced people to borrow more than they could afford. Then when they couldn't afford the mortgage because the variable rate went up (another problem) home owners began to default. This made other homews in the neighborhood less valuable than they had been and with higher payments too boot. So people were in the position of paying more than they could on a home worth less. The defaulted mortgages made the bank investments worth less which made the banks have to put money aside to anticipate the costs of reprocessing and marketing a home in a neighborhood full of foreclosed homes. That made the banks have less to lend and scared to lend what they had except at higher rates than others wanted to borrow. Since THOSE ordinary borrowers were cut out or withdrew, they hyad to scale back plans and lay people off.