The description of circumstances by reporters Greg Ip and Jon Hilsenrath (WSJ), a few days ago, is the clearest I've read. The apparent success of the recent, massive injections of liquidity by the central banks should alter the story a little, but not a lot:
How Credit Got So Easy And Why It's Tightening By GREG IP and JON E. HILSENRATH August 7, 2007; Page A1 [...] "These adverse periods are very painful, but they're inevitable if we choose to maintain a system in which people are free to take risks, a necessary condition for maximum sustainable economic growth," Mr. Greenspan says today. The evolving financial architecture is distributing risks away from highly leveraged banks toward investors better able to handle them, keeping the banks and economy more stable than in the past, he says. Economic growth, particularly outside the U.S., is strong, and even in the U.S., unemployment remains low. The financial system has absorbed the latest shock. So far. But credit problems once seen as isolated to a few subprime-mortgage lenders are beginning to propagate across markets and borders in unpredicted ways and degrees. A system designed to distribute and absorb risk might, instead, have bred it, by making it so easy for investors to buy complex securities they didn't fully understand. And the interconnectedness of markets could mean that a sudden change in sentiment by investors in all sorts of markets could destabilize the financial system and hurt economic growth. http://online.wsj.com/article/SB118643226865289581.html?mod=todays_us_page_one
