This crisis that is upon us now was predicted, the severity is something that depends on human factors such as confidence, and wise state intervention that cannot be predicted, but the inevitability was as night follows day.
The US economy that is the largest in the world, also grew rapidly, not out of productivity growth, but out of consumption led growth where lending institutions relaxed lending amounts and rates. This made it easier for people who are not financially savvy to rack up huge credit card debt, and release equity from increasing home prices to borrow to finance consumption. Hitherto positive savings rates thus became negative.
China was eagerly supplying the US consumer with cheaper products, thereby increasing consumption of such items like flat screen TVs and electronic items. The dollars the Chinese received went back to purchase US treasury debt. There is a limit to how far one can go, when one is unable to pay one’s debts. The unscrupulous lenders who were remunerated more based on the increase in the amounts lent, devised more schemes, such as secondary loans with teaser interest rates to get people to commit to borrow. Like a ponzi or pyramid scheme, when the rate of increase began to fall as there were no more takers, and the teaser rates ended, people who had signed up unwittingly and foolishly, were unable to pay their loans. The loans had been sold off in the secondary markets with Fannie Mae and Freddie Mac guarantees, and so were off the books of the regulated financial institutions.
The incompetent accountants(the largest firms in the world) failed to realize that any fraudulent information on the loan documents, hold the originator responsible, and the originators were the first to go bust when fraud was discovered, when they were unable to meet their obligations. The banks thought they would have recourse but were left holding worthless paper and insurance companies, who guaranteed these without fully understanding the risk profile, began defaulting.
Not to be outdone, international banks and insurance companies joined the bandwagon not wanting to be left out of this jamboree with tiny banks in Iceland joining the fray through internet banking crossing borders seamlessly, wanting a piece of the pie. Now even they have to be rescued by their governments making it a global phenomenon.