by Kenneth Black

Created on: September 25, 2008

It's been called the Great Depression 2, or at least a valiant effort to prevent it from becoming that.

Others have said it could be the worst financial crisis the United States has faced since that first Great Depression. While it may be too early to predict the return of soup lines wrapping around city blocks, some are starting to wonder if we're not that far off.

How did the American financial system get to this point? What caused such a tremendous downturn so seemingly quickly?

The answers to these questions are as complex as the markets themselves. But getting a grasp on the overall picture is, thankfully, not too difficult.

Interdependency
Businesses depend on each other. They do not operate in a vacuum. They have partners and those partners understand that each element is vital to the continued success of the other.

For example, McDonald's has must depend on beef producers for its hamburger product. Those producers also depend on the fast food giant. If something were to happen and McDonald's suddenly went out of business, that would obviously affect the beef producers. But it would also affect the producers' feed suppliers, the transportation suppliers and a number of others.

This is also true in the financial markets. It also applies to the home mortgage you probably have.

Home Mortgages
So how does it all fit together? For those who own a home, at some point in time they had to approach a bank about taking out a mortgage loan. In the past, an approval usually meant the borrower and lender were in a relationship with each other for 20 to 30 years, substantially longer than many marriages.

This is no longer true.

Now, as little as minutes after the loan closing, it may be bought by a different company. In many cases, it goes to Fannie Mae or Freddie Mac and is repackaged with other loans in what are known as mortgage-backed securities. These are then sold on the secondary mortgage market.

It is not necessary to understand the minute details of mortgage-backed securities, but it is necessary to know they are groupings of mortgages sold as a package.

The companies now at the root of so much of the problems - such as Bear Stearns, Lehman and Merrill Lynch - were heavy investors in the secondary mortgage market and bought up many of these mortgage-backed securities.

So how does this affect an insurance company like AIG? They, along with others like them, were responsible for insuring the mortgages. Fannie Mae and Freddie Mac also insure mortgages.

The Crisis
From 2001

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