My humble and only slightly educated guess as to how the market fell down.
1995: the Community Reinvestment Act (CRA) was passed encouraging (forcing?) banks to make loans to lower income borrows. The aim was to reduce discriminatory lending to those living in lower income neighborhoods.
The CRA also required Fannie and Freddy by law to purchase these loans just like they would higher quality loans. Therefore removing any risk from the bank that was doing the lending.
Now this went along swimmingly for about 10 years, more people were demanding houses so home prices went up. Those people who had less of an ability to repay their loans were mostly ok because they tapped into the increasing value of their home by refinancing.
Eventually supply started to catch up with demand. Home builders bulldozed acres of land to put up massive subdivisions while countless apartment complexes were converted to condos. Demand waned, prices started to stabilize then fall. Loans were defaulted on and houses slipped into foreclosure.
Now all of these loans that were collateralized by Fannie and Freddy then sold off started to go bad. These “assets” are held by just about everyone in one way or another. Losses started to mount.
Bailouts start to happen so banks are perceived as weak. Business lending all but stops, and Banks horde as much cash as they can to ride out the storm.
When Lehman failed the government was content to sit on the sidelines. If the government will let Lehman collapse, then who will it save? Everyone bails out of financials Sell Sell SELL!
So here we are, the stock market is down massive amounts, the financial sector is in tatters, and things are looking pretty grim.
Final verdict: Buy stocks, and for goodness sake only lend money to people who can actually pay it back! The CRA was a bill with good intentions, but all the sunshine and puppy dog tails in the world will not help someone below the poverty line make a $1200 a month mortgage payment.
The first two paragraphs say it all. It was Congress who got us into this mess. And now we should trust them to show us a way out? We should vote all of them out of office.