Like most of us, I guess, I was caught absolutely flat-footed by the economic crisis. I got the part about subprime loans, and why they were both stupid and greedy, but I did not get how that bit of banker's nonsense instantly spread to the national economy and the world economy. Finally I read an article that actually put the thing together in a coherent way. It's in the May 14 issue of the New York Review of Books, and it's by Robert M. Solow, who won the Nobel Prize for economics, so presumably he's not just pulling ideas out of his nose. He starts by talking about leverage, and how very tempting it is as long as prices continue to rise. In the 1990s, it was typical for brokerages (or banks - the difference between the two became blurred) to use a 10-1 model; they used $100,000 to borrow $1 million, and everything was rosy. But it was rosier still at 20-1, and even rosier at 30-1. I am summarizing here - the whole article can be found [here]. [In Solow's words,] "According to data compiled by the Federal Reserve, household wealth in the U.S. peaked at $64.4 trillion in mid-2007, and had plummeted to $51.5 trillion at the end of 2008. Something like $13 trillion of perceived wealth vanished in not much more than a year. Nothing concrete had changed. Buildings still stood; factories were still just as capable of functioning; people had not lost their ability to work or their skills or their knowledge of technology. But a population that thought in 2007 that they had $64.4 trillion with which to plan their lives discovered in 2008 that they had lost 20 percent of that."