While the complexity of this topic can span pages, ZeroHedge has a fantastic synopsis.  Unfortunately much of the language is geared for people who understand the inner workings of our financial system, but an attempt to at least acclimate oneself is required.  I am currently working through the material myself and suffice it to say the intervention perpetrated by the Federal Reserve will have lasting effects and pain for many years to come.  What should have been a jolt to the system will now turn into a stagnant mess that may end in one violent fashion or another many years down the road.

This is not an article about the housing collapse although securities are mentioned, but rather the financial run up to what most Americans know as the housing crisis of 2008.  In reality the housing bubble was nothing more than a subset of the much larger global credit crisis foisted upon the people of the world by benevolent central banks.  Do keep in mind that our free market system, the system so many people are proud of us has long been tainted and riddled with reprehensible amounts of intervention.   It is crucial to understand the difference between how a free market capitalist system would operate versus a system whose entire existence is under the mercy of powerful financial moguls and equally powerful politicians enabling each other to what amounts to financial genocide.  A Nuremberg proceeding for the guilty parties would be the only logical step after the inevitable collapse and suffering of so many innocent people.

And here is the liquidity crunch in its full flow-chart glory:

1. If can not obtain short-term (overnight or term) funding in repo market, go to Eurodollar market
2. If can not obtain short-term funding in Eurodollar market (LIBOR), go to asset sales
3. If asset sales are impossible due to lack bids, illiquid markets, and collateral consists of toxic MBS and CCC-rated junk bonds, yet margin calls are streaming and repo counterparties are demanding their cash back, go to bankruptcy
4. File for bankruptcy

This would be natural chain of events in a normal capitalist country. However, America in times of stress is anything but - which is why enter 3.5 (after 3 and before 4): the Federal Reserve.