Can somebody explain in summary what exactly is meant by the global "credit crisis"?

I am ramping up as an investor and don't totally understand when people refer to the credit crisis. What is it? What caused it? And how does it affect companies and the markets? I know this is a lot to ask, I'm not expecting somebody to write me an essary but a good paragraph would really help.|||After the internet bubble, the FED lowered interest rates to stimulate the economy. The US moved into a new bull market. Times were good. People had money to spend. Interest rates were low. And banks were looking for new ways to make money.





Thus the CDO was born. Banks realized they could take mortgages, auto loans, and credit card debt and bundle it all together as a Collateralized Debt Obligation (CDO). And even better, CDOs were rated as investment grade.





Banks sold CDOs to anyone and everyone. Pension funds, hedge funds, asset management companies, and wealthy individual investors. Banks made billions. Everyone was happy. Large banks started buying the small banks which issued subprime loans to cut out the middle man so to speak (or vertically integrate loan origination with CDO bundling).





Then something completely unexpected happened. The FED started raising interest rates again. (I know. What were they thinking?) Well, subprime loans are risky to begin with. Then tack on an adjustable interest rate and . . voila. People start defaulting.





But the real problem became the CDOs held off balance sheet. What does that mean? With mortgage defaults rising, the risky subprime mortgages bundled in the CDOs lost value. But no one really knew how much. The opacity of the debt instruments made them undesirable as collateral.





So when a hedge fund went to a bank asking for a loan using CDOs as collateral, they wouldn't touch it. If you don't know the value of the debt security how can you borrow against it? Banks, hedge funds, anyone who held CDOs became the lepers of the financial world. Banks were afraid to lend money because they didn't know what kind of CDO exposure the borrowers faced. Without proper risk assessment, you can't price a loan. Thus you have a "credit crunch".





The market effects we're seeing are largely due to falling home prices. For most people, their home is their largest asset. Now home equity has been reduced or is even negative. People use the equity in their home to secure loans for home improvements, new cars, vacations, etc. And consumer spending accounts for 60% of the GDP. So you see there are direct ties between home values and economic growth.|||Phips is right but maybe I can simplify.





Banks loan money for homes, and much of that is borrowed, like they loan out the depositor's money or borrow elsewhere. Only 20% is theirs.





In return they get a mortgage. Then they sell the mortgage to an investor and get their money back collecting the loan fees as their profit. Then they loan the money out again.





But those loans were riskier than known and some started to fail.





This scared the investors so much they refuse to buy the mortgages or will only buy them at a very low price (costing the banks money).





So the banks won't sell them for such a low price but that means they don't have money coming in to loan. Thus the money stops moving.





So with no money coming in to loan, people or businesses can't get "credit", they can't borrow. There is no money there.





That is the crisis.





I think that is about as simple as I can make it.|||Credit was too loosely extended by loan originators, which provided them highly profitable business for a time, but buckled under pressure when underqualified mortgage holders began defaulting on loans they were not capable of paying back (and were not legitimately qualified to commit to a loan).





As a result, lenders are now much more protective of their current porftolios, and stringent with their loan acceptance, creating crunches in consumer confidence, and reducing liquidy