"The current crisis started with a burst housing bubble, which led to widespread mortgage defaults and hence to large losses at many financial institutions. That initial shock was compounded by secondary effects. as lack of capital forced banks to pull back, leading to further declines in the prices of assets, leading to more losses, and so on-a vicious circle of de-leveraging. Pervasive loss of trust in banks, including on the part of other banks, reinforced the vicious circle.
The downward spiral accelerated, post Lehman.
We have a globalized financial system in which a crisis that began with a bubble in Florida condos and California McMansions has caused monetary catastrophe in Iceland. We're all in this together, and need a shared solution."
to read Paul Krugman's article printed in: International Herald Tribune, 10/10/2008, click on