The housing crisis simplified

Unless you’ve been living under a rock over the past few months, it’s clear there’s a credit crisis that’s been very costly for US taxpayers — in short, we’ve had to “save” companies too large to fail. There’s a lot of debate about what could and should have been done instead of bailing out these companies, as well as discussion concerning what we should do now that we’re knee-deep in this financial crisis.

How we got here is pretty simple, from a financial standpoint: the cause was a combination of greed and complex financial instruments, which even senior people on Wall Street didn’t understand. Credit default swaps and collateralized debt obligations allowed risk-averse funds to invest in high return assets that were supposed to remove the risk. As people know now, this all fell apart and caused a global financial crisis.