So I am by no means an expert on economics and in fact I understand *very* little. But I had another conversation with my uncle last night and I thought I would mention that ... the meltdown is not the stockmarket crashing. The freefall of the share market is a sideeffect of what has actually happened - banks are failing. When I mentioned the fiction of money going around, its not the share market but the loans and mortgages markets - which includes loans between banks and loans to companies - as flinthart
mentioned yesterday, for every dollar asset that a bank has, it can loan $10 - this is where the fiction comes in. If suddenly everyone recalls their loans, there just isn't this money to repay. So banks loan each money, they insure each other for the loans they have and everything is fine and dandy till people start defaulting on loans. So the subprime mortgage market hit the fan and American banks starting having to take over property - as this hits the real estate market, prices plummet and suddenly property is not worth what it was and banks suddenly have less assets. But they still have loaned out money on these assets so they have to somehow raise the money. They start recalling their loans in order to not go under ... and then basically what has happened is banks are looking dodgy, noone is loaning money and there is no market in which to set values for assets.
Essentially the market (not the stock market) has stopped. No money is moving around. And then the banks need to go raise cash and thats where shares come in. Further, companies borrow money but since banks are not loaning money right now, as companies' loans come up to be rolled over, they aren't being rolled over and the banks are recalling the money ... and companies (and countries) are/will be starting to go under. And the share market plummets because companies are no longer worth what they were yesterday - because there is no market to value assets (and no money moving around).
I *think* that's what's happening. From what I can gather.
And instead of what they did last time (Great Depression) the people in control are throwing money at the problem. The real problem though is .. throwing 1 Trillion Dollars at the US Banks is not stopping the freefall and it's not getting money to move (and be loaned again). And so ... noone knows how to fix this, what will fix it and how low it will all freefall before it hits rock bottom.
Anyway - feel free to correct me if I don't have this straight.