Yes, yes, I know that I'm not an economist. But I spent a few hours on Friday running some numbers, doing so modeling, and analyzing data. So, here's my chain of causes, with a (knowing me) predicable conclusion. Each item is linked to its cause.

Why?

(--> = caused by)

credit freeze & stock market panic
--> the collapse of a handful of large institutions
--> institutions did not have enough cash
--> devaluation of mortgage investments owned by institution*
--> large number of defaults on sub-prime mortgages by homeowners
--> atypical lending: adjustable rate mortgages, fraudulent mortgages, and other devices*
--> (a) interest rates were too low*
--> economy was in recession following dot com crash
--> dot com bubble
--> income inequality (see below)
--> (b) people could not afford to buy houses
--> price of housing was too expensive in many markets
--> (1) workers wages were stagnant

--> excessive profit-taking (see below)
--> (2) speculation
--> income inequality / excessive saving & investment among high income people
--> excessive profit-taking / extraordinary high wages at top, stagnant at bottom
--> (1) successful new business models
--> opening of world market, tech boom, market excess, etc
--> (2) upper bracket taxes too low
--> Ronald Reagan, the Chicago school, Laffer, Howard Jarvis, and Republican in general




* these three situations were also caused by the failure of government regulation/oversight

The early 1980s tax rate cuts for high earners (and its legacy) has completed altered the course of the economy. The United States, which saw slow growth in the 1970s, traded moderation for chaotic dynamism. And at what cost! The glut of money concentrated at the top contributed to the ridiculous surge in the stock market leading up to the 1987 crash, the savings & loan crisis of the late 1980s, the dot com bubble, and the housing bubble. What happened is: when upper income people have too much money, they don't spend. They save/invest it. This is supposed to be a good thing. The result, however, is that they heavily tilt the balance in favor of demand for securities and, therefore, bid up their prices. (Additionally, in recent years, income inequality abroad has also hurt us. The foreign rich are also increasing demand for security. A large portion of the blame for this is the US's failure to move away from oil consumption.)

Not only this, such demand caused security sellers to devise new ways to attract investors in the highly competitive environment. As a result, instruments such as junk bonds (in the 1980s), unwise mortgages (in the 1980s and 2000s), mortgage securitization (2000s), and hedge funds (2000s) were developed or expanded. If one needed any evidence of the glut of money at the top, one need not look any further than the hedge funds, which have seen a ten-fold increase in the money they manage over the past five years. Bubbles occur when too much speculation occurs. Excessive speculation is caused by excessive money or access to it through loans. In the early years of this decade, we had the perfect storm: steep income inequality and extremely low interest rates (= easy access to money). Combined with the failure of government regulation, something that has been problematic for at least a decade and as many as three (one could chart this all the way back to the deregulation of banking in 1980 -- something for which we can blame the Democrats of that time), this excess of money to save or invest yielded the situation that we have to day.

At the same time, the situation for average Americans worsened as wages remained flat, prices increased (albeit slowly), and stealth inflation occurred in the widespread rise of credit fees, interest rates, (and due to speculation) house prices. Even if someone was trying to plan an economic catastrophe, I don't think they would be this successful. Ah, the invisible hand of the free market, working wonders.

How to fix it?

Stave off panic
Find a way to keep enough credit available, so business can function
(have govt buy equities stake in financial corporation that are in trouble)
then
Government should subsidize employment in the short term
Government should renegotiate mortgage terms/principle for some houses to stop excessive foreclosures
Top 0.1% tax rates should be raised above 60% (they were above 65% for all but one year between '45 and '75)
Top 1% tax rates should have a 40% floor (they never dropped below 42% until 1981)
Financial industry should be regulated (hedge funds, derivatives, credit default swaps, cap executive pay)
Financial industry should be re-regulated (reinstate Glass-Steagal, reinstate usury laws, reinstate leverage limits)

If nothing else, this crisis should be the stake through the heart of voodoo (supply-side) economics and its thirty year legacy.