Yesterday I linked to "The Slump Goes On: Why?", the impressive tour d'horizon of the recent economic crisis by Robin Wells and Paul Krugman which ran in the New York Review of Books.

It might be the best comprehensive piece on the subject yet.* In their view, what happened:

1. a global savings glut
2. which led to a North Atlantic** housing bubble
3. which led to a "Minsky moment"***
4. which led to an old-fashioned bank run on the "shadow banking system"****
5. which led to a deleveraging of the American household*****

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* A second article on what needs to be done is coming.
** the U.S., England, Ireland, Spain
*** "Minsky’s theory, in brief, was that eras of financial stability set the stage for future crisis, because they encourage a wide variety of economic actors to take on ever-larger quantities of debt and engage in ever-more-risky speculation. As long as asset prices keep rising, driven by debt-fueled purchases, all looks well. But sooner or later the music stops: there is a "Minsky moment" when all the players realize (or are forced by creditors to realize) that asset prices won’t rise forever, and that borrowers have taken on too much debt."
**** A crisis of confidence in the banking system. In the United States, the banking system gave way to the more profitable "shadow banking system." As much as 60 percent of business now used "repo" (repurchase) agreements - very short-term loans to hedge funds and investment banks - to finance their business. In Europe, there was a crisis of confidence in governments' ability to backstop their overextended banks. So in addition to a run on the banks, there was a "sovereign debt crisis" in countries such as Iceland, Greece and Ireland.
***** American businesses are profitable and sitting on liquidity, however American households are collectively paying down debt so there is a lack of aggregate demand and government needs to step in and fill the gap.