Watching the stock market meltdown over the last few weeks has been interesting but too not too disturbing (as long as I don't check my 401-k balances).
I did hear a good analysis of how it happens that over-rated mortgage backed securities can cause such a drop in the DOW. Banks lend to each other over night, and the collateral they use can include large bundles of mortgages that have been sold on the market. Since everyone knows they have been historically overvalued due to mortgage credit being extended to subprime borrowers, as the housing market softens the lending banks start to get nervous about loaning to other banks with such collateral. Not being able to borrow overnight means banks cannot lend as much, putting upward pressure on interest rates, and making businesses nervous.
Many European banks have invested in these mortgage backed securities, which spreads the fun internationally. Eventually these securities will become properly valued and credit will return to the markets. However there will be spasms of overreaction, both market level and regulatory, causing continuing upheaval and inefficiencies in the markets.
