I still don’t understand (and it may take a book length tome to remedy that) how a few bad loans in one sector of something so unimaginably large as the US economy can cause the collapse of not only said US economy, but financial markets all over the world.
The entire world overleveraged, not just the U.S. There are plenty of good explanations out there (e.g. Jim Willie financialsense.com) from people who have seen this coming for a long time.
Those loans were packaged and repackaged and sold and resold domestically and internationally, so much that no one knows what the underlying value of those repackaged bundles of loans really is.
Since no one knows, everyone in the financial markets is scared. Whereas these were seen as great investments, now they are toxic, and lending between large banks, etc., has simply seized.
All because no one knows the real value of what they have in their mortgage portfolios. The good has been sunk...not by the bad...but by the unknown.