The mortgage and credit crisis that has hit the United States for the past seven months has many consumers confused about what happened. So, let's sum it up: The subprime mortgage market collapsed when interest rates reset higher and consumers couldn't afford the mortgages; this led to defaults that caused the loans to become worth less money; the banks holding these loans had to mark down the value of these securities (loans); the write-down forced many of these banks to come up with more cash thanks to government regulation and investor demand; the banks could not sell the securities to get the cash since nobody wanted to buy them; and this caused banks like Bear Stearns to go under.

From The New York Times:
Raise your hand if you don’t quite understand this whole financial crisis. It has been going on for seven months now, and many people probably feel as if they should understand it. But they don’t, not really. The part about the housing crash seems simple enough. With banks whispering sweet encouragement, people bought homes they couldn’t afford, and now they are falling behind on their mortgages. But the overwhelming majority of homeowners are doing just fine. So how is it that a mess concentrated in one part of the mortgage business — subprime loans — has frozen the credit markets, sent stock markets gyrating, caused the collapse of Bear Stearns, left the economy on the brink of the worst recession in a generation and forced the Federal Reserve to take its boldest action since the Depression?