Despite reading the WSJ and N.Y. Times every day I still don't completely understand what happened in the financial sector meltdown. Neither does Freakonomics author Steven D. Levitt. Fortunately he has smart friends Doug Diamond and Anil Kashyap from the Chicago School of Business who explain much of the mess in this Times article.
Much of the trouble lies in too much risk and not enough long-term investment capital according to the authors.
And why does this matter to the average citizen?
As their own funding dries up, the remaining financial firms will be much more cautious in extending credit to normal firms and individuals. So even for people whose own circumstances have not much changed, the cost of the credit is going to rise. For an individual or business that falls behind on payments or needs an increase in short-term credit because of the slowing economy, credit will be much harder to obtain than in recent years.
Definitely worth a read.