That's a good question. Unfortunately there are multiple reasons that can't be boiled down to a single sound bite. But here's the concise version:
During the past 10 years there has been a widespread change in the application of risk to business and investment decisions. The government gets a lot of blame by the talk radio crowd for making policies that require banks to make home loans to risky customers. That's part of it, but internal to the real estate industry the incentives were for writing a mortgage, so sales people wrote mortgages. The standards for eligibility for these loans dropped to the point where in some markets you didn't need an income or a job to secure a home loan. Contributing to this was the concept that a mortgage could be written and then immediately sold to another party willing to take on the risk. Fannie Mae and Freddie Mac are among those taking on this risk.
A similar trend occurred in some financial institutions, where there was a de-coupling of business fundamentals from investment. In other words, investments were invented that had nothing to do with the value of the companies that were being invested in.
Blame is given to the rating agencies, like Moodys, for not correctly rating the risk of various investments. In this context it is important to know that the rating agencies get pressure from the industries they are rating, and often succumb to that pressure.
Some industries were over-built. In some markets, it is estimated that 40% of the retail businesses could close without any impact on the consumer. In other words, no loss of convenience or selection, no change in price.
Government borrowing and spending is very alarming, and it is making our currency worth far less than it was only five years ago.
