Well, that includes me too. Here is an excellent primer from Stephen Cecchetti's on the crisis and the mechanics of how the Fed and the ECB have intervened.
And why did the crisis happen when it did?
It is natural to ask whether there is some specific reason for these events to occur when they did. Can we identify a specific trigger? While we can see something that has happened, as I suggested earlier there has been no fundamental deterioration in economic conditions. In fact, in the United States there was no economic data released on Thursday 9 August 2007. So, it isn’t that people suddenly changed their view of the future.
Instead, what happened was analogous to a bank run. Bank runs can be the result of either real or imagined problems. Here’s what how it works. Most people, even fairly sophisticated investors, are not in a position to assess the quality of the assets on a financial institution’s balance sheet. In fact, most people don’t even know what those assets are. So when we learn that one bank is in trouble, investors begin to worry about all financial institutions and investors start to flee. The inability to accurately value assets leads to a strong shift toward high-quality securities like Treasury bonds.
Please read these two sentences again:
Most people, even fairly sophisticated investors, are not in a position to assess the quality of the assets on a financial institution’s balance sheet. In fact, most people don’t even know what those assets are.
Obviously, this is fine if the rest of us don't have to pay for the costs of this ignorance. But financial fragility surely has implications for the real economy. Is this the necessary downside of a sophisticated financial system? Or can we do better with an improved regulatory and prudential structure?