Everything you ever wanted to know about the biggest economic meltdown since the Great Depression but were afraid to ask. A speculative bubble occurs when price far outstrips the fundamental worth of the asset. Bubbles have occurred in everything from real estate, stocks and railroads to tulips, beanie babies and comic books. As with all bubbles, it took more and more money to make a return. In 1996, the Fed allows regular banks to become heavily involved in investment banking, which opens the door to conflicts of interest in banks pushing sketchy financial products on customers who poorly understood the risks. In 1999, under intense pressure from financial firms, Congress overturns Glass-Steagall, allowing banks to engage in any sort of activity from underwriting insurance to investment banking to commercial banking (such as holding deposits). Many Americans joined the stock mania literally in the last days and lost considerable wealth, and some, such as Enron employees, lost their life savings. When the stock market bubble erupted, turbulence rippled through the larger economy, causing investment and corporate spending to sink and unemployment to rise. Then came the Sept. 11, 2001, attacks, generating a shock wave of fear and a drop in consumer spending. Burned by the stock market, many people shifted to home purchases as a more secure way to build wealth. By 2002, with the economy already limping along, former Federal Reserve Chairman Alan Greenspan and the Fed slashed interest rates to historic lows of near 1 percent to avoid a severe economic downturn. Low interest rates make borrowed money cheap for everyone from homebuyers to banks. This ocean of credit was one factor that led to a major shift in the home-lending industry -- from originate to own to originate to distribute. Low interest rates also meant that homebuyers could take on larger mortgages, which supported rising prices. In the originate-to-own model, the mortgage lender -- which can be a private mortgage company, bank, thrift or credit union -- holds the mortgage for its term, usually 30 years. Every month the bank* originating the mortgage receives a payment made of principal and interest from the homeowner. If the buyer defaults on the mortgage, that is, stops making monthly payments, then the bank can seize and sell a valuable asset: the house. Given strict borrowing standards and the long life of the loan, it's like the homebuyer is getting married to the bank. *Shorthand for any mortgage originator. In the originate-to-distribute model, the banks sell the mortgage to third parties, turning the loans into a commodity like widgets on a conveyor belt. By selling the loan, the bank frees up its capital so it can turn around and finance a new mortgage. Thus, the banks have an incentive to sell (or distribute) mortgages fast so they can recoup the funds to sell more mortgages. By selling the loan, the bank also distributes the risk of default to others. The banks made money off mortgage fees, perhaps only a few thousand dollars per loan. Because they sold the loan, sometimes in just a few days, they had no concern that the homebuyer might default. Banks began using call centers and high-pressure tactics to mass-produce mortgages because the profit was in volume--how many loans could be approved how fast. This was complemented by fraud throughout the realestate industry, in which appraisers over-valued homes and mortgage brokers approved anyone with a pulse, not verifying assets, job status or income. And the mushrooming housing industry distorted the whole economy. Of all net job growth from 2002 to 2007, up to 40 percent was housing-sector related: mortgage brokers, appraisers, real-estate agents, call-center employees, loan officers, construction and home-improvement store workers, etc. To make the loans easier to sell, the banks go to Fannie Mae or Freddie Mac and get assurance for conforming (or prime mortgages*). Assurance means one of the agencies certifies that the loans are creditworthy; they also insure part of the loan in case the homeowner defaults. Before their recent nationalization, Fannie and Freddie were government-sponsored entities (GSEs). While anyone could buy shares in the two companies, they were also subject to federal regulation and congressional oversight. This federal role was seen as an implicit guarantee: While there was no explicit guarantee, all parties believed loans backed by Fannie and Freddie were absolutely safe because the government would not let the two agencies fail. This allowed them to borrow huge sums of money at extremely low rates. *Prime refers to the credit score of the borrower. Banks then sold their newly acquired assured prime mortgage loans to bundlers, ranging from Fannie and Freddie to private labels, such as investment banks, hedge funds and money banks (ones that hold deposits like savings and checking accounts. Bundlers pooled many mortgages with the intention of selling the payment rights to others, that is, someone else pays to receive your monthly mortgage payments. The next step was to securitize the bundle (a security is a tradable asset. Much of the financial wizardry of Wall Street involves turning debts into assets. Say you're Bank of America and you sell 200 mortgages in a day. Lehman Brothers buys the loans after they are assured and bundles them by depositing the mortgages in a bank account -- that's where the monthly payments from the 200 homeowners go. Then, a mortgage-backed security (MBS) is created from this bundle. An MBS is a financial product that pays a yield to the purchaser, such as a hedge fund, pension fund, investment bank, money bank, central bank and especially Fannie and Freddie. The yield, essentially an interest payment, comes from the mortgage payments. How does it work? The homeowner keeps making monthly mortgage payments to Bank of America, which makes money from the fees from the original mortgage and gets a cut for servicing the mortgage payments, passing them on to Lehman Brothers. Lehman makes money as a bundler of the mortgages and underwriter of the mortgage-backed security. The purchaser of the mortgage-backed security, say, Fannie Mae, then gets paid from the bank account holding the mortgage payments. At first, this process covered only prime mortgages because Fannie and Freddie could not assure subprime loans. To address low rates of home ownership among low-income populations and communities of color, around 2004 Congress began encouraging Fannie and Freddie to start assuring subprime mortgages on a wide scale. And easy credit fed investors' appetite for more and more mortgage-backed securities, which provided funding for new mortgages. One definition of subprime loans is any loan at an interest rate that is at least 3 percentage points more than a prime loan. Many of these loans were adjustable-rate mortgages (ARMs) with teaser rates. The rate was low for the first few years, but then it would reset, causing monthly payments to leap dramatically, sometimes to two or three times the original amount. Subprime borrowers are considered riskier to lend to because of low credit scores. Subprime borrowers are concentrated among people of color and immigrant and low-income communities, partly because racial and class disparities result in less access to banking services such as credit cards, online billing and checking and saving accounts. Bill paying becomes a labor-intensive process, making it much more likely that payments will be late or missed, driving down credit scores. With mortgage brokers and lenders pushing loans on anyone and everyone, those with less financial acumen -- disproportionately low-income people, immigrants, the elderly and communities of color -- often found themselves with mortgages that became unaffordable. With the surge in mortgage loans, around 2004, banks started extensively using financial products called collateralized debt obligations (CDOs). The banks would either combine mortgage-backed securities they already owned or bundle large pools of high-interest subprime mortgages. CDOs were sliced into tranches -- think of them as cuts of meat -- that paid a yield according to risk of default: The best cuts, the filet mignon, had the lowest risk and hence paid the lowest yield. The riskiest tranches, the mystery-meat hotdogs that paid the highest yield, would default first if homebuyers stopped making payments. This was seen as a way to distribute risk across the markets. The notion of distributing risk means all the market players take a little risk, so if something goes bad, everyone suffers but no one dies. Tranches were given ratings by services like Standard & Poor's, Moody's and Fitch. The highest rating, AAA, meant there was virtually no risk of default. The perceived safety of AAA meant a broad variety of financial institutions could buy them. And because tranches were marketed as a tool to fine-tune risk and return, this spurred a big demand. There was a conflict of interest, however, because the rating services earned huge fees from the investment banks. Moody's earned nearly $850 million from such structured finance products in 2006 alone. The investment bank also bundled lower-rated mortgage backed securities, like BBB -rated ones, and then sliced them to create new tranches rated from AAA to junk. This was like turning the hotdogs into steaks. Furthermore, the banks would hedge the tranches, another way of distributing risk, by purchasing credit default swaps (CDSs) sold by companies like AIG and MBIA. The swaps were a form of insurance. This was seen as a way to make tranches more secure and hence higher rated. For instance, say you're Goldman Sachs and you have $10 million in AAA tranches. You go to AIG to insure it, and the company determines that the risk of default is extremely low so the premium is 1 percent. So you pay AIG $100,000 a year and if the tranche defaults, the company pays you $10 million. But CDSs started getting brought and sold all over the world based on perceived risk. The market grew so large that the underlying debt being insured was $45 trillion -- nearly the same size as the annual global economy! Also around 2004, things began to get even trickier when investment banks set up entities known as structured investment vehicles (SIVs). The SIVs would purchase subprime MBSs from their sponsoring banks. But to purchase these MBSs, the structured investment vehicles needed funds of their own. So the SIVs created products called asset-backed commercial paper (short-term debt of 1 to 90 days). Asset-backed means it is backed by credit from the sponsoring bank. The SIVs then sold the paper, mainly to money market funds. In this way, the SIVs generated money to purchase the mortgage-backed securities from their bank. The SIVs made money by getting high yields from the subprime MBSs they brought, while paying out low yields to the money markets that purchased the commercial paper (profiting from a spread like this is known as arbitrage). Wall Street's goal was to conjure up ways to make money while not encountering any liability. It was moving everything off-book to the SIVs to get around rules about leveraging. Banks, hedge funds and others leverage by taking their capital reserves -- actual cash or assets that can be easily turned into cash -- and borrowing many times against it. For instance, Merrill Lynch had a leverage ratio of 45.8 on Sept. 26. That means that if Merrill had $10 billion in the bank, it was playing around with $458 billion. The Federal Reserve is supposed to regulate reserves to limit the growth of credit, but the SIVs were one method to get around this rule. More leverage also meant more risk for the bank, however, because funds could disappear quickly if a few bets went bad. This is all part of what's called the Shadow Banking System, meaning it gets around existing regulations. It was deregulation that led to the huge growth of the shadow banking system. In 2004 Wall Street successfully lobbied the Securities and Exchange Commission to loosen regulations on how much they could leverage against their capital reserves. This allowed the companies "to invest in the fast-growing but opaque world of mortgage-backed securities; credit derivatives, a form of insurance for bond holders; and other exotic instruments," according to the New York Times. The only real oversight left in place was self-policing by the investment banks themselves to determine if they were putting investors at risk. The whole process worked as long as everyone believed housing prices would go up endlessly. This is a form of perceptual economics, one principle of which is that any widely held belief in the market tends to become a self-fulfilling prophecy. In the case of housing, homeowners took on ever-larger mortgages in the belief that prices would keep rising rapidly. Mortgage lenders believed the loans were safe because even if the homeowner defaulted, the mortgage holder would be left with a house that was increasing in price. Confidence in rising prices led the creators and purchasers of mortgage-backed securities to think these investments were virtually risk-free. This also applied to over-leveraging -- as long as there was easy credit and quick returns to be made, investors clamored for more mortgage-backed securities. And this applied to the money market funds that brought the paper from structured investment vehicles. As long as the money market funds had confidence in the system, they didn't cash out the commercial paper when it came due, but rolled it over at the same interest rates. This allowed the SIVs to mint money without posing any liabilities for their sponsoring banks. This system kept the U.S. economy chugging along for years. For some 35 years, real wages have been stagnant for most Americans, but as house values skyrocketed over the last decade, many homeowners refinanced and cashed out the equity -- turning their homes into ATMs. For example, if you owed $200,000 on a mortgage but the house value rose to $300,000, you could potentially turn the $100,000 difference into cash by refinancing. By 2004, Americans were using home equity to finance as much $310 billion a year in personal consumption. This debt-driven consumption was the engine of growth. U.S. over-consumption was balanced by over-production in many Asian countries. Countries like China, India, Taiwan and South Korea run large trade surpluses with the United States, which speeds their economic development. They invest excess cash in U.S. credit instruments ranging from corporate debt and MBSs to government bonds and bills. It's what economists call a virtuous cycle: we buy their goods, helping them develop, while they use the profits to buy our credit, allowing us to purchase more of their goods. But it's also unsustainable. A country cannot over-consume forever. In the final stage of the housing bubble, fewer first-time buyers could afford traditional mortgages. Rising house prices required ever-larger down payments so subprime mortgages multiplied, as they often required little or no money down. From 2004 to 2006, nearly 20 percent of all mortgage loans were subprime loans. As the vast majority were adjustable-rate mortgages (ARMs), this created a time bomb. The minute interest rates went up, the rates reset, and homeowners with ARMs were saddled with larger monthly payments. Various factors combined to slow real-estate prices and deflate the bubble. Rising prices led to a building boom and oversupply of houses, everaccelerating prices meant more money brought smaller returns and, once again, the Fed played a role by raising interest rates. It was trying to stave off inflation, but given the proliferation of adjustablerate mortgages, it led to higher mortgage payments, pushing hundreds of thousands of homeowners into foreclosure. Once the bubble started to leak, the process accelerated, turning the mania into a panic. First, the default spread to the structured debt instruments like collateralized debt obligations and mortgage-backed securities. The system of distributing risk failed. Securitization had spread across the entire financial system -- investment and money banks, pension funds, central banks, insurance companies -- putting everyone at risk. Because the finance sector had lobbied aggressively for decades to slash regulation, the lack of oversight amplified risk. As mortgage holders defaulted, mortgage-backed securities also began to default. The subprime funding conduit from Wall Street froze up, which led big mortgage lenders like Countrywide, New Century Financial and American Home Mortgage to go belly-up. As panic set in, money market funds began to stop rolling over the commercial paper -- they wanted to cash it out. So SIVs now had to either call on their credit line from their sponsoring banks or sell assets such as the mortgage-backed securities to raise money. Mortgage defaults and forced sales of the MBSs began to push prices down even further. This forced banks to book losses, requiring some to sell more assets to cover the losses, further lowering prices, forcing them to book more losses, creating a vicious cycle. This is known as a liquidation trap. Since no one was sure about the size of the losses, banks began to hoard funds, which caused the credit markets to dry up. Over the last year, the Federal Reserve and U.S. Treasury have taken increasingly drastic measures -- lowering interest rates, pumping cash into the banking sector, allowing investment banks to borrow funds while putting up low-valued securities as collateral. This then proceeded to financing takeovers, such as the Fed providing a $29 billion credit line for JP Morgan to take over Bear Stearns in March. Then it nationalized Fannie Mae and Freddie Mac; this was followed by the federal takeover of AIG, which was done in by its gambling with credit default swaps. In the end, the legendary Wall Street banks disappeared in a fortnight -- bankrupt, acquired or converted into bank holding companies like Citigroup. But the contagion has not been contained. Whether the bailout plan can succeed is highly questionable. Many are skeptical as to whether the bailout will even restore confidence -- and credit -- to the banking system. As Reuters stated recently, "Doubts remain as to how it [the bailout plan] could immediately thaw the frozen money and credit market." Even if the bailout revives the banking sector, few economists think it will jumpstart the consumer credit machine. For one, over-leveraged, money-strapped banks will eagerly dump nearworthless securities on taxpayers in exchange for cash to bulk up their reserves. Plus, with working hours and wages declining and unemployment, home foreclosures and inflation surging, banks are in no mood to give consumers more credit, so consumption -- and hence the economy -- will continue to contract. There are many other, better options that were proposed: avoiding the poisonous mortgage-backed securities and buying equity stakes directly in troubled banks, re-regulating the industry, sending in teams of government auditors to decide the real worth of financial companies and which should live and die, creating a Home Owners' Loan Corporation to allow the government to buy troubled mortgages directly, allowing local governments to seize foreclosed homes and turn them into subsidized housing to minimize abandonment (which creates ghost neighborhoods, driving down the price of still-occupied homes), public works program, alternative energy investments, a Green New Deal. But these are political questions that depend on organizing and political power to propose, legislate, fund and enact. That's what will determine if there is a 21st-century New Deal or if Wall Street will get away with the biggest financial crime in world history.

A powerful excerpt from 'Winter Soldier: Iraq and Afghanistan' lays bare the racism at the core of the Iraq occupation. In March of this year, a courageous group of veterans brought the war home, at a historic event held in Silver Spring, Md., inspired by Vietnam veterans a generation before. "Winter Soldier: Iraq and Afghanistan" convened more than 200 soldiers who have served in the so-called "War on Terror;" like their fellow soldiers before them, who shared stories that laid bare the nightmare of Vietnam, these veterans bore witness to the crimes that have been committed in Americans' names during the occupation of Iraq and Afghanistan. The hearings lasted four days; in their testimony, soldiers described how the discarding of the military's rules of engagement and its systematic dehumanization of Iraqi and Afghan civilians has led to horrible acts of violence against innocent men, women and children. "These are not isolated incidents," was a common refrain, even as the episodes they described seemed exceptionally brutal. For many of the veterans, it was the first time they had told their stories. When I got to Iraq in 2003, I learned a new word, "haji." Haji was the enemy. Haji was every Iraqi. He was not a person, a father, a teacher, or a worker. It's important to understand where this word came from. To Muslims, the most important thing is to take a pilgrimage to Mecca, the Hajj. Someone who has taken this pilgrimage is a haji. It's something that, in traditional Islam, is the highest calling in the religion. We took the best thing from Islam and made it into the worst thing. Since the creation of this country, racism has been used to justify expansion and oppression. Native Americans were called "savages," the Africans were called all sorts of things to excuse slavery, and Vietnam veterans know the multitude of words used to justify that imperialist war. So haji was the word we used. It was the word we used on this particular mission I'm going to talk about. We've heard a lot about raids and kicking down the doors of people's houses and ransacking their houses, but this was a different kind of raid. We never got any explanation for our orders. We were only told that a group of ?ve or six houses was now property of the U.S. military, and we had to go in and make those families leave their houses. I tried hard to be proud of my service, but all I could feel was shame. Racism could no longer mask the reality of the occupation. These are human beings. I've since been plagued by guilt. I feel guilt any time I see an elderly man, like the one who couldn't walk who we rolled onto a stretcher and told the Iraqi police to take him away. I feel guilt any time I see a mother with her children, like the one who cried hysterically and screamed that we were worse than Saddam as we forced her from her home. I feel guilt any time I see a young girl, like the one I grabbed by the arm and dragged into the street. We were told we were ?ghting terrorists; the real terrorist was me, and the real terrorism is this occupation. Racism within the military has long been an important tool to justify the destruction and occupation of another country. Without racism, soldiers would realize that they have more in common with the Iraqi people than they do with the billionaires who send us to war. I threw families onto the street in Iraq, only to come home and ?nd families thrown onto the street in this country, in this tragic and unnecessary foreclosure crisis. Our enemies are not ?ve thousand miles away, they are right here at home, and if we organize and ?ght, we can stop this war, we can stop this government, and we can create a better world.

Look no further than the World Bank to see how many economic, social and environmental problems so-called experts can make worse. Remember the World Bank, that global "development" institution based in Washington, D.C., that dispenses billions of dollars a year to poorer nations with the declared intent of ending global poverty? We -- and many of you -- spent decades protesting the World Bank and documenting the bank's projects and policies that exacerbated economic, social and environmental problems. In the United States, thousands of protesters took to the streets in the years prior to 9/11 to condemn the financial behemoth. Across the Third World, where the impacts of World Bank lending are felt on the ground every day, such protests began even earlier. This weekend, World Bank President Robert Zoellick will use the occasion of the World Bank and International Monetary Fund's annual meetings in Washington, D.C., to announce that critics like us were oh so wrong and that we should look to the World Bank to play a key role in solving the world's food, climate, poverty and other crises. Were we indeed wrong? Could millions of our allies in developing countries, including so-called beneficiaries of the development mega-agency, have possibly been so wrong? Is it a time for a mea culpa? Having taken a close look at the World Bank past and present in our recently published book, Development Redefined: How the Market Met Its Match, we'd say it's not. When the Institute for Policy Studies started monitoring World Bank greenhouse gas emissions in 1997, the Bank was investing roughly 100 times more in fossil fuel energy projects than in clean energy. Tens of billions of dollars of dirty energy lending later, the Bank certainly has demonstrated its ability to contribute to climate chaos. Here, Zoellick is onto a truth of some sorts. If you really get down to the basics, over the course of its history, the World Bank has been all about "inclusive globalization." For example, over the past two decades, the economic-globalization free-market model it pushed on its borrowing countries has propelled the total number of billionaires in the world from around 100 to 1,125, with a far more inclusive group of countries being home to the billionaires today. So too does the World Bank now acknowledge that its math was wrong and the number of people living in poverty today is actually much higher than the Bank's prior calculations asserted. In other words, "inclusive globalization" has helped create a larger, more inclusive class of poor people. Way to go, World Bank. The World Bank has loaned tens of billions of dollars to Africa since the Bank set up shop right after World War II? The fact that poverty and inequality have risen in most African countries over that same period is surely pure coincidence. Consider the case of Malawi, where the government explicitly rejected the World Bank's advice on how to deal with a crisis in domestic corn production that threatened widespread famine. The result of ignoring the Bank's expertise? By late 2007, Malawi was not only feeding its own population, but also exporting corn. Dare we suggest that if Zoellick really cares about sub-Saharan Africa, he would encourage other countries to follow Malawi's example and ignore the Bank's advice? Indeed, check out the Bank's preferred solution to climate change. It's to get governments out of the picture and let the invisible hand of "carbon markets" prevail. Talk about ingenuity regarding an appropriate role for the public sector: The Bank has devised a way to make hundreds of millions of dollars off carbon markets by charging a hefty commission on trades. Or take the food crisis. By pressing countries to follow a set of policies geared to shift farmers from subsistence food crops (rice and corn, for instance, that the grower could eat) to export crops (cut flowers, ornamental plants, gourmet veggies -- that either can't be eaten or aren't meant for local stomachs), the Bank has created a "freer" global market for farm products grown largely by or for big agribusiness companies. Southern countries get to be more vulnerable to and dependent upon the whims of an unfair and volatile global market. And, now there's a role for governments to play in quelling the ensuing "food riots." Who could better grasp the challenges faced by people who make less than $2 a day than people who make hundreds of dollars a day, often tax-free? Who could better understand the needs of poor people than experts who zip in and out of poorer countries and stay in five-star hotels? And, as for those World Bank staff who do live in-country, who could better comprehend the realities of the average poor person there than Bank staff who typically live in mansions with chauffeurs and gardeners?

The economic crisis, however painful, will lead to at least one positive outcome. Our economy in recent decades has been propped up by an alarming degree by profligate consumer spending and wasting of resources prompted by an avaricious credit industry. Even before the crisis, it was obvious that the traditional American Dream of comfort and security had been displaced by a "more is better" focus that promotes not quality of life, but rather the unbridled production and consumption of stuff. There was never any chance that could continue indefinitely. Recently, the Global Footprint Network issued a report stating that by September 23, humanity had consumed all the new resources the planet will produce for the year. For the rest of 2008, we are in the ecological equivalent of deficit spending, drawing down our resource stocks -- in essence, borrowing from the future. Sound familiar? We can't hope to keep to our economic budget if we can't keep to our ecological budget. The "more is better" version of the American dream is unsustainable environmentally, fueling a level of resource consumption that the planet cannot keep up with. It is personally unsustainable, drawing American families into a work-and-spend treadmill that depletes savings and clutters lives. And now we see it is unsustainable economically, as well. Whatever economy emerges from this crisis will need to put less emphasis on "more" stuff and greater emphasis on more of what matters -- like healthy communities, a healthy planet and a higher quality of life. In righting the economic ship, the end game shouldn't be to plug up a broken vessel, but to move to something more seaworthy -- one that sails within both personal and ecological limits.

We are facing crises of freshwater, food, deforestation, and ocean health. We need leadership in the protection of all our natural resources. All of our natural resources are in peril because of what we do and what that does to our planet.

We are facing a fresh water crisis. We are facing a food crisis. We are facing a crisis over deforestation. And we are facing crises in our oceans. While carbon emissions from fossil fuels pollute the air, so does a lot of other stuff. Now is the time to press for leadership in the protection of all our natural resources. We must increase our freshwater supply by about 20 percent by the year 2025 to meet world demand, and 90 cities still dump sewage into it. The price of most food has doubled over the past year, forcing millions deeper into poverty and malnourishment. There is now six times as much plastic as zooplankton in parts of the Pacific Ocean, and 90 percent of the big fish on Earth have disappeared. Meanwhile, we have an ever-increasing waste and electronic-waste burden on our hands. We each create twice as much trash per day as we did 40 years ago. The average size of our landfills has multiplied 25 times in that period as well. And our e-waste burden is so bad that we ship 80 percent of it overseas to countries with weak environmental standards. These countries in turn make products from our discards and ship them right back to us. (And we wonder how lead paint gets in toys.) As well, up to 40 percent of global wood production is from illegal timber operations. Deforestation not only displaces people and endangers species, it is the second biggest cause of climate change. (It isn't only fossil fuels that cause global warming.) To be sure, an alternative energy supply is needed and important. But let's not forget the importance of other environmental factors crucial to our health and well-being, not to mention the planet's.